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How to calculate an intangible value of a software product

debopriyo sanyal (Founder Director & CEO) (30 Points)

24 December 2021

Greetings,
I hope this message finds you in the best of your spirits.
Say for eg a one person company is creating a software product and it is created by the founder on his own internally. How would the intangible value of the software product be calculated?
Please let me know.

In my opinion:
If X hours are spent building it and say 1000 INR is the assumed discounted value of the resource in-house.
The intangible value should be X multiplied by 1000.

Please let me know what the CA community thinks about this way of calculating the intangible value of a software product built in-house.

Thanks in advance.

Regards,

Debopriyo

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20 Replies

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 24 December 2021

Its pretty easy. all research expenses are expensed.

All development expenses are capitalised in developing that intangible asset

For the above, salary, legal fee, amortisation of existing software patents used to create this new software.

If you are using that software to sell, revenue recognition standard is applicable.

Use the cost method and dont use discounted values.

Now, if your selling it, then you can capitalise them even then. Your intangible asset will be X exactly that means, aggregate of all costs.

The computer used to develop the software will be treated as PPE.

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yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 24 December 2021

When it comes to sales, there is a small catch here, if this asset has future economic benefits, only then it can be capitalised.

So, Once you make a software, you put it into inventory. All salaries will be expensed like usual because this is inventory. Capitalise only the patents and licenses used. If your selling software on CD, expense the CD cost as well.

You have to do this because, you are not using that software for your company but selling it.

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 24 December 2021

Please remember, the first answer is when you developed your software for the first time. Afterwards, it will be treated like production. In the intangibles standard, you will see a list of all the costs. If you develop a new software every time, then related costs will be capitalised because its DEVELOPMENT. So, if you keep making the same software for sale, it will be PRODUCTION.

debopriyo sanyal (Founder Director & CEO) (30 Points)
Replied 24 December 2021

@ yasaswi gomes If the software is developed by the founder in-house (internally) and the founder does not take pay then how would the intangible value of the software be calculated? Particularly how would the hours spent in creating/developing the software be calculated or brought into its intangible value on the financial statement?

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 25 December 2021

Hi, It is simple again. Pages 11-14 will explain what costs will be capitalised and expensed.

When it comes to costing, people usually follow full cost pricing. This means all the costs you incurred. In your circumstances, it is difficult to asses what resources are consumed and how to calculate them. Many IT companies in India use ABC costing technique in order to find out

How much of a resource is consumed per activity

To allocate Indirect overheads to direct overheads to activities. getdocument (mca.gov.in)

If you have that expertise to measure expenses, on a trial and err basis is also fine, then you can use this technique. Or else follow absorbtion costing which is a traditional method used by many people.

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yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 25 December 2021

Forgot to mention, if you look up at lifecycle costs, you will be able to integrate coating and marketing strategies. Softwares usually have maintenance and that also can be overcome if you give me more specificatiins

debopriyo sanyal (Founder Director & CEO) (30 Points)
Replied 25 December 2021

@ yasaswi The issue is how to calculate the coding costs. As the coder is myself and I do not take a pay.My accountant is arguing that expenditure should be accounted only when incurred and that makes calculating the value of the intangible asset difficult.(Refer paragraph 5 in the doc link shared)

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 27 December 2021

That is for tax purpose your correct.

When you established an OPC, expenses must be accounted for and so you must declare your salary. OPC companies follow all AS standards. Next to overcome this, when you don't draw salary, emphasie on using adjusted market assessment method of pricing your product. This is available in Revenue recognition standard under transaction costs allocated to performance obligation. This means you don't have to include your salary into the product but price it as per your peers or competitors.

debopriyo sanyal (Founder Director & CEO) (30 Points)
Replied 27 December 2021

@ yasaswi Could you please explain with an example? Do you think my initial way of assessing the intangible value is accurate(At the top of this conversation chain)?

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 27 December 2021

1000₹ inhouse resources will be capitalised. Because these are development costs. This is when you develop the first softaware and test it and sell it for the first time only.

When you sell it, you can sell it for 1000+profit margin or 2000₹ because your competitor is selling at that price.

Development costs asset a/c 1000

To Bank a/c 1000

Then when you sell it

By bank a/c

To sales a/c

Next year, these development costs are amortised and the method is usually SLM method or pattern of usage.

Then onwards, all expenses are not capitalised. They are expenses.

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debopriyo sanyal (Founder Director & CEO) (30 Points)
Replied 27 December 2021

Based on what I understood say x hours were needed to build the software and assuming the per hour dev cost is 1000, would it be fair to put the intangible value of the developed software at (1000* x + other incurred expenses when incurred)?