Should development costs (assets) also be shown in the Income statement?

[techie]

My software startup is creating an application and the development costs were taken as assets on the balance sheet to be able to match future revenues against input costs. So the balance sheet now shows the Development costs as assets.

My doubt is, should the same development cost also be reflected in the Income Statement (Expense: Development charges paid and Income: Work in Progress of the same amount) or is this step not required?

[RAL]

I think you are talking abou two complete different things.

First thing, the development cost either treated as expenditure or as an assets.

If you are developing an application and hoping to sell in future then it can be either treated as expenditure or assets (depends on various factors). If it is treated as an assets which will be depreciated over its product life.

But if you are develpoing for a customer who placed an order with you, then the work you have done you may/ may have to treat as work in progress regardless whether you raised an invoice.

[Intel Clarke]

Besides the accounting treatment (which you may be better of leaving to an accountant) also look at the R&D tax credits HMRC offer SMEs.

You can reduce your tax bill by 150% of what you have spent on the development or in certain cases get a cash sum from HMRC

http://www.hmrc.gov.uk/randd/

[techie]

Thanks for the replies.
RAL, its our own application which we will sell to retail clients in the future. Isnt depreciation possible only on fixed assets whereas this is a current asset (I am clearly not an accountant, just asking :) )? We were advised to treat it as an Asset, and now Im not clear whether these should also appear on the P&L account.

Intel, thats a good point, this particular product is not R&D yet though.

[RAL]

Thanks for the replies.
RAL, its our own application which we will sell to retail clients in the future. Isnt depreciation possible only on fixed assets whereas this is a current asset (I am clearly not an accountant, just asking :) )? We were advised to treat it as an Asset,

Why are you doubting on the advice you received? Was it from an accountant or from discussion forum? As you are developing an application with a view to benefit in future, so development expenditure can be capitalised and amortised over expected life of product. Hence it is not a current asset but an asset which will be amortised in future to match against its revenue.

Expenditure on development is normally undertaken with a reasonable expectation of specific commercial success and of future benefit arising from the work, either from increased revenue and related profit or from reduced costs. On these grounds it may be argued that such expenditure, to the extent that it is recoverable should be deferred to be matched against the future revenue. There are conditions to be met if you want to defer the costs. They are
a. There is a clearly defined project;
b. The related expenditure is separately identifiable;
c. Development costs including related production, selling and administrative costs incurred on a project are expected to be covered by future revenues;
d. Adequate resources exist, or are reasonably expected to be available, to enable the project to be completed; and
e. The project is deemed technically feasible and commercially viable depending on; -likely market condition including competing products and services; -public opinion; or -consumer and environmental legislation.

Where all the criteria for recognition have been met, development cost can be deferred instead of writing of as it is incurred (to P& L).

The development cost should be amortised over expected life of product. Also annual review should be carried out for diminution in value.

Also need to consider taxation and you already know this.

The director should be realistic in their assessment of the period over which development cost should be written off.



and now Im not clear whether these should also appear on the P&L account.


I hope above information should be enough to clear your doubt. If you are still in doubt:| I am afraid you have to get paid advice :rolleyes:from a qualified and experienced accountant. Let me know if you want one.;)

[techie]

Thanks RAL, i do trust the accountant obviously, was just trying to understand the issue myself (he has no patience to explain :))
That post does explain it quite clearly I guess