This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members to understand the requirements for capitalising website development costs under FRS 102.

Members may also wish to refer to the following related helpsheets:

• Accounting for intangible assets and goodwill under FRS 102
• Can I revalue an intangible asset under FRS 102?

Under FRS 102 website development costs are usually considered in the context of intangible assets. An entity will only be able to capitalise website development expenditure as an intangible asset if such expenditure meets the following conditions:

(a) The development costs meet the definition of an intangible asset;
(b) The expenditure is not on advertising and promotional activities;
(c) The entity’s accounting policy is to capitalise development expenditure; and
(d) The expenditure meets the recognition criteria.

Each of these conditions are explained in more detail below. Although this helpsheet is written in the context of website development costs, similar principles will apply to software development costs too.

From FRS 102 the definition is:

‘An identifiable non-monetary asset without physical substance. Such an asset is identifiable when:

(a) it is separable, ie capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, asset or liability; or
(b) it arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.

When website development costs have been incurred to set up a website primarily aimed at advertising or promoting an entity’s services, in line with FRS paragraph 102 18.8C(d), such expenditure should be expensed and not recognised as an intangible asset.

When the website development costs relate to activities other than advertising or promotion, such as e-commerce and order processing systems, it may be possible to capitalise the expenditure if the other conditions are met.

When an entity has made an accounting policy choice to expense development expenditure, the expenditure should be expensed as that policy must be applied consistently in accordance with FRS 102 paragraph 18.8K.

When an entity has elected to adopt an accounting policy of capitalising development expenditure, it may be possible to capitalise the expenditure if the other conditions are met.

The final aspect to consider is whether the expenditure meets the recognition criteria:

a) The expenditure must meet the general recognition criteria contained in FRS 102 paragraph 18.4 which permits recognition as an intangible asset only if it is probable (more likely than not) that the expected future economic benefits that are attributable to the asset will flow to the entity and the cost of value of the asset can be measured reliably, and
b) The project is in the development phase, as only expenditure incurred from the point at which the intangible enters the development phase would be capitalised. A project is in the development phase if and only if it meets all the criteria contained within FRS 102 paragraph 18.8H. The entity must be able to demonstrate; the technical feasibility of completing the intangible asset, an intention to complete the intangible asset and use or sell it, an ability to use or sell the intangible asset, how the intangible asset will generate probable future economic benefits, the availability of adequate technical, financial and other resources to complete the development and use or sell the intangible asset and an ability to reliably measure the expenditure attributable to the intangible asset during its development.

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat.