Software has been purchased: should it be recorded as an intangible asset or expensed, and when does amortization start?

"Yo'lbars Kargo" LLC runs a fleet of trucks. The dispatchers used to plan routes by hand, in Excel. The director bought a route-planning program from a developer: the developer transferred the exclusive right to the program to the company. The accountant's question is this: do we record this money as an expense of the current month, or put it on the balance sheet as an asset and then write it off to expenses in parts? The answer comes from NAS No. 7. Below, the standard is examined paragraph by paragraph using one company as an example (the company and figures were made up by the author and are hypothetical).

When does a program become an asset: which six requirements must be met at the same time?

Under paragraph 6 of NAS No. 7, for an asset to be recognized as intangible it must meet all of the following at the same time. If even one is not met, it is not recognized. In the table the requirements are applied to the "Yo'lbars Kargo" program:

Let us stop on the third requirement separately. The standard sets the threshold at no less than fifty times the base calculation amount, but gives the head of the organization the right to set a lower threshold for the reporting period. Write the exact amount into the accounting policy, because that document answers the question "do we recognize it or not" every time.

The other side: future economic benefit. Under paragraph 8, the probability of such a benefit is considered to exist when it is proven that the asset will increase future income or reduce future costs. So the director's spoken "the program will be useful" is not enough: there should be minutes or a calculation sheet. For example, a comparison of fuel consumption per route with previous months.

Is every program an intangible asset: four cases

Paying for a program does not automatically turn it into an intangible asset. The standard distinguishes four cases. Below are four hypothetical purchases by "Yo'lbars Kargo":

The 7 800 000 soums in the third row is below the threshold (10 000 000 soums), so it is an expense. The rule in the fourth row is in paragraph 11 of the standard: if a program or database is an integral part of a fixed asset, it is not recorded separately but together with that tangible fixed asset. If the program stands alone and the exclusive right to it has passed to the company, it is an intangible asset.

Row B is also worth a note. An intangible asset received under a right of use is recorded in off-balance-sheet account 016 at the price accepted in the contract; when it is returned, this account is credited (NAS No. 21, paragraph 453). Periodic payments go to expenses, while a fixed one-time payment is a prepaid expense of future periods, expensed over the term of the contract (NAS No. 7, paragraph 61). For prepaid expenses NAS No. 21 provides account 3120 "Prepaid service fees": subscription costs can be shown there (paragraph 159). The table of prepaid expenses has the line "Costs of a subscription for next year": Dr 3120, Cr 5110 (NAS No. 21, paragraph 161, line 4); paragraph 156 gives a press subscription as an example here. Whether a software subscription fits this line is decided in the accounting policy according to the substance of the contract.

What goes into the initial cost and what does not?

An intangible asset is recognized at its initial cost (paragraph 14). The initial cost of an acquired asset consists of the eight types of cost listed in paragraph 15. The list is given in full below, with hypothetical amounts for purchase A:

Check: 96 000 000 + 2 400 000 + 6 000 000 + 4 800 000 + 7 200 000 = 116 400 000. Three of the eight (rows 3, 4 and 7) are zero in this example, but the list must stand in full: at another company they may be non-zero. Recoverable taxes are not taken into account in the example: the standard says only non-recoverable taxes and levies are added to the initial cost.

Now what is not included. The same paragraph 15 says that the costs of opening a letter of credit, the bank's intermediary fee for transfers, the intermediary fee for conversion when buying in foreign currency, other bank services, as well as other costs not directly related to the purchase are not added to the initial cost: they become an expense in the reporting period in which they were incurred. Interest on a loan used to buy an intangible asset is also not included in the initial cost. This rule applies only to an acquired asset: interest on a loan taken for developing an asset, during the development period, does go into the initial cost of the developed asset (paragraph 15, last two subparagraphs).

Result: the company spent a total of 116 400 000 + 3 750 000 = 120 150 000 soums, but 116 400 000 soums is recorded in the asset, and the remaining 3 750 000 soums become an expense. Once the initial cost has been accepted, it is not changed except in cases set by legislation and the standard (paragraph 25). After initial recognition the asset is shown either at initial cost less accumulated amortization or at the revalued amount; whichever method is chosen must be stated in the accounting policy (paragraph 26).

When does amortization start and how much is it?

It is easy to go wrong here. Under paragraph 41, no amortization is recorded in the very month the asset is recorded: calculation starts on the 1st day of the next month and continues until the depreciable amount is fully recovered or the asset leaves the balance sheet. Calculation stops on the first date of the month following the month in which it was fully recovered (paragraph 42).

"Yo'lbars Kargo" accepted the program on 18 March (hypothetical date). Amortization starts on 1 April. The accounting-policy terms:

• Useful life. The program is expected to be used for 5 years, that is 60 months. The term is set when the asset is accepted (paragraph 47, first subparagraph). For assets whose useful life cannot be determined, the standard provides a five-year norm (paragraph 47); in our example the term is set precisely, and it is also five years.
• Residual value. There is no agreement with the developer or another third party to buy it back after five years, and no active market, so it is taken as zero (paragraph 58). The depreciable amount is the full 116 400 000 soums.
• Method. Straight-line: the annual amount is found by dividing the depreciable amount by the term, the monthly amount is the monthly share of the annual one (paragraphs 48 and 52).

Calculation: 116 400 000 ÷ 5 years = 23 280 000 soums a year; 23 280 000 ÷ 12 = 1 940 000 soums a month.

Check: 9 + 12 + 12 + 12 + 12 + 3 = 60 months; 1 940 000 × 60 = 116 400 000. The last month is March 2031, and amortization stops on 1 April. The table shows clearly that the first year has 9 months, not 12: the purchase was in March, so no amortization was charged for March.

The standard gives two more important rules. The first: at the end of each year the useful life is reviewed again, if a change in the term is expected or the forecast departs noticeably from the initial estimate (paragraph 56); the new term applies from the month after the month of the change. The second: during the useful life, amortization is not suspended, except in cases where a restriction has been placed on the use of the asset (paragraph 43).

What do the journal entries look like?

The rows below are taken only from links that are explicitly present in the NAS No. 21 tables. The program is used for dispatching, that is, for management purposes, so amortization is charged to 9420 "Administrative expenses":

Which account's debit receives the amortization depends on for what purpose the asset is used. Paragraph 52 of NAS No. 21 gives all of these links:

In our example line 4 was chosen, because the program was accepted for management needs. At another company, for example if the program is used directly in providing services, a different line may be chosen: the company documents this itself.

In account 0830 "Acquisition of intangible assets" all costs related to acquiring or creating the asset are accumulated (paragraph 70), and analytical accounting is kept by types and names of intangible assets (paragraph 74). The table of group 0800 in NAS No. 21 has no separate line linking 0830 with a supplier or a bank, so which accounts 0830 is filled from (supplier debt, payment and so on) is set in the accounting policy. The same applies to the 3 750 000 soums not included in the cost: the account for them is set in the accounting policy.

If the program is retired or sold, the initial cost is removed from the credit of 0430 to the debit of 9220 "Disposal of other assets", and the accumulated amortization from the debit of 0530 to the credit of 9220 (NAS No. 21, paragraphs 46 and 51). Suppose that in December 2028 the program was replaced by a new system and written off. Amortization was charged for April 2026 to December 2028, that is 9 + 12 + 12 = 33 months: 1 940 000 × 33 = 64 020 000 soums. The remainder is 116 400 000 − 64 020 000 = 52 380 000 soums.

As a result a debit balance of 52 380 000 soums arises in 9220: this is the carrying amount of the written-off program. If there are sale proceeds, they are shown separately in the credit of 9220 (NAS No. 21, paragraph 393).

Later spending on the program: is it added to the cost?

This is also a frequent question. The standard separates two sides:

1. Costs spent on improving the asset, expanding its capabilities or extending its service life, which increase the benefit originally expected, increase the initial cost (paragraph 27).
2. Costs of keeping the asset in working condition and maintaining the originally set benefit become an expense of the reporting period (paragraph 38). Paragraph 39 lists two cases in which a later cost becomes a period expense: if it does not increase the future benefit directly related to the asset; if it cannot be measured and attributed to a specific asset. Such a cost is not included in the carrying amount.

Example: suppose the dispatcher also paid for a new module that he himself asked for. If the module expands the program's capabilities and increases the expected benefit, its cost is added to the cost in 0430, and in the following months amortization is charged on the new carrying amount. Ordinary technical support and bug fixes are an expense. A cost once recorded as a period expense is not returned to the asset in later periods (paragraph 37).

Practical advice

• Three things are mandatory in the accounting policy: the measurement method after initial recognition (paragraph 26), the amortization method and the possibility of reviewing the useful life (paragraph 54). The threshold for treating an item as an intangible asset (paragraph 6) is set by the manager; writing it into the accounting policy is also practical advice, so that no questions arise during an inspection.
• Read the contract first. Whether the exclusive right passes or only a right of use is granted: this single question sends the program to 0430, to 016 or to expenses. If the contract contains the words "right of use", "license", "subscription", be careful.
• Write the acceptance certificate date precisely. Amortization starts on the 1st day of the month after that month, and if the date is off by a month, the whole schedule shifts.
• Separate the types of cost at the purchase itself. The bank fee and loan interest are not included in the cost, while registration and setup are. Open a separate analytical card for the item in 0830.
• Review the useful life at the end of each year. If the program becomes obsolete in 3 years rather than 5, the term will have to be shortened (paragraph 56), with the new norm applied from the next month.
• Tax accounting is a separate topic. This article is only about accounting: the procedure for recognizing amortization and expenses for tax purposes is checked separately under the Tax Code and the tax accounting rules.