How should software licences be accounted for?

As with many accounting issues, there may be more than one right answer

The rights to use software should be distinguished from the software itself.

If an entity develops its software (either itself or using consultants), it should consider recognising the development and other costs as software using GRAP 31 on Intangible Assets.

Entities frequently acquire the rights to use “off the shelf” software such as ERP, payroll, HR, and financial reporting systems. In these instances, the underlying software belongs to the service provider, but the entity acquires the right to access and use the software for a period. This right of use is often sold as a “licence” by the software provider.

Licences could be accounted for in at least three ways.

• Intangible assets – A licence to use a stand-alone system, e.g. an ERP system, could be recognised as an intangible asset and amortised over the period of use (unless another period is more appropriate).
• Property, plant and equipment – When software is integral to the operation of property, plant and equipment – like the operating system of a computer – the licence could be recognised as part of the cost of the item of property, plant and equipment. Separate recognition as an intangible asset may also be appropriate.
• As an expense – If a software licence is not qualitatively or quantitatively material, the principles in the Standards of GRAP do not need to be applied. In this instance, an entity may recognise the expenditure paid to acquire the licence as an expense. It may also be appropriate to recognise a licence as an expense if the period of the licence isless than one year.

The accounting applied would vary depending on the materiality and the underlying nature and use of the software.

This article reflects the views of the staff of the ASB and not the Board.