Accounting Standards

Intangible Assets -Web Site Costs

Paragraph 11 of FRS 1, Presentation of Financial Statements, requires that financial statements should not be described as complying with Financial Reporting Standards unless they comply with all the requirements of each applicable Standard and each applicable Interpretation of the Financial Reporting Standard. INT FRSs are not intended to apply to immaterial items.

Reference: FRS 38, Intangible Assets

1. An enterprise may incur internal expenditure on the development and operation of its own web site for internal or external access. A web site designed for external access may be used for various purposes such as to promote and advertise an enterprise's own products and services, provide electronic services, and sell products and services. A web site designed for internal access may be used to store company policies and customer details, and search relevant information.


2. The stages of a web site's development can be described as follows:
   
   1. Planning - includes undertaking feasibility studies, defining objectives and specifications, evaluating alternatives and selecting preferences.
      
      
   2. Application and Infrastructure Development - includes obtaining a domain name, purchasing and developing hardware and operating software, installing developed applications and stress testing.
      
      
   3. Graphical Design Development - includes designing the appearance of web pages.
      
      
   4. Content Development - includes creating, purchasing, preparing and uploading information, either textual or graphical in nature, on the web site before the completion of the web site's development. This information may either be stored in separate databases that are integrated into (or accessed from) the web site or coded directly into the web pages.


3. Once development of a web site has been completed, the Operating stage begins. During this stage, an enterprise maintains and enhances the applications, infrastructure, graphical design and content of the web site.
   
   

4. When accounting for internal expenditure on the development and operation of an enterprise's own web site for internal or external access, the issues are:
   

   1. whether the web site is an internally generated intangible asset that is subject to the requirements of FRS 38; and
      
      
   2. the appropriate accounting treatment of such expenditure.
   
   
5. This Interpretation does not apply to expenditure on purchasing, developing, and operating hardware (eg web servers, staging servers, production servers and Internet connections) of a web site. Such expenditure is accounted for under FRS 16, Property, Plant and Equipment. Additionally, when an enterprise incurs expenditure on an Internet service provider hosting the enterprise's web site, the expenditure is recognised as an expense under FRS 8.5 and the FRS Framework when the services are received.


6. FRS 38 does not apply to intangible assets held by an enterprise for sale in the ordinary course of business (see FRS 2, Inventories, and FRS 11, Construction Contracts) or leases that fall within the scope of FRS 17, Leases. Accordingly, this Interpretation does not apply to expenditure on the development or operation of a web site (or web site software) for sale to another enterprise. When a web site is leased under an operating lease, the lessor applies this Interpretation. When a web site is leased under a finance lease, the lessee applies this Interpretation after initial recognition of the leased asset.

An enterprise's own web site that arises from development and is for internal or external access is an internally generated intangible asset that is subject to the requirements of FRS 38.

Any internal expenditure on the development and operation of an enterprise's own web site should be accounted for in accordance with FRS 38. The nature of each activity for which expenditure is incurred (eg training employees and maintaining the web site) and the web site's stage of development or postdevelopment should be evaluated to determine the appropriate accounting treatment (additional guidance is provided in the Appendix to this Interpretation). For example:

1. the Planning stage is similar in nature to the research phase in FRS 38.42-.44. Expenditure incurred in this stage should be recognised as an expense when it is incurred.
   
   
2. the Application and Infrastructure Development stage, the Graphical Design stage and the Content Development stage, to the extent that content is developed for purposes other than to advertise and promote an enterprise's own products and services, are similar in nature to the development phase in FRS 38.45-.52. Expenditure incurred in these stages should be included in the cost of a web site recognised as an intangible asset in accordance with paragraph 8 of this Interpretation when the expenditure can be directly attributed, or allocated on a reasonable and consistent basis, to preparing the web site for its intended use. For example, expenditure on purchasing or creating content (other than content that advertises and promotes an enterprise's own products and services) specifically for a web site, or expenditure to enable use of the content (eg a fee for acquiring a licence to reproduce) on the web site, should be included in the cost of development when this condition is met. However, in accordance with FRS 38.59, expenditure on an intangible item that was initially recognised as an expense in previous financial statements should not be recognised as part of the cost of an intangible asset at a later date (eg when the costs of a copyright have been fully amortised, and the content is subsequently provided on a web site).
   
   
3. expenditure incurred in the Content Development stage, to the extent that content is developed to advertise and promote an enterprise's own products and services (eg digital photos of products), should be recognised as an expense when incurred in accordance with FRS 38.57(c). For example, when accounting for expenditure on professional services for taking digital photos of an enterprise's own products and for enhancing their display, expenditure should be recognised as an expense as the professional services are received during the process, not when the digital photos are displayed on the web site.
   
   
4. the Operating stage begins once development of a web site is complete.

Expenditure incurred in this stage should be recognised as an expense when it is incurred unless it meets the criteria in FRS 38.60.

Effective Date: INT FRS 32 comes into effect on 1 February 2003. The effects of adopting this INT FRS should be accounted for using the transitional requirements in FRS 38.118-38.121. Therefore, when a web site does not meet the criteria for recognition as an intangible asset, but was previously recognised as an asset, the item should be derecognised at the date when this INT FRS becomes effective. When a web site exists and the expenditure to develop it meets the criteria for recognition as an intangible asset, but such expenditure was not previously recognised as an asset, the intangible asset should not be recognised at the date when this INT FRS becomes effective. When a web site exists and the expenditure to develop it meets the criteria for recognition as an intangible asset, and where such expenditure was previously recognised as an asset and initially measured at cost, the amount of expenditure initially recognised is deemed to have been properly determined according to this INT FRS.

Appendix

This appendix is illustrative only and does not form part of the Interpretation. The purpose of the appendix is to illustrate examples of expenditure that occur during each of the stages described in paragraphs 2 and 3 of the Interpretation and illustrate application of the Interpretation to assist in clarifying its meaning. It is not intended to be a comprehensive checklist of expenditure that might be incurred.

Example Application of INT FRS-32