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A. Facts of the Case
1. A company was incorporated on 27th September, 1999 under
the Companies Act, 1956 as a Government company as a part of
Indian Railways’ wider organisational reform and to strengthen its
marketing and service capabilities in the areas of rail catering,
tourism, and passenger amenities. The company obtained the
certificate for commencement of business on 2nd December, 1999.
The authorised share capital of the company is Rs. 50 crore and
paid up share capital is Rs. 20 crore. The total paid up capital is
subscribed by the Ministry of Railways.
2. The main activities of the company are as under:
• On-board catering services and static catering units on
the Indian Railways network.
• Selling of railway tickets by way of e-tickets and i-tickets
through the company’s web portal.
• Managing and operating all India Railway Enquiry Call
Centre.
• Setting up of food plazas with private partnerships at
railway stations on Indian Railways network.
• Running of special train charters, special coach charter
and promotion of rail tour packages and value added
tours.
• Manufacturing packaged drinking water for Indian
Railways passengers.
• Managing the departmental catering units, taken over
from the Indian Railways.
• Establishment of budget hotels / management of existing
Rail Yatri Niwas / budget hotel.
• Organising special train charters on hill railways.
3. During the year 2005-06, the company had awarded a contract
for design and development of the corporate portal of the company
to M/s XYZ Ltd. at Rs. 32.20 lakh. The corporate portal is leveraging
the web/internet technologies/tools for dissemination of information
and allow a familiar, easy to use web. The portal is being accessed
through internet and/or intranet. The portal is facilitating the users
throughout the enterprise to access a wide variety of information,
e.g., company’s announcements, tender calendar, etc. Also
employees of the company can view human resource details. Portal
is also helping in the speedy and efficient dissemination of
information.
4. The querist has stated that an amount of Rs. 32.20 lakh was
incurred on development of web portal. As per the accounting
policy adopted by the company, the amount incurred on
development of web portal was capitalised along with the computer/
server. A disclosure in this regard was given in the notes to the
accounts.
5. During the course of supplementary audit of the accounts of
the company under section 619 of the Companies Act, 1956 by
the Audit Party of Comptroller and Auditor General (C&AG) of
India, it was observed that :
“ ‘Fixed Assets – Computers’ includes a sum of Rs. 32.20
lakh incurred on web portal of the company. It is a software
and is an intangible asset and as stated under Accounting Standard (AS) 26, ‘Intangible Assets’, besides disclosing
method and rate of amortisation the following disclosures are
also to be made:
(i) Whether it is an internally generated intangible asset or
not.
(ii) A distinction has to be made between internally
generated assets and other intangible assets.
(iii) The gross carrying amount and the accumulated
amortisation (aggregated with accumulated impairment
losses) at the beginning and end of the period.
(iv) A reconciliation of the carrying amount at the beginning
and end of the period showing (a) additions, indicating
separately those from internal development and through
amalgamation; (b) retirements and disposals; (c)
impairment losses recognised in the statement of profit
and loss during the period (if any); (d) impairment losses
reversed in the statement of profit and loss during the
period (if any); (e) amortisation recognised during the
period; and (f) other changes in the carrying amount
during the period.
Thus, requisite disclosures in terms of mandatory AS
26 pertaining to an intangible asset have not been made.”
6. The querist has stated that as per Accounting Standard (AS)
10, ‘Accounting for Fixed Assets’, a fixed asset is an asset held
with the intention of being used for the purpose of producing or
providing goods or services and is not held for sale in the normal
course of business. As per paragraph 10 of Accounting Standard
(AS) 26, ‘Intangible Assets’, “an asset may incorporate both
intangible and tangible elements that are, in practice, inseparable.
In determining whether such an asset should be treated under AS
10, Accounting for Fixed Assets, or as an intangible asset under
this Standard, judgement is required to assess as to which element
is predominant. 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 a fixed asset. The same applies to the operating system of a computer. Where the software is not an integral part of the related
hardware, computer software is treated as an intangible asset.”
7. The querist has further stated that hardware and software
platform for the said corporate portal was advised by M/s. XYZ
Ltd. As per the requirements given, the said developed software
would operate through web and application server and data server.
The said computer machines were not supposed to be operated
as stand-alone machines. In the view of the company, the
application software developed by M/s XYZ Ltd. is an integral part
of the web application server and data based server. Accordingly,
the company has decided to capitalise the cost of Rs. 32.20 lakh
incurred on designing of web portal of the company, along with
computers, as per the accounting policy followed by it. A disclosure
in this regard has been made as per note no. 20 of the notes to
accounts. In view of the above, according to the querist, the amount
of Rs. 32.20 lakh incurred on web designing of web portal has
been correctly accounted for.
B. Query
8. The querist has sought the opinion of the Expert Advisory
Committee of the Institute of Chartered Accountants of India as to
whether the accounting policy followed by the company with regard
to capitalisation of software along with computers is correct or the
same is needed to be rectified, as pointed out by the Audit Party
of the C&AG of India.
C. Points considered by the Committee
9. The Committee notes from the Facts of the Case that the
company has incurred an expenditure of Rs. 32.20 lakh on
designing and development of the corporate portal of the company.
The Committee notes that the basic issue raised in the query
relates to whether the accounting policy of the company of
capitalising such development costs related to portal to ‘Fixed
Assets – Computers’ is proper or not. Accordingly, the Committee
has answered this particular issue and has not touched upon any
other issue arising from the Facts of the Case, such as, whether
or not such expenditure has properly been classified as being
related to the development phase of the generation of an internally generated asset, viz., portal, as per the provisions of AS 26. The
Committee has presumed that the entire expenditure in respect of
which the query has been raised relates to the development phase
of the portal.
10. The Committee notes paragraph 10 of AS 26, which provides
as follows:
“10. In some cases, an asset may incorporate both intangible
and tangible elements that are, in practice, inseparable. In
determining whether such an asset should be treated under
AS 10, Accounting for Fixed Assets, or as an intangible asset
under this Standard, judgement is required to assess as to
which element is predominant. 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 a fixed asset. The same applies
to the operating system of a computer. Where the software is
not an integral part of the related hardware, computer software
is treated as an intangible asset.”
From the above, the Committee notes that from purely accounting
point of view, there are broadly two types of computer software,
viz., (a) computer software which is an integral part of the computer
and without which that computer cannot operate, such as, an
operating system, which is a foundation software of a machine
that controls the operation of a computer and allows users to enter
and run their software packages; and (b) other software. The
Committee is of the view that the basic difference between the two
is that the first type of software helps the computer machine to run
and forms a platform for running other computer software.
Therefore, the Committee is of the view that it is only the first type
of computer software that should be capitalised along with the
related hardware.
11. The Committee notes from the Facts of the Case that the
company has capitalised the application software internally
developed by the company along with the web application server
and data based server for which the reason is stated to be that the
application software is an integral part of the web application server
and data based server and that the said computer machines were not supposed to be operated as stand-alone machines. In this
regard, the Committee notes that application software is a software
program running on the top of the operating system that has been
created to perform a specific task for a user. The said computer
machines can still be run through the operating system without the
application software, though not for the desired tasks. Thus, the
Committee is of the view that the application software cannot be
treated as an integral part of the related machines and cannot be
capitalised alongwith the said computer machines. Accordingly, in
the view of the Committee, the computer software under
consideration should be treated as separate internally developed
intangible asset provided it meets the requirements of AS 26.
D. Opinion
12. On the basis of the above, the Committee is of the opinion
that the accounting policy followed by the company with regard to
capitalisation of software along with computers is not correct and
the same needs to be rectified on the lines of paragraph 11 above.
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