GAAP: Software and website development costs

What impact will new UK GAAP have on certain technologies?

Current UK GAAP

Under FRS 10 software development costs directly attributable to bringing a computer system or other computer-operated machinery into working condition for use within the business are classified as tangible fixed assets, like part of the hardware. 

UITF 29 applies the above principles in FRS 10 to website development costs (not website planning costs that cannot be capitalised) requiring that all such costs should be classified as tangible fixed assets.

Accounting treatment under FRS 102

FRS 102 does not address the classification of software and website costs and therefore each entity should develop and apply a suitable accounting policy to classify such costs as tangible fixed assets or as intangible assets.

In developing a suitable accounting policy management makes reference to, in descending order, other FRS dealing with similar issues, any SORP applicable to the entity, general recognition criteria and measurement concepts in section 2 of FRS 102 and IFRSs. Software and website development costs (not research costs) may be recognised as internally generated intangibles only if the entity can demonstrate:

a)    the technical feasibility of completing the intangible asset so that it will be available for use or sale;
b)    its intention to complete the intangible asset and use or sell it;
c)    its ability to use or sell the intangible asset;
d)    how the intangible asset will generate probable future economic benefits;
e)    the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset;
f)     its ability to measure reliably the expenditure attributable to the intangible asset during its development. 

Reporting and commercial impact of the changes

In view of the lack of direction in FRS 102 it is conceivable that some entities will classify software and website development costs as intangible assets while under current UK GAAP they would have been classified as tangible assets.

It is unlikely that choosing to classify assets under one or the other of the two categories will result in material differences in terms of initially recognised amount and subsequent amortisation/depreciation or impairment, especially in view of the fact that the estimated useful economic life of such assets is likely to be short. 


Whether software and website development costs are treated as intangible or tangible assets, the deemed cost can be either the fair value on transition date, or a previous GAAP revaluation at the revaluation date. Additionally the general transitional procedures in FRS 102 require the reclassification at the date of transition of items that were recognised under previous GAAP as one type of asset (ie tangible or intangible) or liability but are a different type of asset or liability under FRS 102. 

Taxation impact of the changes

We have already seen what FRS 10 has to say about software. Under the current rules of FRS 10, internally generated assets cannot be capitalised, unless there is a readily ascertainable market value, which in practice would be rarely, if ever. But internally generated software is excluded from this general rule, which makes it clear that such costs, if appropriate, should be capitalised and treated as a tangible fixed asset.

Under FRS 102, there will be greater scrutiny of Intangible assets, certain software costs will be reclassified from tangible fixed assets to intangible fixed assets, leading to possible acceleration of tax relief through accounting amortisation of these software that will fall within the intangibles assets regime instead of the capital allowances regime.

The tax treatment mirrors the tax position for website costs. The main feature of the intangible assets regime is that the tax treatment follows the accounting treatment. As there may be more assets classed as intangible fixed assets the tax treatment will be easier to follow on from the accounts.

As the choice may be down to the individual entity, the tax difference will be down to how far the policy of the entity differs from its current accounting policy. In addition, there is also the possibility of recognising software and website development as an internally generated intangible fixed asset, subject to various conditions.

Due to the lack of guidance, the change in tax treatment could be significant as the difference between the current fixed asset treatment and the possible intangible asset treatment under FRS 102.