An entity may incur expenditure on the development and operation of its own web site for internal or external access. A web site designed for external access may be used for various purposes such as to promote and advertise an entity’s own products and services, provide electronic services, and sell products and services whereas a web site designed for internal access may be used to store company policies and customer details, and search relevant information.
SIC Interpretation 32 Intangible Assets—Web Site Costs prescribes the appropriate accounting treatment of internal expenditure incurred by the entity on development, enhancement and maintenance of a website. Appendix A to Ind AS 38 Intangible Assets is converged form of SIC Interpretation 32 Intangible Assets—Web Site Costs in relation to its applicability in India.
An intangible asset is defined in para 8 of IAS 38 as an identifiable non-monetary asset without physical substance. Para 9 of IAS 38 provides computer software as a common example of an intangible asset. By analogy, a web site is another example of an intangible asset.
The stages of Web site’s development are Planning, Application and Infrastructure development, Graphical design and Content development. Once the web site is successfully developed, the Operating stage begins. Under this stage, an entity is required to maintain and enhances the applications, infrastructure, graphical design and content of the web site.
Recognition as an Intangible Asset
A web site developed by an entity for its own use (whether for internal or external access) is an internally generated intangible asset that is subject to the requirement of IAS 38. Para 57 of IAS 38 requires expenditure on an intangible item to be recognised as an expense when incurred unless it forms part of the cost of an intangible asset that meets the recognition criteria in para 21 of IAS 38.
It implies that a web site arising from development shall be recognised as an intangible asset if, and only if, in addition to complying with the general requirements described in para 21 of IAS 38 for recognition and initial measurement, an entity can satisfy the requirements in para 57 of IAS 38.
Future economic benefits, as envisaged by IAS 38’s criteria for recognition of internally generated intangible assets, will be generated from a web site only when the web site is capable of generating the revenue. For example, the web site is capable of generating direct revenues from enabling orders to be placed.
However, if web site has been developed solely or primarily for promoting or advertising the entity’s product and services, the entity will be unable to demonstrate that such a web site will generate future economic benefits, and costs incurred on the development of the web site shall be expensed as incurred.
Accounting Treatment of Web Site Expenditure
Internal expenditure incurred on the development and operation of an entity’s own web site shall be accounted for in accordance of IAS 38. Accounting treatment of internal expenditure incurred on web site’s can be summarised as follows:-
- undertaking feasibility studies
- defining hardware and software specifications
- evaluating alternative products and suppliers
- selecting preferences
Recognise as an expense when incurred in accordance with para 54 of IAS 38.
B :Application and infrastructure Development
- purchasing or developing hardware
- obtaining a domain name
- developing operating software (e.g. operating system and server software)
- developing code for the application
- installing developed applications on the web server
- stress testing
- Apply the requirements of IAS 16
- Recognise as an expense when incurred , unless the expenditure can be directly attributed to preparing the web site to operate in the manner intended by management, and the web site meets recognition criteria in para 21 and 57 of IAS 38
C:Graphical design development
- designing the appearance (e.g. layout and colour) of web pages
Recognise as an expense when incurred, unless the expenditure can be directly attributed to preparing the web site to operate in the manner intended by management, and the web site meets the recognition criteria in para 21 and 57 of IAS 38.
- creating, purchasing, preparing (eg creating links and identifying tags), and uploading information, either textual or graphical in nature, on the web site before the completion of the web site’s development.
- Examples of content include information about an entity, products or services offered for sale, and topics that subscribers access
Recognise as an expense when incurred in accordance with para 69 (c) of IAS 38 to the extent that content is developed to advertise and promote an entity’s own products and services (e.g. digital photographs of products).
Otherwise, recognise as an expense when incurred, unless the expenditure can be directly attributed to preparing the web site to operate in the manner intended by management, and the web site meets the recognition criteria in para 21 and 57 of IAS 38.
- updating graphics and revising content
- adding new functions, features and content
- registering the web site with search engines
- backing up data
- reviewing security access
- analysing usage of the web site
Assess whether it meets the definition of an intangible asset and the recognition criteria set out in para 18 of IAS 38, in which case the expenditure is recognised in the carrying amount of the web site asset.
Recognise as an expense when incurred in accordance with para 65-70 of IAS 38
BY : CA. Pankaj Sharma