Appendix 2 - Costs to expense and capitalise

An entity develops a new IT software program to record customer details.

The entity incurred the following costs to develop the new software:

1. $5,000 consultant fees to search and evaluate off-the-shelf systems
2. $2,000 in employee expenses to select the final off-the-shelf system
3. $3,000 in employee expenses to design changes required to the off-the-shelf system
4. $10,000 in employee expenses to construct and test the new software
5. $5,000 for new terminals to replace old terminals that did not have the capacity to handle the new software
6. $500 to promote the new software to staff
7. $2,000 in training staff to operate the new asset.

Assuming the requirements to capitalise are met, these costs would be treated as follows:

1. expense $5,000 consultant fee—as it was incurred in the research phase
2. expense $2,000 employee expenses—as it was incurred in the research phase
3. capitalise $3,000 employee expenses—as it is directly attributable and was incurred in the development phase
4. capitalise $10,000 employee expenses—as it is directly attributable and was incurred in the development phase
5. recognise  $5,000 as property, plant and equipment under AASB 116
6. expense $500 as it is an operating expense incurred in the implementation phase
7. expense $2,000 as it is an operating expense incurred in the implementation phase.