A client of mine has 'created' an asset - basically written some software which will be used by the company but also sold to other companies. They want to show this as an asset on the BS which seems fair enough but I'm not sure what the double entry would be for this, I can dr an asset account but where would the cr sit?
Be warned, I'm going to waffle around this for a while. Please forgive the brain dump format as I try to explain the reasoning behind why this may not actually be an asset.
Linked to your question has to be what did you do with the development costs?
Rules for R&D also include software development so refer to SSAP13 and FRS10 (under UK GAAP) or IAS38 (under IFRS... Note that there is no specific standard for R&D under IFRS so it gets bundled under Intangible assets).
The IFRS definition of the recognition criteria for an internally generated asset :
An intangible asset arising from development should be recognised if, and only if, an enterprise can demonstrate all of the following:
the technical feasibility of completing the intangible asset so that it will be available for use or sale
its intention to complete the intangible asset and use or sell it
its ability to use or sell the intangible asset
how the intangible asset will generate probable future economic benefits. Among other things, the enterprise should demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.
the availability of adequate technical, financial and other resources to coplete the deveplopment and to use or sell the intangible asset
its ability to measure reliably the expenditure attributable to the intangible asset during its development.
Compared to the SSAP13 recognition criteria :
there is a clearly defined project
expenditure is separately identifiable
the project is commercially viable
the project is technically feasible
project income is expected to outweigh cost
resources are available to complete the project.
Note that under UKGAAP (FRS10) internally-generated intangible assets can be capitalised only if there is a readily ascertainable market value.
Assuming that development can be capitalised, is it an Asset?
An internally created asset can only be recognised where the criterion of an asset are actually met. Namely that :
It is seperately identifiable (tick)
It is controlled by the entity (tick)
It is expected to generate future economic benefits for the entity (tick)
It has a cost that can be seperately identified (and here's where it may fall down).
Therefore, you need to asscertain the development cost attributable directly to creation of the asset or it isn't one.
IAS38 specifically states in relation to recognition of computer software as an intandgible asset that :
Initial Recognition: Computer Software
Internally developed (whether for use or sale): charge to expense until technological feasibility, probable future benefits, intent and ability to use or sell the software, resources to complete the software, and ability to measure cost.
Amortisation: over useful life, based on pattern of benefits (straight-line is the default).
Once you have your capitalised development costs you have your double entry as initial recognition is at cost.
Of course, if this is only a small company and development costs have been expensed rather than any attempt made to capitalise them then of course there is no asset to capitalise.
Actually, I didn't waffle as much as I thought that I would.
Also worth a read, although not specifically website development in your case, you may find UITF Abstract 29 of interest.
Also, the ACCA had a very good article on this which you may find of interest. I think that they explain capitalisation and recognition of intangible assets far better than I could.
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
welcome to the forum. Always nice to have some more Chartered Accountants on board.
I'm genuinely interested here. Why would you consider an asset differently for a small, say one bod, limited company as opposed to sole trader?
Personally to date I've only ever dealt with limited companies so my answers will always be geared in that direction.
kind regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Mat, yes the company is incorporated, and also I am intrigued to know what difference this makes! And Shaun thanksfor your points too - not the simple answer I was hoping for, but then I did think it was a vain hope!
