I have recently started as FD of an online business & I am looking for information on capitalisation of costs, relating to the start-up & build of the customer database - i.e. the customer database is a significant (intangible) asset of the business. Our (small) auditors have initially knocked back this, but I want to ensure this is correct before accepting this. Therefore, has anyone gone through this process & won or lost this argument?
DARREN
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Listen to your auditors
Hi Darren.
First, I should point out that ethical guidance of most institutes warns against giving "second opinions" on the basis of queries with limited information like the one you have submitted. Having said that, I will outline the guidance and let you reach your own conclusion.
Assuming you report under UK GAAP, internally generated intangible assets cannot be capitalised under FRS10 unless they have a readily ascertainable market value. In order to capitalise such an asset, you would firstly need to demonstrate that the asset is identifiable, and that you have control over the asset as defined in the standard. If you can establish this, you can then only capitalise it if it is a homogenous asset whose value can be established by reference to trading of similar homogenous assets on an active market.
The other regime for capitalising internally generated intangible assets is for development expenditure under SSAP 13. SSAP 13 outlines the criteria for capitalising such expenditure.
Tax?
Are you sure that you want to capitalise the costs? You may wind up deferring your tax deduction as well as your P&L hit.
As a note, your auditor is likely to ask unfortunate questions like 'could we have the cashflow forecasts showing the future cash benefits from the use of the asset' if you get past the first hurdle of agreeing with them that the costs can be capitalised in the first place. If you can't prove that there are any future benefits reasonably expected from the asset then aside from the moral victory you will end up back where you started from a practical viewpoint.
Is the database an integral part of the site itself?
planning costs—including, for example, the costs of undertaking feasibilityapplication and infrastructure development costs—including the costs of obtainingdesign costs—expenditure to develop the design and appearance of individualcontent costs—
If so you may want to take a look at UITF Abstract 29 on Website Development Costs, which offers some sensible views on what can and can't be capitalised.
If your database forms part of your site I see no reason why you might not look at capitalising some of the costs, as per this guidance. However as was stated above if you are looking to be profitable in the immediate future you may want to write off everything you can to the P&L.
Are you looking for finance or something? No offence intended. www.frc.org.uk/images/uploaded/documents/328.pdf
Quote
The costs of developing a Website include:
(a)
studies, determining the objectives and functionalities of the Website, exploring
ways of achieving the desired functionalities, identifying appropriate hardware and
Web applications and selecting suppliers and consultants.
(b)
and registering a domain name and of buying or developing hardware and operating
software that relate to the functionality of the site (for example, updateable content
management systems and e-commerce systems, including encryption software, and
interfaces with other IT systems used by the entity).
(c)
Website pages, including the creation of graphics.
(d)
expenditure incurred on preparing, accumulating and posting the
Website content.
Planning costs do not in themselves give rise to future economic benefits that are
controlled by the entity. Such costs should not therefore be capitalised as an asset but
should be charged to the profit and loss account as incurred.
In contrast, the remaining costs of Website development (paragraph 3(b)-(d)) could give
rise to an asset, which should be capitalised if the relationship between the expenditure
and the future economic benefits is sufficiently certain.
MtF