View Full Version : Is Software a Fixed Asset?
Is software considered a fixed asset?
02-09-2005, 08:39 AM
Technically it is supposed to be. If you are referring to off-the-shelf programs that don't cost a bundle I would write them off as an expense. If you mean custom designed software created for your business, then that would be an asset.
02-09-2005, 10:07 AM
There is no simple answer.
Here the UK Inland Revenue's view is that "where software is expected to have a useful economic life of less than two years Inspectors will accept that the expenditure is revenue" .
From an Accounting Reporting standpoint materiality is an issue. $2000.00 on a balance sheet where equity is in the millions may give more leeway than treatment where equity is in the tens of thousands.
This is one of those areas where you can sometimes choOse the answer most suitable to you - reduce taxes vs healthy Balance Sheet etc.
If treating as an asset then a sensible depreciation/impairement policy would be required and given the anticipated useful life of softare in this day and age togeher with a sensible residual value you may well be writing stuff off over two years max.
There are many factors to tae into account.
02-09-2005, 01:54 PM
I'm not sure what the GAAP answer is, but the taxation answer depends on where you live.
In Canada, for example, nearly all software is considered a fixed asset in a special asset class with a maximum 100% CCA write-down rate. As far as I know, the Canada Revenue Agency has never officially published a threshold for making software an asset vs an expense and their official position is "even if it costs a $1.00, it's an asset".
IOW, you'd capitilize it and then amortize it completely in the year of purchase. However, since we have the "50% rule" that limits the CCA writeoff to one half of the maximum allowed in the year of purchase, most companies end up writing off software over two years.
Having said all of the above, most practitioners seem to have adopted a materiality cutoff of between $100-$200 per purchase--any below that limit is expensed at the time of purchase and anything above it is an asset to be depreciated. (But then they want to see the total purchased for the year and may change their mind. Sigh).
02-09-2005, 04:49 PM
From an accounting perspective (and assuming you are not a dealer in software):
1. The answer to your question depends in the first instance on whether you are subject to any particular set of accounting standards like GAAP. If you are, you must look at those standards to see if they define what you must do, and
2. If you are not subject to any such accounting standards or they do not define what you must do, you are free to do whatever you find most convenient, although of course you do not want to do something that will result in your accounts producing skewed information. On this basis, the issue is theoretically whether the software will have a value at the end of the financial year. If it will, the software should logically be treated as a fixed asset and only the depreciation in value during the year is written off as an expense in that year. However, if the cost is small, one tends to treat the cost as an expense because it is not worth the effort to treat it as a fixed asset and write off depreciation each year and because treating it as an expense will have a minimal skewing effect on one's balance sheet. In deciding whether or not it is cost effective to go to the trouble of treating it as a fixed asset, one would usually look at all software purchased that year rather than items individually. This might mean that one needs to initially treat it as a fixed asset and if the total for the year proves to be minor, to write it off as an expense at the end of the year.
From a tax perspective, the issue is whether one is entitled to write off the full cost in the year of purchase. If one is entitled to do so, the full cost can be treated as an expense in that year so that it is not treated as a fixed asset. But if one is only entitled to write off, say, one-third of the cost in the year of purchase one would treat the software as a fixed asset and write off the depreciation each year as an expense. Tax systems, as far as I know, generally don't allow the cost of software to be written off in the year of purchase - over two years seems more common - but there may be circumstances in which a write-off is allowed in the year of purchase. For example, under our tax system (South Africa) one can write off the full cost in the year of purchase if the cost per item is less than R1000 (about USD160). Also, software purchased for once-off use, eg perhaps software to transfer data from an old accounting system to a new one, may be written off in the year of purchase.
Larger businesses tend to keep two sets of records: one for accounting purposes and one for tax purposes. They do so because tax rules are necessarily rather rule of thumb and therefore inevitably skew one's accounts to a greater or lesser extent. So if a large corporation has, for example, acquired expensive software which it is confident will last five years, it will still want to write it off over two years for tax purposes - if this is the period the tax regime allows - to minimise its tax, but will want to show it as an asset as long as possible for accounting purposes so that its balance sheet presents as true - and healthy - a picture as possible. This is important if the corporation is listed on a stock exchange or needs to impress its bank each year to maintain its overdraft facilities, etc. But for small businesses, such as most that use QB, it is usually more practical and cost-effective to keep a single set of records, and this necessarily means that one must keep them in accordance with the tax requirements. This in turn means that one's balance sheet will be a bit skewed but usually the skewing is not too serious.
I recently bought QB Premier for @ $ 350 and wrote it off the same day. I'd do the same for a printer, a copy machine, etc. that cost less than $ 500 or $ 600. I don't know anything official, but I just don't imagine you'll get into trouble over something like that.
Now, a $ 50,000 custom program? I'd definitely take that to the max. But software under $ 500 has about ZERO value the minute you break the seal on the package. To claim it as an asset does not make much sense. You can resell the printer or the copier, even, but once you install the software it has value only to you.
As I recall, assets are things you can conceiveably turn into cash on short notice. You won;t do that with QB or Peachtree.
02-09-2005, 10:19 PM
To claim it as an asset does not make much sense.
Who ever said that income tax laws had to make sense :). As Ken points out, most larger companies (and a few smaller ones or even individuals) have income for financial statement presentation (to banks, partners, creditors, etc.) and income for tax purposes -- and the two often are at odds since the income tax system in most countries is no longer solely a method of financing the operations of government but instead is a tool to direct the population to invest or spend money in things that the government of the day deems socially desirable.
09-05-2008, 04:44 AM
The key thing is: be aware that what you regard as a definition of the difference between an asset and expense - which is part of your considered view of your business' financial standing and essentially your affair to define (having consulted your accountant, obeyed your country's accounting standards, etc.) - is probably not the same as your country's tax regulations' definition.
It is a bit of a pain for a small business to maintain separate records for the two purposes, but it may become important to do so if, for instance, you are preparing accounts to attract a potential purchaser to fund your retirement.
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