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Depreciation on purchase of software

Depreciation on purchase of software

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Just wondering can anybody out there help me. Our firm is considering purchasing software on behalf of our customers. This software package will allow our customers to submit necessary information to allow us to assess whether or not to advance funding to customers and to assess their creditworthiness etc. We are purchasing the software and in effect are using this as a type of customer sponsorship, as individually the purchase of this software would be onerous on some of our smaller customers/prospective customers.

My question is are we correct to charge depreciation on this software over the next three years? Is there any guidance etc. on a similar situation?

All help or suggestions would be appreciated.

Iggy

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By johngroganjga
27th Jul 2015 16:53

"On behalf of"?

Do you mean "on behalf of"?  Or do you perhaps mean "to be used by"?

If you mean the former you will have no software to depreciate (although your clients will) and the question of what rate to depreciate it at will not arise.

If you mean the latter, yes you will need to select a suitable depreciation period, and three years is probably in the right ballpark. 

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By Iggy P
27th Jul 2015 23:00

Auditors getting sticky

Thanks John.Yes this is a very grey area-I would argue that it is to be used by our customers but would be a bit more assured if there was some guidance or case histories of a similar type to refer to.

I don't want to start depreciating it and then have our auditors to start quoting chapter and verse that it is not allowable for depreciation etc.etc.and have to take a hit for it to the P and L at the year end.

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By johngroganjga
28th Jul 2015 07:47

Not sure where the grey area is, unless you mean the expected useful life of the asset. Provided you can justify the reasonableness of the period you choose the auditors are unlikely to take issue.

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By slarti
30th Jul 2015 10:56

Is software actually capital?

Most companies that I visit no longer treat software as a capital item, writing it off in the year of acquisition, as it has no residual value - you can't sell it on.

The exceptions being those with embedded software that is part of physical equipment.

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By johngroganjga
30th Jul 2015 11:32

Whether there is a residual value is irrelevant. The question is whether its use extends over more than one accounting period.

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By slarti
30th Jul 2015 12:06

Re: Whether there is a residual

<i>The question is whether its use extends over more than one accounting period.</i>

But many things have a use that extends over one accounting period that are not capitalised, eg pens, flip charts, staplers.

But there must be another argument as so many companies no longer seem to capitalise their software.

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Red Leader
By Red Leader
30th Jul 2015 12:08

materiality

slarti wrote:

<i>The question is whether its use extends over more than one accounting period.</i>

But many things have a use that extends over one accounting period that are not capitalised, eg pens, flip charts, staplers.

Because they are immaterial.

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