Concern grows at grey areas in IT accounts

IT directors and accounting experts have raised concerns about uncertainty as to how companies account for expenditure on IT...

IT directors and accounting experts have raised concerns about uncertainty as to how companies account for expenditure on IT projects.

With corporate accounting methods under intense scrutiny following the multi-billion pound bankruptcies of Enron and WorldCom, the spotlight could now turn on how companies account for IT investment and consultancy spend, they warn.

Guidance on when UK company investment should be capitalised is outlined in a series of UK accounting standards.

Some IT directors, however, have warned that there are conflicting practices and widespread confusion among UK companies about whether money spent on IT consultants should be capitalised or treated as an expense.

The attraction for companies of capitalising consultancy spend is that its costs can be spread over a number of years in their accounts.

One IT director at a multinational company said, "In our company for one project we capitalised all hardware and software but expensed the money we spent on consultants.

"But there is a tendency for a company to say it does not want all that money going into its profit-and-loss account. Instead it is capitalised and spread over three years."

Accounting rules on when to capitalise assets need to be revisited in the wake of recent accounting scandals, he added.

One expert on accounting regulations, who asked not to be named, said that generally IT consultancy costs should be capitalised if consultants were developing a new software or hardware system, rather than just giving general advice.

He admitted, however, that much in this area was left to the discretion of companies, adding that software was "a bit of a grey area" for accounting standards.

Industry figures, however, urged IT directors and company boards to take a consistent approach to accounting for consultancy spending, to help to ensure financial transparency.

"Software build costs and consultancy, whether external or internal, should be treated as an expense," said Bob Aylott, principal consultant at outsourcing specialist Orbys Consulting, and a veteran of the consultancy market. "There is absolutely no excuse for capitalising it, in my view."

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