Revaluation of Intangible Asset

Software built by Directors has been independently revalued, is this allowed to be recognised?

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Two companies are owned by the same two Directors. Their main trading business which makes a trading income, pays their salaries and is the main employment for each of them. 

For the past year they have been spending some of their time building a piece of software which was supposed to sit in the second (previously non-trading) company. The piece of software has been independently valued at £1m and they want that to be capitalised as an intangible in company 2. IFRS 18.18C doesn't allow revaluation of an asset which was not previously recognised, or the recognition of an asset at anything other than initial cost,  and since the only cost incurred has been their time and a small coding subscription, there is currently nothing capitalised for the project. (all the work has taken place during the current accounting period). 

Is company 1 able to charge company 2 for the Director's time and the subscription it "shared" with company 2 for this period, in order for their to be a capital value to the project which can then be revalued?

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By David Ex
23rd Apr 2024 16:43

AccountingBen wrote:

Is company 1 able to charge company 2 for the Director's time and the subscription it "shared" with company 2 for this period, in order for their to be a capital value to the project which can then be revalued?

And create a (large) taxable profit in Co 1? Doesn’t seem very sensible, unless I’m missing something.

And this is all done after the event with no prior agreement for Co 2 to be liable for those costs?

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Replying to David Ex:
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By AccountingBen
25th Apr 2024 11:32

It wouldn't be a large profit in Co 1, it would be Director's time and they are remunerated relatively little.

I suppose so, yes, but the companies are under common control so would prior agreement be an issue in reality?

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Replying to AccountingBen:
Stepurhan
By stepurhan
25th Apr 2024 11:57

AccountingBen wrote:

It wouldn't be a large profit in Co 1, it would be Director's time and they are remunerated relatively little.


If company 1 is charging on the relatively little that the director's are paid, you are going to end up with a relatively little intangible asset. If company 1 bills what you think the work is worth, company 1 is going to have a large profit.

Your statement implies a third option I'm just not seeing as feasible.

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By paul.benny
23rd Apr 2024 17:18

There is no IFRS18, so I'm assuming you're referring to FRS102 s18

For me the first test is in 18.4: you only recognise an intangible asset if it is probable hat the expected future economic benefits that are attributable to the asset will flow to the entity.

What's the track record of the company in creating and marketing similar software? What sort of market share would they need to generate revenue to justify a £1m valuation? Etc. If you haven't got those things nailed down, auditable (even if you're below audit threshold), forget about revaluing.

Once that's sorted, yes , you can adopt the revaluation model. But again, valuation needs to be robust - who has valued? What is basis of valuation? What expertise do valuers have.

A further question: who owns this software? Big company employment contracts essentially make employer the owner of anything their staff invent. It's wholly different scenario if your guys own it personally and license to their own company. Whether better or not is another matter but worth considering.

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Replying to paul.benny:
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By AccountingBen
25th Apr 2024 11:35

Thanks for you response, yes sorry FRS102 s18.

The Directors have both built a software before which they sold for £750k about 4 years ago, in a similar sector, but through a different business.

The valuer is a chartered accountant with experience in the industry and has put together a comprehensive, prudent valuation document.

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