Amortization of Computer Software The amortization method for computer software shall reflect the pattern in which the

assets future economic benefits are expected to be consumed by the entity. If such pattern cannot be determine reliably, the straight line method is used. Illustration On January 1, 2012, an entity had capitalized cost P7,500,000 for a new computer software product with an economic life of 5 years. Sales for 2012 for the software product is P2,250,000. The total sales of the software over its economic life are expected to be P15,000,000. On December 31, 2012, the software had a fair value less cost to sell of P6,500,000. The pattern of future benefits from the computer software cannot be determined reliably. Accordingly, the amortization of the software is computed using the straight line method. The entry to record the amortization is: Amortization of computer software 1,500,000 1,500,000

Computer software (7,500,000/5years)

After the amortization is recorded, the carrying amount on December 31, 2012 is computed as follows: Computer software Amortization for 2012 Carrying amount 7,500,000 (1,500,000) 6,000,000

The carrying amount of the computer software shall not be more than its fair value less cost to sell. Otherwise, an impairment loss is recognized. In this case, the fair value less cost to sell is P6,500,000 whish is higher than the carrying amount. Thus, no impairment loss is recognized. Classification of computer software a. As a rule, computer software is classified as intangible asset. b. Computer software purchased for resale shall be treated as inventory.

c. A computer software purchased as an integral part of a computer controlled machine tool that cannot operate without the specific software shall be treated as property, plant and equipment However, if the computer software is not an integral part of the related hardware, it is classified as an intangible asset. Web site development costs Under SIC 32, a website that has been developed for the purpose of promoting and advertising an entitys products and services does not meet the requirement of PAS 38 to be recognized as an intangible asset. Therefore, web site development cost shall be expensed as incurred.

Problem 31-1 (IFRS) 1. Which of the following statements in relation to research and development is true? I. Expenditure during the research phase of a project may sometimes be capitalized as an intangible asset. II. Expenditure during the development phase of a project may sometimes be capitalized as an intangible asset. A. B. C. D. I only II only Both I and II Neither I nor II

2. Which of the following statements in relation to development is true? I. The product being developed should have already been put into commercial productions or use. II. Development involves the application of research findings. A. B. C. D. I only II only Both I and II Neither I nor II

3. A newly set up dot.com entity has recently completed one of its highly publicized research and development projects and seeks an advice on the accuracy of the following statements made by one of its stakeholders. Which statement is the most accurate? A. Cost incurred during the research phase can be capitalized. B. Cost incurred during the development phase can be capitalized if criteria such as technical feasibility of the project being established are met. C. Training cost of technicians used in research can be capitalized. D. Designing of jigs and tools would classify as research activities. 4. Which principle best describes the current method of accounting for research and development cost? A. B. C. D. Associating cause and effect Systematic and rational allocation Income tax minimization Immediate recognition as an expense

5. Web site development cost incurred for the purpose of promoting and advertising an entitys product or service should be A. B. C. D. Expensed as incurred. Recognized as an intangible asset with a definite life. Recognized as an intangible asset with indefinite life. Included as component of other comprehensive income.

Problem 31-2 (AICPA Adapted) 1. The proper accounting for costs incurred in creating computer software is A. To capitalize all cost until the software is sold. B. To charge research and development expense when incurred until technological feasibility has been established for the product. C. To charge research and development expense only if the computer software has alternative future use. D. To capitalize all costs as incurred until a detailed program design or working model is created. 2. Which of the following statements is true regarding the proper accounting treatment for internal-use software costs? I. Preliminary cost should be capitalized as an incurred. II. Application and development costs should be capitalized as incurred. A. B. C. D. I only II only Both I and II Neither I nor II

3. Which of the following statements is incorrect regarding internal-use software? A. The application and development costs of internal-use software should be amortized on the straight line basis unless another systematic and rational basis is more appropriate. B. Internal-use software is considered to be software that is marketed as a separate product or as a part of a product or process. C. The costs of testing and installing computer hardware should be capitalized as an incurred. D. The costs of training and application maintenance should be expensed as an incurred.

4. A computer purchased as an operating system for the hardware or as an integral part of the computer controlled machine tool that cannot operate without the specific software shall be treated as: A. B. C. D. Intangible asset Property, plant and equipment Inventory Expense

5. At the beginning of the current year, an entity had capitalized cost for a new computer software product with an economic life of four years. Sales for the current year were ten percent of expected total sales of the software. The pattern of future sales cannot be measured reliably. At year-end, the software had a net realizable value equal to eighty percent of the capitalized cost. The unamortized cost reported in the year-end statement of financial position should be A. B. C. D. Net realizable Value Ninety percent of net realizable value Seventy five percent of capitalized cost Ninety percent of capitalized cost