In the digital era, websites are not just online platforms; they are pivotal assets for businesses, representing their virtual identity and often serving as primary points of interaction with customers. However, handling website costs in accounting can be complex, with various rules and guidelines to follow. This article aims to clarify what constitutes capitalisable costs versus expenses in website accounting, along with insights into development and maintenance costs.
Criteria for Capitalising Website Development Costs
Website development costs (excluding research costs) may be recognised as internally generated intangibles if an entity can demonstrate the following:
- Technical feasibility of completing the intangible asset so that it will be available for use or sale.
- Intention to complete the intangible asset and use or sell it.
- Ability to use or sell the intangible asset.
- How the intangible asset will generate probable future economic benefits, such as demonstrating the existence of a market or its internal usefulness.
- Availability of adequate technical, financial, and other resources to complete the development and use or sell the intangible asset.
- Ability to measure reliably the expenditure attributable to the intangible asset during its development.
Understanding Assets vs. Expenses
The key principle in treating website costs in accounting is whether the expenditure results in future economic benefits beyond the current period.
Assets Criteria for Website Costs:
Capitalisable costs are those directly associated with creating or acquiring an asset that provides future economic benefits. For websites, this includes expenses related to design, development, and implementation. These costs are recognised in the Balance Sheet as they enhance the company’s ability to generate revenue or other benefits over multiple accounting periods.
Profit and Loss Expense Recognition for Website Costs:
Expenses are costs incurred for day-to-day business operations that do not generate future economic benefits beyond the current accounting period. These often include routine maintenance, content updates, and minor repairs that do not significantly enhance the website’s overall value or functionality.
Development Costs: Assets or Expenses?
The treatment of website expenditure can relate to Research and Development expenditure, which helps recognise these expenses in the appropriate financial statements. The treatment of research and development costs depends on the website’s development stage.
Research Stage:
Costs incurred during the preliminary stage, such as research, conceptualisation, and feasibility studies, are typically expensed as they do not result in identifiable assets. These costs are necessary for decision-making but do not contribute to creating a tangible asset with future economic benefits.
Development Stage:
Costs directly attributable to the website’s development, including design, coding, and testing, are usually capitalised as part of the website’s asset value. These costs represent investments in creating an identifiable asset that will generate future economic benefits for the business.
Post-Development Stage:
After the website is substantially complete, ongoing costs such as training, content updates, and minor enhancements may be expensed as maintenance costs unless they result in significant improvements or expansions. If post-development activities result in substantial enhancements that materially improve the website’s functionality or extend its useful life, these costs may be capitalised.
Maintenance Costs: Expense Recognition
Maintenance costs are expenditures necessary to keep the website operational and up to date and should be booked in the Profit and Loss statement.
Routine Maintenance:
Routine maintenance costs, such as hosting fees, domain registration, and regular updates to software or plugins, are expensed as incurred. These costs are essential for the website’s ongoing operation but do not materially enhance its value or functionality.
Significant Enhancements:
If maintenance activities lead to significant enhancements that substantially improve the website’s functionality or extend its useful life, these costs may be capitalised. For example, a major redesign or upgrade that enhances user experience or expands the website’s capabilities could qualify for capitalisation.
Website Costs: UK GAAP & IFRS
Once capitalised, Section 18 of FRS 102 provides an option to follow a cost or revaluation model for subsequent measurement. The entity must allocate the depreciable amount of an intangible asset systematically over its useful life. The amortisation charge for each period shall be recognised in profit or loss unless another section of the standard requires the cost to be recognised as part of the cost of an asset. The amortisation begins when the intangible asset is available for use and ceases when the asset is derecognised. If the useful life cannot be reliably estimated, it shall not exceed five years. Additionally, an assessment of whether there are any indicators of impairment of the asset’s carrying value is required.
IFRS (International Financial Reporting Standards):
Intangible Assets (IAS 38):
Under IAS 38 “Intangible Assets,” a website can be recognised as an intangible asset if it meets criteria such as being identifiable, controlled by the entity, expected to generate future economic benefits, and having a reliably measurable cost. Costs incurred during the development phase can be capitalised if they meet criteria like technical feasibility and intention to complete. Research phase costs are expensed as incurred. The asset is amortised over its useful life, with annual impairment testing for assets with an indefinite useful life.
UK GAAP (FRS 102):
Under FRS 102, a website can be recognised as an intangible asset if it is identifiable, controlled by the entity, and expected to generate future economic benefits. Development costs meeting specific criteria can be capitalised. Research costs are expensed as incurred. The asset is amortised over its useful life, typically not exceeding five years if it cannot be reliably determined, with impairment assessments required.
Key Differences:
- Useful Life Assumption:
- IFRS: Allows for an indefinite useful life with annual impairment testing.
- UK GAAP: Presumes a maximum useful life of five years if the useful life cannot be reliably determined.
- Impairment Testing:
- IFRS: Intangible assets with indefinite useful lives are tested annually for impairment.
- UK GAAP: Intangible assets are amortised over a presumed useful life, typically not exceeding five years.
- Detailed Guidance and Flexibility:
- IFRS: Provides detailed guidance and flexibility in recognising and measuring intangible assets.
- UK GAAP: Provides a more prescriptive approach with specific presumptions.
Conclusion
Navigating website costs in accounting requires a clear understanding of the distinction between capitalisable costs and expenses to be recognised in the appropriate item of the Financial Statements. While costs directly associated with website development and substantial enhancements are typically capitalised as assets, routine maintenance and day-to-day operational expenses are expensed as incurred.
