General startup accountancy Flashcards
What are the general rules around capitalisation of costs?
Costs are accurately recordable, and probable future economic benefits attributable to the asset will arise
What are the rules around capitalisation of development costs?
- Technical feasibility
- Intention to use or sell the asset
- Ability to use the asset (existence of a market / internal need for the project)
- Future economic benefits
- Measurable costs
- Ability to complete the asset
What are the rules around capitalisation of research costs
Research costs cannot be capitalised
What are the rules around capitalisation of software development costs
Internally generated software costs can be capitalised if they meet the capitalisation criteria (feasibility, availability of resources, future economic benefits, measurable costs)
Purchased software costs may also be capitalised, including the direct cost of acquiring, configuration costs, direct labour costs.
What is the subsequent measurement of capitalised development costs?
Amortised over its useful economic life, once it becomes available for use. Recognise at lower of carrying amount and recoverable amount.
What is the treatment of subsequent costs incurred with regards to capitalisation?
These can be capitalised so long as they enhance the asset or extend its UEL. Otherwise they are expensed e.g. repairs and maintenance
What is the treatment of borrowing costs with regards to capitalisation?
These can be capitalised if they are incurred to finance the qualifying asset which takes a substantial period of time to prepare. E.g. interest on loan used to develop software
Commonly incurred expenses which cannot be capitalised?
Research costs, training costs, advertising and promotional costs, internally generated brand, relocation costs, recruitment costs, abandoned project expenses
Treatment of inventories?
Held at the lower of cost and net realisable value. Cost includes all costs required to bring to their current condition (including materials and labour).
Treatment of equity settled share based payments?
Recognise an expense based on the fair value of the equity instrument at the grant date, spread it over the vesting period. e.g. £2k option value, vesting over 3 years = £667 per year:
Dr P&L, Cr Equity (share option reserve).
Fair value of the share options should be recalculated annually and the associated expense should be recognised over the remaining vesting period.
On exercise date:
Dr cash (from E’ees payment)
Cr share capital (value of the granted shares)
Cr share premium (balance between cash paid and nominal value of shares granted)
Dr share equity reserve
Cr retained earnings
Treatment of cash settled share based payments? (e.g. share appreciation rights)
No entry at grant date. Annually the FV needs to be calculated, and the associated expense and liability recognised. At exercise date, the remaining associated cost is recognised in the P&L and the cash is paid out.
Revenue recognition for sale of goods?
- Risks and rewards of ownership have been transferred
- Seller retains no control
- Revenue can be accurately measured
- Economic benefits will be received
Revenue recognition for services (current)?
Revenue is recognised by reference to the stage of completion of the transaction, provided this can be reliably estimated.
This can be ascertained via:
- Percentage of completion (based on costs incurred to date vs expected total costs)
- Milestones e.g. delivery of report
- Proportion of services performed (e.g. 10,000 emails sent out of contracted 20,000)
Revenue recognition (from Jan-26)
Aligned with IFRS: 5 step model
1. Identify contract
2. Identify value
3. Identify performance obligations
4. Apply value to each obligation
5. Recognise revenue on completion of performance obligation
