The depreciation of an intangible asset

CHECK..what can be can capitalised… R&D complications

Takeaway … change your policy … ID all costs that could be classed as intangible … stick them in the balance sheet and boost your EBITDA

The basic idea … you put the cost of intangible assets in your balance sheet … and amortise / write-them off / spread the cost of them through your P&L over their expected useful life …

eg you spent £100k on product development costs this year … but you don’t expect to start selling that newly developed product until next year… and you’ll sell it for 4 years…

Move the full £100k cost to the Balance Sheet

Profits go up by £100k … Assets go up by £100k

You now amortise that asset over the 4 years you’ll be using it to generate revenues

So next years profit will be hit by a £25k amortisation charge … and the asset will fall in value to £75k

Year after profits hit by £25k … and the asset value is now £50k … rinse repeat

Why does it matter when trying to boost the value of your deal ?

Because you can take costs out of the P&L … which pumps up EBITDA

Note … Amortisation is the A in EBITDA… and EBITDA is profit before A … so you can see amortisation costs do not effect EBITDA… or your company value

So ID all the dev costs you can and get them out of your profit figure

Using the above example and assuming a multiple of 7 is being offered for your company I just added £700k of value to the deal …

Not too shabby for a bullshit bookkeeping exercise and the application of appropriate accounting policies

Steps you need to take

1. Change your accounting policy … it is now company policy to capitalise development costs and amortise them over their useful life …

2. ID all dev costs you can … internal and external costs

Technical stuff

Under FRS102 the basic rule is … capitalise development costs … which then fall under the Intangible Assets regime … which means the tax treatment follows the accounting treatment … which means if you amortise £25k of intangibles this year your profits for tax purposes will be lower by £25k

If you are daft enough to file Micro-Entity accounts you have no choice but to write off all costs … no capitalising of intangibles is allowed

What can you capitalise ?

Here’s some examples