Question

Cairns Ltd is considering four options to obtain computer software to use for their payroll and general ledger. The options are:

1. Purchase the computer software externally.

2. Contract independent programmers to develop specific software for the company.

3. Buy computer software to incorporate into a product that the company will develop.

4. Employ its own programmers to write software that the company will use.

Required

1. For each of the four options, explain whether the computer software satisfies the definition of an intangible asset in accordance with AASB 138 Intangible Assets.

2. For each option that satisfies the definition of an intangible asset, explain the recognition criteria that would be applied by Cairns Ltd.                                                                                                                  

Answer 1

As per AASB 138, an intangible asset is a non monetary asset without a physical substance. An intangible asset can be recognized only if it can be independently  indefinable. Intangible assets can be capitalized only if they meet the recognition criteria i.e. is capitalized as an asset only if the costs result in future economic benefit to the entity and they can be measured reliably. The development costs and other expenses incurred for the intangible asset must be directly attributable for capitalization.

a&b :

1.Purchase the computer software externally.- This is recognized as an intangible asset since it will entail future economic benefits for the company.

2. Contracting independent programmers to develop specific software for the company - The final cost of the software can be recognized as an intangible asset.

3. Purchase computer software to incorporate into a product that the company will develop - Purchase of software will qualify as intangible asset and any directly attributable development costs to the software.

4. Employ its own programmers to write software that the company will use - Recruitment of staff specifically to write the software can be capitalized.