SIC-6, which stands for Costs of Modifying Existing Software, refers to the accounting standard under the International Financial Reporting Standards (IFRS) that provides guidance on how to account for costs incurred in modifying existing software. In this article, we will delve into the definitions, explanations, examples, and case studies related to SIC-6 in 1200 words.
Definitions:
SIC-6 defines modifying existing software as changes made to software programs or systems to enhance their functionality, improve their performance, correct errors, or adapt them to new hardware or software environments.
Costs of modifying existing software include all costs directly attributable to modifying the software, such as coding costs, testing costs, and costs of necessary hardware or software upgrades.
Explanations:
SIC-6 emphasizes that costs of modifying existing software should be capitalized if they result in significant enhancements to the software that are expected to provide future economic benefits to the entity. These enhancements could include improved functionality, increased productivity, or expanded marketability of the software.
Capitalizing costs of modifying existing software means that these costs are recorded as an asset on the entity’s balance sheet, rather than being expensed in the period in which they are incurred. The capitalized costs are then amortized over the expected useful life of the software or expensed when the related software revenues are recognized, depending on the entity’s accounting policy.
Examples:
ABC Ltd, a software company, incurs costs of $100,000 to modify its existing software to enhance its functionality and improve its performance. The company expects that these modifications will result in increased sales and higher revenues over the next five years. As per its accounting policy, ABC Ltd capitalizes costs of modifying existing software. Therefore, it will record the $100,000 as an asset on its balance sheet and amortize it over the next five years.
XYZ Inc, a technology company, incurs costs of $50,000 to modify its existing software to correct errors and adapt it to a new software environment. The company expects that these modifications will not result in any future economic benefits. As per its accounting policy, XYZ Inc expenses costs of modifying existing software. Therefore, it will record the $50,000 as an expense in its income statement in the period in which the costs are incurred.
Case Studies:
Case Study 1:
Company A, a multinational corporation, modifies its existing software to adapt it to new hardware and software environments. The costs incurred for the modifications include coding costs, testing costs, and costs of hardware upgrades. As the modifications are expected to provide future economic benefits, Company A capitalizes the costs of modifying existing software and amortizes them over the expected useful life of the software.
Case Study 2:
Company B, a start-up software company, modifies its existing software to correct errors and enhance its functionality. The costs incurred for the modifications include coding costs and testing costs. As the modifications are not expected to provide any future economic benefits, Company B expenses the costs of modifying existing software in the period in which they are incurred.
In conclusion, SIC-6 provides guidance on how to account for costs incurred in modifying existing software under IFRS. It emphasizes that costs of modifying existing software should be capitalized if they result in significant enhancements to the software that are expected to provide future economic benefits. Examples and case studies illustrate how entities should apply the standard in practice. It is important for entities to carefully consider and apply the requirements of SIC-6 to ensure appropriate accounting treatment of costs of modifying existing software in their financial statements.