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bigduckontax
bigduckontax, Accountant
Category: Tax
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What are the basic rules governing whether software developed

Customer Question

What are the basic rules governing whether software developed in-house, using third party consultant resources, can/should be capitalised as opposed to expensed in the P&L?
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
, I'm Keith and happy to help you with your question.
The answer to your question is as long as the proverbial piece of string! In theory, as it creates an asset to the business the purist would say it should be capitalised and written off over the anticipated life of the product. On the other hand a practical accountant might feel that software is so relatively short lived (don't tell me, Sage has been around and very good it is too) and its development costs should be written off against the P&L account immediately they occur. There is also another factor to consider which is how much of the organization's time and effort is put into software development. A general glance around the web indicates that only really major projects like construction and major items of equipment should ne the subject of capitalization. This problem first came to the fore in Queen Victoria's reign when the railway companies were looking to close their capital accounts. Unlike a factory owner who could draw a line once his factory was complete, the railway companies, with their constant replacement and refurbishment of capital items requirements, never could.
Having delivered that little homily I personally favour the immediate write off against the P&L, purely because of its practically, convenience and sheer common sense. Over the months and years the profits and losses will smooth out and overall the position will be accurately reflected in the accounts in the longer term.
However, there is one policy I would recommend and that is consistency. Don't chop and change between finite items where capital costs are clearly incurred and the more nebulous world of software development.
If you really want to make your head spin have a look at the opinion of Deloitte UK Accounting Plus here
http://www.iasplus.com/en-gb/standards/ias/ias38
It's something to read on a wet Sunday afternoon, but it does emphasise the situation of short lived assets and their separate treatment from more tangible items. Here is an extract covering short finite lives, the last paragraph being particularly pertinent and you don't want to be dragged into annual reviews in my opinion.:
'Measurement subsequent to acquisition: intangible assets with finite lives
The cost less residual value of an intangible asset with a finite useful life should be amortised on a systematic basis over that life: [IAS 38.97]
The amortisation method should reflect the pattern of benefits.
If the pattern cannot be determined reliably, amortise by the straight line method.
The amortisation charge is recognised in profit or loss unless another IFRS requires that it be included in the cost of another asset.
The amortisation period should be reviewed at least annually. [IAS 38.104]
Expected future reductions in selling prices could be indicative of a higher rate of consumption of the future economic benefits embodied in an asset. [IAS 18.92]
The standard contains a rebuttable presumption that a revenue-based amortisation method assets is inappropriate. However, there are limited circumstances when the presumption can be overcome:
The intangible asset is expressed as a measure of revenue; and
it can be demonstrated that revenue and the consumption of economic benefits of the intangible asset are highly correlated. [IAS 38.98A]'
I do hope I have helped throw some light on your position. In my view write it off against the P&L as it occurs.
Customer: replied 2 years ago.

Thank you and I tend to agree with your view. Presumably if we were able to meet the (very stringent) R&D development rules, then we would be advised to capitalise to get the relief?

Expert:  bigduckontax replied 2 years ago.
If you could, but I doubt that you will convince many that it is true R&D. It's not years of research to develop and test a new drug . I feel that the time factor is a substantial negative against the R&D treatment.
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Expert:  bigduckontax replied 2 years ago.
Thank you support.
Customer: replied 2 years ago.

Thanks.

Expert:  bigduckontax replied 2 years ago.
Delighted to have been of assistance.
Customer: replied 2 years ago.

Please stop the automated reminders saying you need more information!!!

4 emails so far.

Expert:  bigduckontax replied 2 years ago.
Not my doing, I did not send them, sorry. There is a glitch in the Just Answer system and although it has been reported repeatedly to JA it still continues to bug customers.

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