What changed
RBI issued guidelines for uniform amortization of software costs for UCBs, covering both internally developed and purchased software. Previously, there was no consistent practice among banks. The circular specifies cost components and mandates a three-year straight-line amortization at 33.33% per annum.
What it means for you
UCBs must now follow a standardized approach for software cost amortization, reducing accounting variability. This ensures consistent financial reporting and aligns with rapid technological obsolescence. Banks need to adjust their accounting policies to comply, impacting profit recognition over three years.
What you must do
- Amortize all software costs (internal or purchased) over three years using straight-line method at 33.33% annually.
- Ensure cost of internally developed software excludes selling, admin overheads, and staff training costs.
- Deduct trade discounts and rebates from purchased software cost before amortization.
- Acknowledge receipt of this circular to the concerned RBI Regional Office.
Who it affects
Primary (Urban) Co-operative Banks (UCBs), Chief Executive Officers of UCBs, Finance and accounting departments of UCBs
What costs are included in internally developed software?
Directly attributable costs like materials, services, salaries of personnel engaged in development, and necessary overheads. Exclude selling, admin overheads, and staff training costs.
How should purchased software cost be calculated?
Include purchase price, import duties, taxes (non-recoverable), and directly attributable expenses for making software ready. Deduct trade discounts and rebates.
Why is the amortization period three years?
Due to rapid technological obsolescence of computer software, RBI mandates a three-year straight-line amortization at 33.33% annually to reflect useful life.