Capitalization of internally generated assets

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ahbun
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Joined: 28 Jun 2021, 10:49

Capitalization of internally generated assets

Post by ahbun »

Background:
If Company A has purchased a new company (Company B) and there is a plan to migrate the financial data to Company A accounting system. The migration of financial data will be performed by an internal IT team of Company A. In this case, can we capitalize the time spent incurred by the internal IT team for this data migration purpose?

Even if it is not migrated by the internal IT team, the Company will have to purchase or engage external advisor to complete this. Hence, there is a cost saving element which can justify the future economic benefit?

Appreciate if someone can provide some guidance.
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Marek Muc
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Re: Capitalization of internally generated assets

Post by Marek Muc »

As I see it, migrating data from one system to another is akin to "expenditure on relocating or reorganising part or all of an entity" which is recognised as revenue expense in P&L under IAS 38.69(d)
JRSB
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Re: Capitalization of internally generated assets

Post by JRSB »

there isn't really a cost saving element is there? either external person does it or your own people use up their time.
Student of IFRS.
ahbun
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Re: Capitalization of internally generated assets

Post by ahbun »

Hi Marek, thanks for your view. I have another question also related to the capitalization of intangible assets.

If Company A signed a 1 year data licence agreement with a service provider. In the agreement, the service provider specified the Terms and Conditions of how the data can be used and grant Company A a non-exclusive, non-transferrable, revocable licence for the permitted use only during the contract period and allow Company A to enter into subscription agreement with 3rd parties to use the data. The data provider have specified how the data can be used by Company A and the 3rd party:
i. use for marketing, promotion, demo purposes
ii. use for internal testing, implementation and integrating them to customer system
iii. use to develop new systems or products or amend or further existing products or systems
iv. access, view and manipulate the data and create manipulated data
v. store the data in its system
vi. distribute the data to customer's personnel who is authorised to access/use the system
Company A cannot use the data for any other purpose other than those permitted under the agreement. The service provider also provide live technical support, update data in real-time basis and guaranteed continuous availability.

But in the agreement under "Intellectual Property'' session, the service provider agree that any manipulated data are the property of Company A and the use of the manipulated data is determined in Company A's sole discretion.

Company A has the intention to use the data to build a platform or system for own use. In this case, can the licence fee charged by the data provider be capitalized?
I'm a bit confused whether this licence fee should fall under IAS 38 or IFRS 16, and whether they can be capitalized or not.
ahbun
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Joined: 28 Jun 2021, 10:49

Re: Capitalization of internally generated assets

Post by ahbun »

JRSB wrote: 29 Jun 2021, 10:36 there isn't really a cost saving element is there? either external person does it or your own people use up their time.
In a way the time cost incurred by the internal people is cheaper than engaging an external person. But I think the challenge will be to showcase the economic benefit of this data migration project as the project nature did not help to save any costs or increase revenue or simplified processes?
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Marek Muc
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Re: Capitalization of internally generated assets

Post by Marek Muc »

if you purchased this data subscription to develop your own intangible asset, I would treat subscription fee as any other professional fee and include it as part of the cost of new asset if recognition criteria are satisfied
marea
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Re: Capitalization of internally generated assets

Post by marea »

Just as a side note:

"rights held by a lessee under licensing agreements for items such as films, videos, plays, manuscripts, patents and copyrights within the scope of IAS 38 Intangible Assets" are outside the scope of IFRS 16.

So IAS 38 would be applicable if criteria are met.
ahbun
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Joined: 28 Jun 2021, 10:49

Re: Capitalization of internally generated assets

Post by ahbun »

Thanks Marek and Marea for sharing your thoughts. Appreciate it.
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