Assume REH AG, a hypothetical company, incurs expenditures of €1,000 per month during the fiscal year ended 31 December 2009 to develop software for internal use. Under IFRS, the company must treat the expenditures as an expense until the software meets the criteria for recognition as an intangible asset, after which time the expenditures can be capitalized as an intangible asset.
1. What is the accounting impact of the company being able to demonstrate that the software met the criteria for recognition as an intangible asset on 1 February versus 1 December?
2. How would the treatment of expenditures differ if the company reported under U.S. GAAP and it had established in 2008 that the project was likely to be completed?
EXAMPLE 10-5 Impact of Capitalizing versus Expensing for Ongoing Purchases
A company buys a £300 computer in Year 1 and capitalizes the expenditure. The computer has a useful life of three years and an expected salvage value of £0, so the annual depreciation expense using the straight-line method is £100 per year. Compared to expensing the entire £300 immediately, the company’s pretax profit in Year 1 is £200 greater.
1. Assume that the company continues to buy an identical computer each year at the same price. If the company uses the same accounting treatment for each of the computers, when does the profit-enhancing effect of capitalizing versus expensing end?
2. If the company buys another identical computer in Year 4, using the same accounting treatment as the prior years, what is the effect on Year 4 profits of capitalizing versus expensing these expenditures?