Generally speaking, intangible assets are non-physical assets employed over the long term. It may be challenging to value intangible assets, which are often intellectual. On the other hand, tangible assets are both quantifiable and physical and are utilized in the operations of a corporation. An organization's property, plant, and equipment (PP&E) are examples of physical assets. Long-term assets, such as equipment that is crucial to the operations of a corporation and has a specific physical component, are referred to as "PP&E," which stands for "plant, property, and equipment." Because it is not a physical object, the software is often regarded as an intangible asset in most situations.

However, the rules of accounting specify that there are exceptions that authorize the categorization of computer software as PP&E. One example of such an exemption is the software used in a personal computer (property, plant, and equipment). The following accounting rules will explain how and when computer software should be categorized as property, plant, and equipment (PP&E):

• Statement 51, Accounting and Financial Reporting for Intangible Assets, issued by the Governmental Accounting Standards Board (GASB).

What Is Meant By PP&E?

We must first establish the accounting standard for property, plant, and equipment, sometimes referred to by its acronym, PP&E. Following SFFAS No. 6, physical assets are considered to be PP&E if the following conditions are met:

• They are expected to be usable for at least two years after purchase.
• They are not made to be sold in the standard course of business.
• They were purchased or built to be utilized by the entity or to make themselves accessible for use by the business in the future.

Criteria for Capitalization to Be Considered PP&E

A set of guidelines must be followed to decide whether or not software should be expensed or capitalized as property, plant, and equipment. If the software satisfies the property, plant, and equipment requirements outlined above, it is possible to include the program in the PP&E category.

• Because there are no monetary number limits for the cost of computer software, whether internal or new software, management has considerable leeway in the decision-making process.
• The management team is responsible for determining the capitalization criteria in compliance with the PP&E principles. For instance, when purchasing software in large quantities, the calculation should consider not just the cost per unit but also the product's expected lifespan. If a third-party contractor built the software, the sum paid to the vendor for development and installation has to be categorized.
• The software that is an intrinsic element of a company's property, plant, and equipment is not included as part of the software's capitalization.
• The point at which the process of capitalization begins is not established by a monetary threshold but rather by the conclusion of the testing phase of the program.

Recognition

As was just discussed, it is clear that for computer software to be capitalized in the balance sheet, it must satisfy several prerequisite conditions before doing so. If this specific need is not satisfied, the business must include the computer program's cost on the income statement as an expenditure. The following is a list of the conditions that must be met before computer software may be included in an asset register as property, plant, and equipment:

• The lifespan of the computer program must be more than two years.
• It is forbidden to buy a computer program to resell it. To put it another way, the company's standard operations should not include the practice of reselling software since this is not an appropriate line of business for the organization.
• For the supplied entity to use the software that is intended to be capitalized, it is necessary to either acquire or create it.
• If the computer software can satisfy the requirements mentioned above, then the organization's books may be able to include it as a physical asset.

The computer software is recognized in the financial statements (and the firm's balance sheet) after the risk and benefits associated with ownership of the company software have been transferred. This occurs when the ownership of the program is sold or otherwise transferred. This indicates that the cost of capitalization (or recording), as well as the cost of computer software, is truly not dependent on the fact that the corporation has paid for the cost of the asset.