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Software Valuation

Hi

If a software has been created by a director for the company before and after the incoporation of the company now he wants to put £50,000 value to it to put in the books of the company because he spends his time in developing and other developers. Which factors to consider to value this software? competitors etc..?

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20th Feb 2019 07:05

So many issues, so little time...

Is the director selling his IP to the company or licensing it?
Is the software in a state that economic benefits will flow to the owner, or is significantly more work needed?
Have you read the relevant standard?

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20th Feb 2019 09:07

Here's a start:-

Once the research phase has completed and the project has been moved into the development phase, the entity may recognise software and website development costs if, and only if, an entity can demonstrate all of the following:

The technical feasibility of completing the intangible asset so that it will be available for use or sale.
Its intention to complete the intangible asset and use or sell it.
Its ability to use or sell the intangible asset.
How the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.
The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.
Its ability to measure reliably the expenditure attributable to the intangible asset during its development.
Micro-entities reporting under FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime cannot capitalise any development costs; all such costs are written off to the profit and loss account as incurred.
https://www.aatcomment.org.uk/frs-102-long-read-intangible-assets-and-go...

Of course make sure that the director pays tax on his £50k income.

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21st Feb 2019 09:07

Working in M&A I come across a lot of nonsense when it comes to valuation.

Founders, particularly of software companies, tend to put silly valuations on their little babies. They base value on number of lines of code written or how many hours were spent developing it etc. It gets even crazier - I've had them quote numbers based on the multiple that Oracle / Google / Microsoft are worth!

Wanderer has given you a comprehensive answer. Good luck with 'managing your client's expectations'.

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By Accaols
23rd Feb 2019 04:54

Thanks for your replies. Another question is why just show the valuation as director income,50k . Why not via director loan account? Because no money received from the company and software was made to generate economic benefit out of which director will get income.

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to Accaols
23rd Feb 2019 07:43

Because that credit to the director's loan account is the director's income and taxable. I assumed that this point had been overlooked in the question and that's why I separately mentioned it.
And that subsequent director income from the economic benefit which you now mention will be further taxable income.

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By Accaols
25th Feb 2019 09:30

Thanks again Wanderer for highlighting that skipped point. Can you please also share some reference from HMRC so i can see this director income implications in more detail

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to Accaols
25th Feb 2019 10:10

This is such a basic point that it shouldn't need referencing. Are you actually an accountant? (not being rude.)

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By Accaols
25th Feb 2019 10:55

Even a very basic things about DLA are shown on HMRC website:
https://www.gov.uk/directors-loans

But the point you are mentioning is not in the basics there.

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to Accaols
25th Feb 2019 11:02

Are you actually an accountant?

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By Accaols
25th Feb 2019 11:14

yes i do but something you put into DLA as credit and take it as director income in his personal tax return. I havent seen it before

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to Accaols
25th Feb 2019 11:34

Well think about it.

Why not debit the Fixed Assets and / or P&L with a load of costs (as you are suggesting) that reduces the company's profit to nil and no tax, with the credit to DLA. If the credit to DLA wasn't taxable you have come up with the number one, all time wheeze to pay no tax!

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