How to account for the costs of websites.
In 2013 it is a rare business that does NOT have a website. They can vary from a static page showing a few contact details to an elaborate interactive masterpiece, but most businesses today will have some online presence. Websites and software are updated, changed and amended on a more frequent basis. This can cause confusion about how and where the costs should be shown in the accounts.
In February 2001 UITF Abstract 29 Website Development Costs was released. The abstract recognises that many companies incur significant costs in developing websites, describes the different types of costs associated with website development, and sets out the correct accounting treatment for the costs.
The abstract sets out four broad categories of cost:
- planning costs
- application and infrastructure development costs
- design costs
- content costs.
Planning costs should not be capitalised, but should be written off as incurred through the profit and loss account. However, the other three types of cost could give rise to an asset, which should be capitalised if the relationship between the expenditure and the future economic benefits is sufficiently certain.
The UITF came to the conclusion that design and content costs should only be capitalised to the extent that they create an enduring asset and there are reasonable grounds for supposing that future economic benefits in excess of the amounts capitalised would be generated by the website, which would only be the case if the website was capable of generating revenues directly, for example by enabling orders to be placed, or subscribers to pay for access, or even by the selling of advertising space.
In considering whether capitalised website development costs should be tangible or intangible assets, the UITF considered FRS 10, and in particular the section of paragraph 2, which says: ‘Software development costs that are directly attributable to bringing a computer system or other computer-operated machinery into working condition for its intended use within the business are treated as part of the cost of the related hardware rather than as a separate intangible asset’.
In order to be consistent with the approach in FRS 10, the UITF concluded that capitalised website development costs should be shown as tangible assets and so are subject to the requirements of FRS 15 and FRS 11, including provision of depreciation and impairment reviews where appropriate. In calculating depreciation, it should be remembered that technological advances tend to proceed at a rapid rate so the estimated useful economic life is likely to be short.
The consensus reached by the UITF was that:
- website planning costs should be put through profit and loss accounts as incurred
- application and infrastructure development costs should be capitalised if the relationship between the expenditure and future economic benefits is sufficiently certain
- expenditure to maintain or operate the website after its development should be charged to the profit and loss account as incurred
- design and content development costs should be capitalised only to the extent that they lead to the creation of an enduring asset delivering benefits at least as great as the amount capitalised, which would be to the extent that: (a) the expenditure is separately identifiable; (b) it is reasonably certain that the website is technically feasible and commercially viable; (c) the website will generate sales or other revenues directly and the expenditure makes an enduring contribution to the development of the revenue generating capabilities of the website.
As they are tangible fixed assets, the website development costs are subject to capital allowances, including AIA. There is some guidance on HMRC’s website here and here.
Software
We have already seen what FRS 10 has to say about software. The general rule in FRS 10 is that internally generated assets cannot be capitalised, unless there is a readily ascertainable market value, which in practice would be rarely, if ever. But internally generated software is excluded from this general rule, as set out in the excerpt above, which makes it clear that such costs, if appropriate, should be capitalised and treated as a tangible fixed asset.
Only directly attributable software development costs that are associated with computer hardware for the entity’s own use should be capitalised as a tangible fixed asset. In determining whether any externally purchased software could be an asset that should be capitalised, the usual rules used to determine whether an item is an asset should be applied.
The tax treatment mirrors the tax position for website costs, and guidance can be found on HMRC’s website.
Article contributed by ACCA