Accounting for Software Investments Evaluating Financial Value, Quality and Risk

Study on the importance of valuing IT asset

The first section explains the importance of valuing the IT asset. In fact, an IT asset can be valued by taking into account its fair value. The purpose of fair value is to provide accurate information on the value of assets and liabilities of the company. Fair value is also very important in the process of decision making; over the years, when it comes to IT, it gained more and more weight given that the budget for IT increased in most companies. In practice, this notion is not always easy to capture.

The second chapter explains in detail how the cost of software should be accounted for in financial statements and what is done in practice. The concept of fair value exists in Belgium GAAP since 1975 and is more and more present in the international accounting standards (IAS and IFRS). Therefore, software cost could be capitalized when the entity believes that future economic benefit deriving from it will flow to the company. Besides, capitalizing costs reduces information asymmetry between management and stakeholders. However, in practice, we observe that a lot of companies tend to expense all their IT costs for the sake of simplicity or some fiscal advantages.

The third chapter explains the importance of assessing software quality. In Cost Management, many argue that increasing software quality can significantly reduce costs. A high quality application will require less time and money spent for maintenance and critical changes in response to business needs. In all, it reduces the Total Cost of Ownership. Good quality can also mean better software performance, which in turn can translate into higher employee and business process performance, and therefore better margins. However, more often than not, organizations don't have a detailed inventory of their software and they do not perform an appropriate strategic application life cycle planning. In consequence, they are not aware of the value of their IT, or the scale of IT debt, costs and risks that follow. When developing an application (in-house or outsourced), both its functional and structural quality, as well as the risks it may generate should be considered, and not only the time and budget needed.

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