A:

In accounting terms, an intangible asset is something of value that is not of physical nature. On the other hand, property, plant and equipment (PPE) are just as the name suggests. PPE refers to physical long-term assets, such equipment that is vital to a company's operations and has a definite physical component. Under most circumstances, computer software is classified as an intangible asset because of its non physical nature. However, accounting rules state that there are certain exceptions that permit the classification of computer software as Property Plant and Equipment (PPE).

Some of the statements that have rules concerning the classification of software include:

  • Financial Accounting Standards Advisory Board (FASAB) Statement of Federal Financial Accounting Standards (SFFAS) No. 10, Accounting for Internal Use Software.
  • Governmental Accounting Standards Board (GASB) Statement No. 42, Accounting of Costs of Computer Software Developed or Obtained for Internal Use.

There are two general rules that are applied to determine whether or not software must be capitalized as PPE or expensed. If software meets the criteria of property, plant and equipment, meaning it will be used in providing goods and services, then it can be classified as PPE. For example, a computer company would capitalize computer software as PPE because it is used in a major part of the company's operations that is intended to provide profits. However, software that provides a means for a warehouse to efficiently perform inventory management duties would not be incorporated as PPE.

The second capitalization criterion is based on cost. If an individual copy of the software package costs more than $100,000 it is classified in the PPE category. The software would then be amortized, like other assets, over its useful life. However, as a general rule, if two software copies are purchased for $150,000 they are accounted for as intangible assets.

If the two preceding conditions are not met, then the software, whether purchased or created internally would be considered an intangible asset. The basic nature of the business and the stage of software development also play a significant role in the classification decision.

This question was answered by Chizoba Morah.

RELATED FAQS
  1. What is property, plant and equipment, and what does it mean?

    Property, plant and equipment (PP&E) is a term that describes an account on the balance sheet. The PP&E account is a summation ... Read Answer >>
  2. How does portfolio management software work?

    Discover the functions of various complexity levels of portfolio management software, and learn how traders utilize portfolio ... Read Answer >>
  3. What is the difference between fixed assets and current assets?

    Learn the differences between fixed assets such as land and current assets such as cash, as well as how these types of assets ... Read Answer >>
  4. What is the fixed asset turnover ratio and why is it important?

    Learn about the fixed asset turnover ratio and how this calculation is used to analyze how efficiently a company uses its ... Read Answer >>
  5. What types of companies have a high proportion of intangible assets?

    Explore what types of companies are most likely to have a high proportion of intangible assets, due to the nature of the ... Read Answer >>
  6. How does one amortize intangible assets?

    Understand what distinguishes intangible assets and how companies are required to amortize their value over time to recover ... Read Answer >>
Related Articles
  1. Investing

    Explaining Property, Plant and Equipment

    Property, plant and equipment are company assets that are vital to business operations, but not easily liquidated.
  2. Investing

    How To Evaluate A Company's Balance Sheet

    Asset performance shows how what a company owes and owns affects its investment quality.
  3. Insights

    The Industry Handbook: Software Industry

    Discover how the software industry has changed throughout the years to become a mainstay for businesses from programming to software as a service.
  4. Investing

    World's top 10 Software Companies

    Want to invest in software stocks but finding it difficult to identify companies with major software revenue? Here is a list of top software companies
  5. Trading

    The Vital Importance of Choosing The Right Day Trading Software

    Software has made day trading quick and automatic--all the more reason to be as painstaking as possible when choosing the right one for your needs.
  6. Taxes

    Tax Software Vs a CPA: Which Is Right For You?

    There are occasions when software will suffice, and others that require an accountant’s expertise. Here how to decide which is right for you.
  7. Managing Wealth

    Comparing Tangible and Intangible Assets

    Tangible assets are physical assets such as land, vehicles or equipment.
  8. Financial Advisor

    Best Software Programs for Creating an Investment Policy Statement

    An Investment Policy Statement (IPS) guides an investor's long-term investment decisions. This article describes the best softwares for creating an IPS.
  9. Investing

    The 5 Biggest Chinese Software Companies (CHL, TCEHY)

    Read about the five largest and most influential software companies in China, including a new startup considered to be an upcoming superstar.
  10. Investing

    Intangible Assets Provide Real Value To Stocks

    Intangible assets don't appear on balance sheets, but they're crucial to judging a company's value.
RELATED TERMS
  1. Property, Plant And Equipment - PP&E

    A company asset that is vital to business operations but cannot ...
  2. Business Software & Services Industry ETF

    An exchange-traded fund (ETF) that invests in business software ...
  3. Intangible Asset

    An asset that is not physical in nature. Corporate intellectual ...
  4. Physical Asset

    An item of economic, commercial or exchange value that has a ...
  5. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses ...
  6. Currency Trading Software

    Trading software to help the currency trader with forex trading ...
Hot Definitions
  1. Nonfarm Payroll

    A statistic researched, recorded and reported by the U.S. Bureau of Labor Statistics intended to represent the total number ...
  2. Conflict Theory

    A theory propounded by Karl Marx that claims society is in a state of perpetual conflict due to competition for limited resources. ...
  3. Inflation-Linked Savings Bonds (I Bonds)

    U.S. government-issued debt securities similar to regular savings bonds, except they offer an investor inflationary protection, ...
  4. Peak Globalization

    Peak globalization is a theoretical point at which the trend towards more integrated world economies reverses or halts.
  5. Phishing

    A method of identity theft carried out through the creation of a website that seems to represent a legitimate company. The ...
  6. Insurance

    A contract (policy) in which an individual or entity receives financial protection or reimbursement against losses from an ...
Trading Center