4.4 Particular accounting policies: Statement of Financial Position items

4.4.1  Property, plant and equipment

The appropriate accounting treatment for items of property, plant and equipment is provided in NZ IAS 16 Property, Plant and Equipment. NZ IAS 16 does not apply to the following types of property, plant and equipment:

• property, plant and equipment classified as held for sale in accordance with NZ IFRS 5 Non-current Assets Held for Sale and Discontinued Operations;
• biological assets related to agricultural activity (see NZ IAS 41 Agriculture);
• the recognition and measurement of exploration and evaluation assets (see NZ IFRS 6 Exploration for and Evaluation of Mineral Resources); and
• mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources.

In addition, specific accounting policies apply to the following types of assets:

• investment properties (once initial construction or development is complete NZ IAS 40 Investment Property is relevant); and
• licences and patents (NZ IAS 38 Intangible Assets is relevant).

Departments involved in any of the above activities should consult with the Treasury.

NZ IAS 16 applies in part to leasehold interests in property and assets being acquired under hire purchase and other financing arrangements, including options and other rights to purchase such assets. However, departments are prohibited by the Act from entering into such arrangements by the Act unless approved by the Minister of Finance.

All individual assets or groups of assets must be capitalised if their historical cost is $NZ5,000 or greater. This threshold must be regarded as the upper limit. Departments may, with due consideration to their particular circumstances, set lower or multiple limits. However once established, these limits must be consistently applied in future periods. Where the value of items is less than $NZ5,000 (or such lower threshold as has been set by the department), assets must be expensed. However, where the value of an individual item is less than the threshold, but such item is part of a group of similar items (for example loose tools or instruments), these may either be expensed on purchase or be capitalised at an aggregate amount. In the latter case, cost is the initial purchase price of the class of items, with the cost of subsequent replacements being written off as they are acquired.

Where an item of property, plant and equipment that has been revalued is disposed of, any revaluation surplus in respect of that item of property, plant and equipment must be transferred from the revaluation reserve to Taxpayers' Funds.

Where an item of property, plant and equipment is transferred within the Crown this must be transferred at the gross amount of the asset. All related accumulated depreciation must be transferred also.

4.4.2.1  Computer software

Computer software must be classified as an intangible asset and accounted for in accordance with NZ IAS 38 unless it is an integral part of hardware, such as an operating system, in which case it is classified as property, plant and equipment and accounted for in accordance with NZ IAS 16.

The transaction costs associated with identifying and reporting the cost of internally generated software are likely to be significantly greater than the transaction costs associated with identifying and reporting the cost of other assets. As a result it is appropriate to apply a higher capitalisation threshold to these assets than other assets.

In determining whether the cost of an internal software development can be capitalised the requirements of NZ IAS 38 and NZ SIC 32 must be complied with. All individual software developments that meet these requirements must be capitalised if their historical cost is $50,000 or greater. This threshold must be regarded as the upper limit. Departments may, with due consideration to their particular circumstances and in particular considerations of materiality, set lower limits. However once established, these limits must be consistently applied in future periods. Where the value of items is less than $NZ50,000 (or such lower threshold as has been set by the department), the costs of internally generated software developments must be expensed.

In determining whether software development costs, including upgrades, should be capitalised, departments' attention is drawn in particular to the following requirements paraphrased from NZ IAS 38 and NZ SIC 32:

• Costs associated during the research phase of a software development should not be capitalised, but must be expensed (NZ IAS 38 paragraph 54). Activities occurring in the research phase include the search for and selection of alternatives (NZ IAS 38 paragraph 56).
• Software development can only be capitalised if:
  • it is technically feasible to complete the development; and
  • the software is intended to be, and can be, used or sold; and
  • the usefulness or market value of the software can be demonstrated; and
  • the expenditure attributable to the software development can be measured reliably (NZ IAS 38 paragraph 57).
• The cost of a software development includes costs of materials and services used or consumed in generating the software, employee costs including the cost of employee benefits, fees to register the software, and amortisation of patents and licences used to generate the software (NZ IAS 38 paragraph 66).
• The cost of a software development does not include overhead expenditure, identified inefficiencies and initial operating costs incurred before the software achieves planned performance, and expenditure on training staff to operate the asset (NZ IAS 38 paragraph 66).
• The nature of intangible assets is such that, in many cases, there are no additions to such an asset or replacements of part of it. Accordingly most subsequent expenditures are likely to maintain the future economic benefits or service potential embodied in an existing intangible asset rather than meet the definition of an intangible asset and the recognition criteria (NZ IAS 38 paragraph 20).

In determining whether the usefulness or market value of the software can be demonstrated reference should be able to be had to a business case where measurable economic benefits or service potential from the development are identified.

In determining whether subsequent expenditure on software represents an addition to the software the following factors are likely to be useful in making a judgment as to whether the subsequent expenditure should be capitalised:

• Conventional maintenance that does not change the characteristics of the software does not create additional benefits or service potential and should be expensed.
• Changes to software that permit it to be used in the same way under normal operating conditions, such as repairing faults introduced by bugs, should not be capitalised.

When software is updated or upgraded, the costs of the upgrade should only be capitalised when the increased usefulness or increased market value of the software can be demonstrated.