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Capitalise Internal Website?

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When a company has developed it's own internal website for requesting IT, raising IT and providing many other employee resources, is this capitalised? Thanks 

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By johnt27
08th Jan 2021 16:08

This sounds like an internal ticketing system/intranet and as such is not going to generate any economic benefit to the business so doesn't pass the first hurdle of being recognised as an asset.

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By Jasmin3
08th Jan 2021 16:16

Hi John,

Thanks for your reply. I thought as much, nevertheless I still wanted to clarify, as in a previous contract they were capitalising developments to their internal reporting systems too - which effectively produces their management accounts etc. Or can internal reporting systems be capitalised? Sorry, I'm going around in a loop here.

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By johnt27
08th Jan 2021 16:29

That's probably not right either! If there are no probable future economic benefits from such development, and I can't see how management reporting does, then it doesn't meet the criteria for capital treatment. This would be an asset if it's the development of a system with an intention to sell to 3rd parties. Not clear from your comments if this is the case.

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By Jasmin3
08th Jan 2021 16:40

It's definitely not created for third parties, purely for efficienct and better internal reporting. Large companies (especially those undergoing transformation), invest huge sums into their reporting systems, am I right in thinking this is simply expensed to the p/l? Thanks

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By johnt27
08th Jan 2021 17:07

Generally, yes - expensed to the P&L. It may, in some instances, qualify for R&D tax which is a further incentive to expense.

When large companies, or any sized companies, undergo transformation changes you might recognise intangible assets relating to IT/software but that really depends on the structure of that transformation.

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By Jasmin3
08th Jan 2021 17:24

Very insightful, thanks. Is there any resource where I can understand more about whether transformation would trigger the capitalisation of IT/software? I'm referring to large transformation projects; people, systems and long term finance road maps being implemented.

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By johnt27
08th Jan 2021 18:22

Being glib - Mr Google usually helps for resources.

More often with transformation projects I'm thinking of group re-organisations or acquisitions/disposal where the recognition criteria for intangibles are a little different.

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By paul.benny
08th Jan 2021 17:22

I'm a bit less convinced than johnt27. A system may generate economic benefits without generating revenue and some estimation of these benefits often forms part of the investment case. In this case the economic benefit may be from having an efficient process for recording and tracking IT helpdesk requests, rather than relying on informal processes such as emailing.

Larger businesses spend sizeable amounts on implementing SAP or similar and in my experience invariably capitalise the implementation costs. The amount capitalised would typically be third party costs (consultants, upfront license fees) plus the salary costs of any staff working full-time on the project.

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By Jasmin3
08th Jan 2021 17:56

Hi Paul, really intereting points, as that is exactly what was being capitalised; the implementation by both internal and external staff and fees. In terms of a license fee it'll be an intangible asset plus the internal development of any bespoke addins for example; SAP BW and SAP Analytics or others being capitalised? Like John, I was trying decipher the economic benefits, however these were being stated in investment/business cases prior to approval in terms of benefits to the company rather than inflows of monetary benefits.

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By paul.benny
09th Jan 2021 08:09

I'd certainly be comfortable capitalising costs along the lines you mention. For own staff, if a person is seconded to the project and their position is back-filled, I would capitalise and amount equivalent to the cost of the back fill. Possibly also include anyone seconded full-time and not back-filled if the secondment an extended period (say > 1month).

I'd also disagree with johnt27 on life. No-one spends 6- and 7-figure sums and many months on projects like this with an expectation of a 3 year life. I've worked with a SAP implementation that was >15 years old.

For back-office systems like yours, I'd look for evidence of typical upgrade/renewal cycles by other users - but I would have though 5-7 years might be reasonable. One qualification is that a few months after go-live, the capitalisation should close - compare with a building refurbishment. Six months after completion, you're largely dealing with maintenance and minor enhancements that should be revenue costs.

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By johnt27
08th Jan 2021 18:25

Paul makes a good point. I think the difference between implementing a full blown ERP system which will probably generate economic benefit - it allows the company to invoice customers, ship stock and scale up from a previous system etc (benefit clear) compared to an IT ticketing system is less clear.

Whilst economic benefit isn't defined in FRS 102 or IFRS does this include time saved by the users of such a system being implemented? If they're salaried staff, the business won't necessary make any financial savings so will the business sell more widgets or time as a result. Purely rhetorical questions.

If you compare this to the more typical intangible asset query that crops up this space - websites. Most commentators (ICAEW, ACCA, AAT and others) will tell you that a website developed without sales functionality does not meet the recognition criteria of an intangible asset. I'd question how an IT ticketing system or management reporting system etc would not be equally disqualified and expensed. How do the economic benefits move from being possible to probable?

After this you've got to think about Useful Economic Life. For a licenced product like SAP this will be pretty clear. For something developed inhouse, less so, and probably linked to other systems. More often than not these systems are on annual licences, although I appreciate cloud SAAS products will not, and UELs tend to be tied to these, which means a 1 year write off negating the need to capitalise. Finally, given the rate of technological change I'd challenge any business that is using UELs of more than 3 years for software.

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