Ind AS Accounting for Machinery with Embedded Software

1. Question

Alpha Manufacturing Limited (hereinafter referred to as “the company”), an Indian company, has imported highly specialised robotic equipment to enhance its automated production capabilities. The equipment has a technical life of 20 years. However, it cannot operate independently and requires a specific software system, which must be purchased separately from a third-party vendor. This software is installed and permanently embedded into the machinery. Without it, the machinery cannot function.

The company acquires a software licence for 12 years, which is renewable for an additional 3 years at no significant cost. However, under the licensing agreement, the maximum enforceable period for which the company can use the software is 15 years. Beyond this period, the licence cannot be renewed or extended under any circumstances.

The company capitalises both the machinery and the software as a single asset under Property, Plant and Equipment (PPE). It depreciates the combined amount over 15 years, considering the enforceable right to use the software.

State whether the accounting treatment followed by the company is in line with the requirements of the Indian Accounting Standards?

2. Relevant Provisions

Ind AS 16, Property, Plant, Equipment

Para 7 – The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if:

(a) it is probable that future economic benefits associated with the item will flow to the entity; and

(b) the cost of the item can be measured reliably.

Para 60 – The depreciation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.

Ind AS 38, Intangible Assets

Para 8 – An intangible asset is an identifiable non-monetary asset without physical substance.

Para 12 – An asset is identifiable if it either:

(a) is separable, i.e. is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so; or

(b) 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.

Para 4 – Some intangible assets may be contained in or on a physical substance such as a compact disc (in the case of computer software), legal documentation (in the case of a licence or patent) or film. In determining whether an asset that incorporates both intangible and tangible elements should be treated under Ind AS 16, Property, Plant and Equipment, or as an intangible asset under this Standard, an entity uses judgment to assess which element is more significant. For example, computer software for a computer-controlled machine tool that cannot operate without that specific software is an integral part of the related hardware and it is treated as property, plant and equipment. The same applies to the operating system of a computer. When the software is not an integral part of the related hardware, computer software is treated as an intangible asset.

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