I have a client who has just purchased new sage software for about £1400. On the basis he had his last sage software running for about 9 years I have suggested he capitalise and claim AIA.
Thought I would throw it into the mix for today's discussion to gauge your thoughts and also what you think about depreciation period (Im thinking same as PCs).
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
I would capitalise- Possibly 9 years as per last edition? With the cloud around the corner ( Or up in the sky) could be two years depreciation. Would we capitalise this particular software as tangible or intangible? I think FRS 10 possibly covers this. Interested to keep up with this post.
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Johnny - Owner of an overly-active keyboard.
A man who can read, yet doesn't, is in no way wiser than a man who can't.
I certainly wouldn't suggest depreciating software over more than three years even if it remains in use for longer.
Some may argue that software loses all value that moment that it is installed so simply expense but of course thats neither what depreciation is or indeed what an asset is (well, not when the business is being run on a going concern basis anyway).
Similar to the discussion with John about WDA's yesterday whether to use the AIA / WDA's is all down to the overall tax scenario. I know that you don't do smaller self employed clients but normally I would expand the answer to say that one also needs to consider making the best use of the personal allowance which is perishable where the WDA's are not.
Its a scenario that whether you expense it or capitalise and claim the AIA the tax result for the client and HMRC will be the same either way. If the client is thinking about taking out a loan anytime soon capitalising will be a better option as it will show both higher profits and higher non current assets without any tax consequence (lol, he says telling a corporate banker how that works!!!).
Anyway, just my musings and interesting in the approaches that others would take as as you say its one of those Sunday afternoon chats without any one right / wrong type answer.
I've been good and not gone into my normal detailed definition what an asset is, what deprecition is, etc. (every day in every way I'm getting better and better, lol). That in itself is a good example to use when asking new members to tell us about their qualifications / experience levels / etc. so that we are able to gear responses appropriately.... I'm waffling aren't I...
Laters.... Ooh, it's suits night... And the new series of Dragons Den :D Thats me sorted from 21:00 to 23:00 tonight then.
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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.
From past experiences of 'sage MK1' knowing it had value to the business for nine years, is it wrong to depreciate 'Sage MK2' over 9 years? Can we use the past to predict the future?
Would you treat software as tangible or intangible?
Knowing that the software will have no resale value as most software has a one user licence, is this enough to send to the P&L?
I suspect that more likely than not, it comes down to how material the software is to the business. If this software was mine, it'd capitalise - if it was Tesco, it would be sent to the P&L. (Then again, Tesco would probably be paying a hell of a lot more!)
It is of my opinion there is no right answer, yet also no wrong way to account for this.
On the tax front; only use what capital allowances you 'need' else you will have wasted them.
All based upon opinion of course ;)
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Johnny - Owner of an overly-active keyboard.
A man who can read, yet doesn't, is in no way wiser than a man who can't.
you've made my day as I get to explain what depreciation is where I didn't think that I was going to be able to as Joanne would have given me a hard time for teaching my granny to suck eggs... Not that she's my granny, she's younger than I am, it's just a figure of speech... I suspect that I may need legal council. Anyway, I digress.
Depreciation is matching the useful economic life of an asset to the service that it performs for the business. So, if a business expects an asset to be used in the business for x number of years on a consistent basis then you divide the price of the asset (less any residual) accross the years so the expenditure matches the revenue that it generates or helps to generate.
That often confuses people as when (say) someone buys a computer by the end of the year it might only be worth a quarter as much but in the books it is still two thirds of the value. Thats because the books are prepared on a going concern basis in that nobody is expecting to have to get rid of the assets in a fire sale so they are carried at the written down value taking into account how that asset will be consumed by the business.
Capital allowances as opposed to depreciation can in some ways be looked at as a timing difference but eventually they will reach the same end result.
So, why three years for software and computers? Thats pretty much the technology horizon where we are counting down to obsolesence. It may be that the asset continues to be used in the business after the three years. It may be that the equipment / software is obsolete after six months. We simply make a best judgement as to what is generally accepted as the event horizon for an asset and base our depreciation figures upon that.
As you say and I indicated earlier, there is also arguement that one could expense the software but as I said, you need to consider that in relation to planning for what the business needs. Unusually in this instance there is no adverse tax consequence to going either route in which instance Capital Expenditure seems the better option as profits are higher which opens up better relationships with finance providers.
Yes, Tesco's would pay many millions for their IT sollutions which will be largely bespoke with commercially available add ons (the price of which would make your eye's water!) and possibly some systems running in SAP. I have never seen Sage software used in serious corporate environments. Not saying that it doesn't exist but I personally have never seen it.
Whether software is a tangible or intangible is a whole different question. The short answer to that one is that software is an intangible unless purchased with hardware in which case the software can be classibied as a tangible as part of the asset. There are also R&D considerations that can be thrown in the pot in some instances but as a general rule of thumb its an intangible asset (or an expense, see above).
kindest regards,
Shaun.
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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.
One day Joanne.....I'll be able to answer one of your questions after the 100's you've answered of mine!! Though that day is not today
Lol.... I would have money on it that you keep seeing questions that you know the answers to inside out but people such as Joanne, John, Myself and others keep diving in before you've had chance to answer... Sorry! .
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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.
Hi
Yes I see your point. If software needs to be run from a disc, I know most don't now, but could that not be an argument for it being tangible? On the book value and TWDV therein lays the deferred tax figure? Thanks
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Johnny - Owner of an overly-active keyboard.
A man who can read, yet doesn't, is in no way wiser than a man who can't.
I'd double check that he's actually able to use it for more than one year - and that's not just Sage's first year rental of the software paid up front.
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Vince M Hudd - Soft Rock Software
(I only came here looking for fellow apiarists...)
Thanks to everyone who posted an opinion - was just to start a bit of a conversation this one really, as I said earlier.
Just to clarify and working backwards up the thread a bit, oh hell, might jump around a bit (maybe more tomoz as Im knackered and need my beauty sleep)....
Sage - perpetual licence, not just a one year licence. Is on a disc. Is currently used by one company but is a two company licence. Or is it three? Cant recall, buts its definately more than one.
Improving the profit figure in the accounts is a good think (yes even that small amount will help a little)
There is the potential for a sale of the business, or a search for an investor at some point in the not to distant future on the cards.
Oh no Johnny - no way would I depreciate it over 9 years. Think Shaun has done a good job covering that one off - I almost said - of go on, you really want to .....its so easy to make his day Johnny!
Oh and yes Shaun - you need to sack the last legal council and get a new one. Just to set the record straight - I may be an old bird, still defo younger than Shaun, not a granny, no intention of being a granny (told my son he had better not embarass me!), although there are some grandads out there who I dont mind flirting with, as long as they are not younger than 52 and not older than 56!
Also Shaun you would be surprised at some of the corporates who use Sage. At the sage 200 level it fits some of them well enough. But not the likes of the really large players obviously youve worked with.
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
One day Joanne.....I'll be able to answer one of your questions after the 100's you've answered of mine!! Though that day is not today
Lol.... I would have money on it that you keep seeing questions that you know the answers to inside out but people such as Joanne, John, Myself and others keep diving in before you've had chance to answer... Sorry! .
I agree with Shaun!!!
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
I appreciate nine years is a hell of a long time, I do admit it is seen as wrong. But...(No I do really see how I'm wrong) is it really wrong to go off of the valve of the previous software to the business? The previous version held value for nine years.
Of course I understand the meaning of depreciation, that is accountancy 101 :P
Straight-line depreciation is flawed anyway.... Surely, how can it be the equivalent each year when the time value of money is not considered? (I'm probably talking tosh, but it is when I'm talking to myself little things pop in to my mind!!)
The disc idea was inline with the curved ways that tax/accountancy can be interpreted - loop holes and all that.
Seriously though, if my logic is incorrect, and I've been pulled up for it I appreciate that, as that is how I learn. It is a pain in the a** not working in an office, to bounce ideas off fellow staff members, therefore, I'm left talking to myself :)
Hopefully I've not come across as being totally inept!
Thanks
-- Edited by abacus12345 on Tuesday 26th of July 2016 04:09:38 PM
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Johnny - Owner of an overly-active keyboard.
A man who can read, yet doesn't, is in no way wiser than a man who can't.
We have to have special software for our designers and machines, we wanted to update to the newer version a few years ago, only to find out that its a yearly update thing. We had to buy 3 years up front in order to get the latest version (someone is onto a good thing there!)
It costs a heck of a lot so we took out a HP agreement, capitalised it and depreciate it over 3 years. We also had a grant towards it which has to be accounted for over its life.
In the meantime the next years became available which we put straight to the P&L (monthly prepayments) and will do so each year going forward.
However, when we upgraded Sage to a newer version this cost just went straight to the p&l.
So every situation is unique.
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Em
MAAT, CIMA student, avoider of Tax as much as possible and going greyer by the day.
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