Accounting of software acquired for monitoring production activities

Facts of the case:
1. A Manufacturing company had purchased a perpetual software from USA for monitoring the production activities in their factory for an amount of Rs.54,09,466.

2. The same company is showing under its Plant and Machinery the following:
     - Plant and Machinery
     - Office Equipment
     - Lab Equipment and charging depreciation @ 6.33% on all of them put together

Issue/Query:
How to account for the software as per IND  38?

Is it correct to treat the software as PPE as per IND AS 16?

Response:
The basic issue of the querist is whether the software to monitor production activities is an intangible asset or property, plant and equipment. In this regard, paragraph 4 of Ind AS 38 Intangible Assets provides the required guidance as under:
“Some intangible assets may be contained in or on a physical substance such as a compact disc (in the case of a computer software), legal documentation (in the case of a licence or patent) or film. In determining whether an asset that incorporates both intangible and tangible elements should be treated under Ind AS 16 Property, Plant and Equipment or as an intangible asset under this Standard, an entity uses judgement to assess which element is more significant. For example, computer software for a computer-controlled machine tool that cannot operate without that specific software is an integral part of the related hardware and it is treated as property, plant and equipment. The same applies to the operating system of a computer. When the software is not an integral part of the related hardware, computer software is treated as an intangible asset.”

The querist has not provided information on whether the software purchased is an integral part of any hardware. In absence of such details, it is assumed that the software purchased to monitor production activities is not an integral part of any hardware. Therefore, such software must be recognised as an intangible asset and not as property, plant and equipment.

Paragraph 21 of Ind AS 38 states as under:
“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.”

Therefore, the company shall recognise the software as intangible asset and measure the same initially at purchase cost of Rs.54,09,466 in absence of any further details on cost.