Enquiry:

Para 5.10 of AFRS for MSEs and SSEs allowed capitalization of expenditure on intangible asset subsequent to its completion, subject to certain conditions. With effect from July 01, 2015, Company is required to comply with Revised AFRS for SSEs, wherein no such para is included, however, para 3.6 in the Revised AFRS for SSEs provide guidance on capitalization of website costs.

Company owns the Job posting website, which is in operation for more than 5 years. Costs incurred during the operational period, subsequent to initial completion, meeting the criteria given under para 5.10 of AFRS for MSEs and SSEs (previously applicable), were also being capitalized by the Company.

a) Whether or not the guidance in para 3.6 of Revised AFRS for SSEs can be applied to capitalize the costs incurred on intangible asset subsequent to its completion?

b) If not allowed, should previously capitalized costs be de-recognized under the requirement of para 22.2b of Revised AFRS for SSEs?

Opinion:

Section 3, Intangible Assets, of the Revised Accounting and Financial Reporting Standard for Small-Sized Entities (the Revised AFRS for SSEs), outlines the accounting and reporting requirements for the intangible assets. Paragraph 3.6 (as stated below) provides guidance for the accounting of website related costs:

3.6 “Website costs are categorized into five basic stages that are planning stage (stage 1), application and infrastructure development (stage 2), the graphical design development (stage 3), content development (stage 4) and operating (stage 5). Costs incurred in stage 1 and stage 5 are always expensed however costs incurred from stage 2 to 4 can be capitalized if it fulfills the criteria of development asset discussed in preceding paragraph, particularly (d) above”.

Considering the above requirements of paragraph 3.6, the Committee is of the view that the cost incurred subsequent to the initial recognition of the website can be capitalized, only, if it relates to the three eligible stages for capitalization i.e. application and infrastructure, graphical design and/ or content development. Costs incurred at planning and operating stages are always expensed.

In relation to second part of the query, the Company should consider the requirements mentioned in section 22, Transition to the Accounting Standards for SSEs, when it adopts the Revised AFRS for SSEs for the first time for the preparation of the financial statements.

Relevant paragraph of section 22 is reproduced below:

22.2 “An entity shall in its opening balance sheet as of its date of transition (beginning of the earliest period presented in financial statements) to this Standard:

a. Recognize all assets and liabilities whose recognition is required by to this Standard;
b. Not recognize items as assets or liabilities if to this Standard do not permit such recognition;
c. Reclassify items that it recognized under its previous financial reporting framework as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity under to this Standard; and
d. Apply to this Standard in measuring all recognized assets and liabilities.

The financial effect of above actions should be reflected in opening balance sheet by adjusting the amount of retained earnings as at the date of transition.”

In accordance with the requirement (b) above, the Committee is of the view that previously recorded intangible asset should be re-assessed for recognition as per the criteria outlined in section 3 of the Revised AFRS for SSEs, and the items not fulfilling the criteria should be derecognized from the opening balance sheet and charged to the retained earnings, i.e., restatement would be required.

(March 14, 2017)