Basis for Conclusions on SIC-32 (INT132_08-15_COMPdec21_01-22)

An intangible asset is defined in IAS  38.87 as an identifiable non-monetary asset without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. IAS 38.98 provides computer software as a common example of an intangible asset. By analogy, a web site is another example of an intangible asset.

IAS 38.6856 requires expenditure on an intangible item to be recognised as an expense when incurred unless it forms part of the cost of an intangible asset that meets the recognition criteria in IAS 38.18–.6755. IAS 38.6957 requires expenditure on start-up activities to be recognised as an expense when incurred. An entity developing its own web site for internal or external access is not undertaking a start-up activity to the extent that an internally generated intangible asset is created. The requirements and guidance in IAS 38.52–.6740.55, in addition to the general requirements described in IAS 38.2119 for recognition and initial measurement of an intangible asset, apply to expenditure incurred on the development of an entity’s own web site. As described in IAS 38.65–.6753–.55, the cost of a web site recognised as an internally generated intangible asset comprises all expenditure that can be directly attributed, or allocated on a reasonable and consistent basis, and is necessary to creating, producing and preparing the asset for it to be capable of operating in the manner intended by management its intended use.

IAS 38.5442 requires expenditure on research (or on the research phase of an internal project) to be recognised as an expense when incurred. The examples provided in IAS 38.5644 are similar to the activities undertaken in the Planning stage of a web site’s development. Consequently, expenditure incurred in the Planning stage of a web site’s development is recognised as an expense when incurred.

IAS 38.5745 requires an intangible asset arising from the development phase of an internal project to be recognised only if an entity can demonstrate fulfilment of the six criteria specified. One of the criteria is to demonstrate how a web site will generate probable future economic benefits (IAS 38.5745(d)). IAS 38.6048 indicates that this criterion is met by assessing the economic benefits to be received from the web site and using the principles in IAS 36 Impairment of Assets, which considers the present value of estimated future cash flows from continuing use of the web site. Future economic benefits flowing from an intangible asset, as stated in IAS 38.17, may include revenue from the sale of products or services, cost savings, or other benefits resulting from the use of the asset by the entity. Therefore, future economic benefits from a web site may be assessed when the web site is capable of generating revenues. A web site developed solely or primarily for advertising and promoting an entity’s own products and services is not recognised as an intangible asset, because the entity cannot demonstrate the future economic benefits that will flow. Consequently, all expenditure on developing a web site solely or primarily for promoting and advertising an entity’s own products and services is recognised as an expense when incurred.

Under IAS 38.2119, an intangible asset is recognised if, and only if, it meets specified criteria. IAS 38.6553 indicates that the cost of an internally generated intangible asset is the sum of expenditure incurred from the date when the intangible asset first meets the specified recognition criteria. When an entity acquires or creates content for purposes other than to advertise and promote an entity’s own products and services, it may be possible to identify an intangible asset (eg a licence or a copyright) separate from a web site. However, a separate asset is not recognised when expenditure is directly attributed, or allocated on a reasonable and consistent basis, to creating, producing, and preparing the web site for it to be capable of operating in the manner intended by management its intended use — the expenditure is included in the cost of developing the web site.

IAS 38.6957(c) requires expenditure on advertising and promotional activities to be recognised as an expense when incurred. Expenditure incurred on developing content that advertises and promotes an entity’s own products and services (eg digital photographs of products) is an advertising and promotional activity, and consequently recognised as an expense when incurred in accordance with IAS 38.57(c).

Once development of a web site is complete, an enterprise begins the activities described in the Operating stage. Subsequent expenditure to enhance or maintain an enterprise’s own web site is recognised as an expense when incurred unless it meets the recognition criteria in IAS 38.60. IAS 38.61 explains that if the expenditure is required to maintain the asset at its originally assessed standard of performance, then the expenditure is recognised as an expense when incurred.^[1] Once development of a web site is complete, an entity begins the activities described in the Operating stage. Subsequent expenditure to enhance or maintain an entity’s own web site is recognised as an expense when incurred unless it meets the recognition criteria in IAS 38.18. IAS 38.20 explains that most subsequent expenditures are likely to maintain the future economic benefits embodied in an existing intangible asset rather than meet the definition of an intangible asset and the recognition criteria set out in IAS 38. In addition, it is often difficult to attribute subsequent expenditure directly to a particular intangible asset rather than to the business as a whole. Therefore, only rarely will subsequent expenditure—expenditure incurred after the initial recognition of a purchased intangible asset or after completion of an internally generated intangible asset—be recognised in the carrying amount of an asset.^[2]

An intangible asset is measured after initial recognition by applying the requirements of IAS 38.72–.8763–.78. The revaluation model Allowed Alternative Treatment in IAS 38.7564 is applied only when the fair value of an intangible asset can be determined by reference to an active market.^[3] However, as an active market is unlikely to exist for web sites, the cost model Benchmark Treatment applies. Additionally, since IAS 38.84 states that an intangible asset always has a finite useful life, a web site that is recognised as an asset is amortised over the best estimate of its useful life under IAS 38.79. As as indicated in IAS 38.9281, many intangible assets are susceptible to technological obsolescence, and given the history of rapid changes in technology, the useful life of web sites will be short.

Following the issue of the revised Conceptual Framework for Financial Reporting in 2018 (2018 Conceptual Framework), the Board issued Amendments to References to the Conceptual Framework in IFRS Standards. In SIC‑32, that document replaced a reference in paragraph 5 to the Framework for the Preparation and Presentation of Financial Statements adopted by the Board in 2001 (Framework) with a reference to the 2018 Conceptual Framework. The Board does not expect that replacement to have a significant effect on the application of the Interpretation. Paragraph 5 describes the accounting for expenditure excluded from the scope of the Interpretation. That paragraph also states that this type of expenditure—expenditure on an Internet service provider hosting the entity’s web site—is recognised as an expense, so the amendment will not affect the accounting treatment.