I work with an antivirus software company in the cybersecurity industry. 95% of our sales are software but we also sell some hardware products.

For the hardware products, we use some units as “proof of concept” stock; our Sales Engineers ship to our customers for a trial period and then we receive it back, inspect it, and then store until needed for the next trial.

These particular units are not sold to customers; they are exclusively for trial purposes.

I am wondering how best to treat the cost of purchasing these stock units:

  • as inventory (doesn’t seem right as not for resale);
  • as fixed assets (doesn’t seem right as no guarantee of future economic benefit);
  • expense (doesn’t feel right as we derive a potential benefit and use for > 1 year).



My view on this is quite straightforward: if you are using these units for more than 1 year (for these testing purposes), then they are property, plant and equipment.

I do not agree with the argument that there are no clear future economic benefits – yes, there are. These units serve for testing and their economic benefit is to generate sale of another unit (or make it more probable).

I do see that there are misconceptions of what future economic benefits are. Let me quote from my own article: “Many people believe that the future economic benefits must be measurable or palpable, otherwise they are not the economic benefits. One of my readers once wrote me: well, I’m still not sure about capitalizing this asset, because I can’t measure the future economic benefits. No, you don’t have to measure them.The future economic benefits are the potential for the asset to contribute to your cash flows or profits. It says nothing about measuring.”

One more comment to assessing likelihood of future economic benefits flowing to the entity: The standards do not specify anything like that and frankly speaking, during my long practice I have never seen such a strict application of IAS 16.7. I would say that just the aim of providing these testing units would be sufficient to say that the future economic benefits are probable – otherwise you would have not done that.