Following the recent “Black Friday” sales, sales data from the United States showed that the amount being spent on online purchases continues to increase each year with an increase in online sales of over 20% in the current year while sales at stores actually decreased from the previous year as more consumers take advantage of the convenience of shopping online.

In recent years many major retailers in South Africa have adopted the “Black Friday” and “Cyber Monday” sales in an effort to increase sales and market share by tapping into the online market.

It is becoming increasingly important for businesses to create and maintain their own websites in order to compete for market share as well as promote their own businesses and products. However determining which costs can be capitalised and which costs should be expensed can be complicated without a proper understanding of IAS 38 – Intangible assets.

In order for a business to capitalise the costs associated with developing a website the requirements of both IAS 38 – Intangible assets and SIC- 32 – Intangible Assets – Website costs have to be met.

There are three critical attributes that have to be met for any website to meet the definition of an intangible asset as required by IAS 38:

  • Identifiability – An asset is identifiable if it can be sold or transferred as a separate asset or if it arises from a contractual or legal right such as the registration of the domain name for the website
  • Control – An entity has control over a website if it has the ability to obtain benefits from the asset
  • Future economic benefits – Increased revenue or cost savings generated from the use of the website

Along with these requirements the recognition criteria of IAS 38.21 have to be met in order to recognise an intangible asset for a website:

  • It is probable that the future economic benefits that are attributable to the website will flow to the entity; and
  • The cost of the website can be measured reliably.

SIC- 32 - Intangible Assets was drafted to specifically deal with the proper accounting treatment related to the costs associated with the development of a website. SIC-32 identifies the following of website development:

  • Planning – The planning stage is similar in nature to the research phase in IAS 38.54-.56. Expenditure incurred in this stage should be recognised as an expense when it is incurred.
  • Application and infrastructure development, Graphical design development and Content   development - Expenditure incurred in these stages should be included in the capitalised cost of a website if it directly relates to preparing the website for its intended use, these include costs such as employee costs, design costs, license fees and the purchase of content for the website.
  • Operation - The operating stage begins once development of a website is complete and it is ready for its intended use. Expenditure incurred in this stage should be recognised as an   expense when it is incurred. Expenditure relating to the advertising and promotion of an entity’s own products should be recognised as an expense when it is incurred.

As the popularity of online shopping continues to grow so do the opportunities for businesses to expand into both local and foreign markets. If your business is not already making use of a website to promote itself you should consider whether developing a website can add value to your business.

Riaan Kruger

Audit Supervisor, Durban