Capitalize or Expense

[abrarh]

The cost of creating an electronic data warehouse (scanning the physical records and putting them in electronic form should be capitalized or expenses out? The cost of the server & software purchased for this purpose was capitalized, but item in quesiton is the labor cost of scanning the documents.

[hanifasif]

It should not be capitalized reason being

1-It’s a recurring item i.e. you will keep on populating the database with new data in the future.

2-Such scanning and populating the database was independent of main asset (the server & software) and has not in anyway increased the working capacity or efficiency of the asset (the server & software).

3-Nor such data entry was necessary to make the DBS work. For example a passenger bus can ply the road irrespective of the fact that there is only one person, the driver on the driving seat.

Please correct me if I am wrong.

[kamranACA]

Dear,

Nice question.

Para 49 of Framework of IFRSs defines an asset as

"An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity"

Para 89 of Framework lays down criteria for recognition of an asset

"An asset is recognised in the balance sheet when it is probable that the future eceonomic benefits will flow to the entity and the asset has a cost or value that can be measured reliably"

Similar criteria could be found in para 7 of IAS 16 and para 21, 22, 24 and 57 of IAS 38 for recognizing property, plant and equipment and Intangible assets respectively. (the assets other than the financial assets).

Electronic data room is prepared at the time of privatizations for the due dliligence of so many investors. Entities may also do this to transfer the huge data easily or to store such data in the long-run or to keep back up as a disaster recovery plan.

We can see that the staionery used for recording various transactions and other data maintained on papers is never recognised as an asset while such stationery has a cost. Why we dont do this?

Because of economic justification. No future economic benefits could be caused by such papers (on their own) for the entity. What is the economic benefit?

Para 53 of Framework of IFRSs describes it as a potential to cause inflow of cash or cash equivalents to the entity. IT may also be a potential to reduce cash outflows from the entity.

We have never capitalized the salaries of the accounting staff who keep the records on manual papers or in systems that could be generated on papers. Because, its economic justfication is of an expense as far as future economic benefits are concerned.

In my view the data stored on CDs, Cartridges and tapes (on its own) cannot contribute any economic benefits to the entity. Therefore, its cost or whatever ancillary cost like labor or overheads in recording such data cannnot be recognized as an asset. These costs have to be recorded as an expense.

Hope the clarification will serve your purpose.

Best regards,

Kamran.

[Muhammad Amir]

Mr Kamran ACA looks infact proves to be a member of Advocates family laugh out

[kamranACA]

Dear Amir,

Was it required to laugh out by you? I dont find any reason. Do you find?

I appreciate your identification capabilities.

Regards,

Kamran.

[msc286]

I really appreciate the time devoted by Mr. Kamran in clarifying the issues at hand. He has this fantastic ability of analyzing the problem and suggesting appropriate way to follow.

I believe Amir Sb. was not intending any offense.

Keep it up Mr. Kamran. The profession needs some sincere efforts on the part of the professionals like you.

[kamranACA]

Dears,

Whatever I do here is pursuit of the professional satisfaction, which we sometimes fail to find in our daily workings due to stereo type functions and lesser inovative workings.

Further, professional discussions always help in enhancing one's own knowldge. No one can snatch anything from us. I appreciate every one who contributes to this forum or other similar forums. I have also been teaching my students free of cost which I had to discontinue due to professional engagements.

I really appreciate Mr. Mahmood for his help to so many people including me. Mr. Amir' attitude is not a problem for me. He is far junior and might be so much frustrated, which we were also used to be in those earlier days.

Regards,

Kamran.

[unseendemon]

I think by now we all know Amir`s posts are to be ignored. I really appreciate the time KamranACA puts into this forums. Its really great for juniors to be able to benefit from the experience of someone who has gone through this phase. All i got to say is , Thank You kamran bhai !

[kamranACA]

You all are welcome!!!