By capitalising what you spend on an intangible asset (be it development of a product, brand, patent, copyright, know how or goodwill), you will increase your profits in that period and then spread the expense (or amortisation) of the asset over its useful life.
This can be an advantage to your short-term reporting and also shows users of your accounts, such as investors, banks and other stakeholders, all your assets that produce your profits and their historic value.
We’ve put together six useful tips on when and how to identify and capitalise your assets.
1) Website development costs
Sales, marketing and management teams spend a lot of time developing and improving company websites. This investment will produce perhaps a three-year rolling benefit for the business. You can capitalise website development costs, just as you might a re-usable marketing stand or database. Keep a tally of internal time and external costs to support the capitalisation and amortisation calculation each month, and for any audit at the end of the year.
2) R&D of intangible assets
Your investments in research and development are designed to make you money from, for example, a new product or methodology or some other intellectual property rights (IPR) you develop. This investment obviously represents cash out of the bank but you can capitalise the cumulative expenditure, show it as an asset on your balance sheet and spread the amortised cost over the future periods of its useful life. You can even capitalise the interest on a loan used to fund the development costs.
3) Acquisition accounting
When you buy a company or business undertaking, you may find that it has not historically capitalised its R&D or IPR investments but written them off to P&L. When you come to account for the acquisition you can split the difference between the consideration paid and the net assets acquired (the goodwill) across both its products or IPR, and the balance of goodwill. You treat the goodwill and IPR in different ways, so be careful and plan for the likely outcome ahead. You re-value your goodwill every year and write off any reduction in value at that time, while you estimate the useful life of your products, know-how or IPR and amortise these over that period, as a monthly charge to your accounts.
4) Write-off small fixed asset purchases
Computer and office equipment is generally so cheap these days it is often more sensible to write off the cost in the month of purchase than to track it on a fixed asset register, charging a really small amount of depreciation every month for three years or more. But you?ll still need to make sure the expenditure abides by both your purchasing controls and your IT policies, eg: all hardware and software licence and version purchases are properly approved and centrally registered.
5) One-off or enhancement costs
There are various items of expenditure which can be bundled into the capital or enhancement value of an asset. For example you can capitalise professional fees in relation to an acquisition. You can add office move costs where these affect the fixtures or fittings of a new office. The cost of upgrading an asset such as your telecommunication or IT infrastructure can be treated as an asset. Don?t forget advances or deposits left with your suppliers or landlord remain an asset until they are used up or returned.
6) Check the rules (IFRS 38, IFRS 3)
Check with your finance director or adviser that the proposed treatment fits in with current accounting standards and rules to make sure it sits comfortably within the guidelines. If in doubt, prepare your proposal with supporting justifications and computations and then bounce them off your auditor in advance.
Robert Murphy is an experienced finance director with My Business FD, which offers high-calibre finance directors to ambitious smaller and growing companies on a part time, flexible and affordable basis. Tel: 0207 717 5254 or enquiries@MyBusinessFD.com.