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Dear friends,

Please, help with the following question.

An entity purchased Antivirus Software license with the validity period of 1 year for $1,200. The entity can't resell the license. Now, the possible treatments:

1) Capitalize as an intangible asset with useful life of 1 year or

2) Recognize as expense directly in profit/loss at the amount of $1,200 at the moment of purchase or

3) Recognize the prepaid expense in balance sheet at the amount of $1,200 at the moment of purchase and evenly write off to profit/loss ($1,000 monthly) during the year.

Are criteria for recognition of an intangible asset met? Please, answer with any reference to the standards.


Best Regards,

in IAS 38 - Intangible Assets by Level 1 Member (1.5k points)

1 Answer

+1 vote

Here are my comments on your options:

1.Capitalization is not recommended. 

Note that IAS 32 says:

An intangible asset shall be recognised if, and only if:
(a) it is probable that the expected future economic benefits that are
attributable to the asset will flow to the entity; and
(b) the cost of the asset can be measured reliably.

Whereas IAS 16 PPE definition says:

Property, plant and equipment are tangible items that:
(a) are held for use in the production or supply of goods or services,
for rental to others, or for administrative purposes; and
(b) are expected to be used during more than one period.

In the case of PPE it is clear that if you don't expect to use the item for more than one year it should NOT be capitalized. 

However intangible asset definition does not mention such a period of use in order to be capitalized. But it talks about potential future economic benefits. Future economic benefits, as I think, means economic benefits which can be derived beyond one period. Therefore I believe capitalization is not in line with IFRS.

2. This is of course an option for you. I think most of the companies do so considering the materiality of the amount concerned.

3. I think this is the best option given IFRS rules and the matching principle of accounting. 

by Level 2 Member (4.6k points)
Thanks for the answer!