Software created for internal use or to order seldom has an observable market price. Comparable transactions are absent, income cannot be isolated, and comparison with off-the-shelf products is unsound, since what is being compared are different volumes of functionality.
The question of value nonetheless arises regularly: on recognising an asset, in preparing a transaction, in resolving differences over the price of work, and in justifying expenditure to an owner or investor. The absence of an observable price does not make calculation impossible — it means that the calculation must rest on the cost necessary to create or replace the object and on assumptions capable of verification.
This service brings together two subjects: determination of the cost of creating or replacing a software product, and assessment of whether information technology meets the needs of the organisation, including the calculation of total cost of ownership.
To obtain a preliminary estimate of scope, timing and fees, please complete the questionnaire. A response is provided within several business days.
Circumstances of engagement
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Accounting and transactions
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Differences over price
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Justification of expenditure
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Recognition of internally created software as an intangible asset, contribution of property to share capital, preparation of an acquisition or disposal, and determination of price on a transfer of rights. |
A divergence between the parties as to the value of the work performed, substantiation of a claim or a response to one, and determination of the amount of a monetary claim before litigation. |
Verification that expenditure on information technology is proportionate to the result obtained, and preparation of a budget case for an owner, a board of directors or an investor. |
Determination of creation and replacement cost
The calculation rests on the cost approach. The volume of work required to create an object of comparable functionality is determined, together with the cost of the resources needed to perform that volume.
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1
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Establishing the actual composition of the object
The program code and its volume, the composition of components and modules, third-party libraries and borrowed solutions, the state of the documentation, and the volume of integration and data migration work are examined. Borrowed components are isolated: the cost of creating them is not included in the calculation. |
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2
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Reconstructing the composition of work
Functionality is decomposed into elementary activities: design, implementation, testing, integration, documentation and commissioning. Project materials, the version control system and task records serve as the basis; in their absence, the composition is reconstructed from the actual result. |
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3
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Determining effort
Effort for each activity is expressed in person-hours. A three-point estimate is applied, with calculation of the expected value, which accommodates uncertainty and yields a range rather than a single figure. The assumptions applied are set out with their justification. |
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4
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Determining the cost of resources
Effort is related to the qualifications of the personnel required and to the rates prevailing in the relevant labour market during the period in question. Overheads, the cost of development tools and infrastructure, and statutory contributions are taken into account. |
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5
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Obsolescence and adjustments
In determining replacement cost, functional obsolescence is taken into account: divergence from current requirements, dependence on platforms no longer supported, and accumulated architectural constraints. The result is stated as at the date of determination. |
Software produced with code generation tools
The spread of tools that generate program code from a textual description has altered the relationship between the volume of code and the effort of producing it. A calculation founded on code volume overstates the result in such cases.
Replacement cost is applied instead: the volume of work required to obtain a result of comparable functionality using the tools available as at the date of determination, including framing the task, reviewing and revising the generated result, testing, and bringing it to a condition fit for operation. This approach reflects the actual conditions under which the object would be reproduced and does not depend on how the source code was obtained.
Alignment of information technology with the needs of the organisation
The second subject of this service answers the question of proportionality: whether the organisation obtains from its investment in information technology a result commensurate with its scale.
- relating the systems in operation to the business processes actually supported, and identifying duplicated and unused solutions
- calculating total cost of ownership for each system: licences, maintenance, infrastructure, personnel, and the cost of downtime and rework
- assessing whether the architectural decisions taken are proportionate to the size of the organisation and to its development plans
- analysing the structure of expenditure and its division between sustaining current operations and development
- assessing dependence on particular suppliers and on particular individuals, including concentration of functions and the absence of interchangeability
- comparing the level of expenditure with that observed in organisations of comparable size and sector
The outcome is a report describing the misalignments identified, together with recommendations, suitable for submission to the governing bodies when deciding upon budgets, the composition of systems and the structure of the information technology function.
Purpose and form of the document
The report is prepared under agreed-upon procedures. It describes the object, the methodology applied, the sources and assumptions used, and the calculation with its intermediate results, so that every step may be verified.
The document is intended for use by the party commissioning it in taking management decisions, in preparing a negotiating position and in substantiating claims. The decision taken upon it remains that of the client.
For purposes where legislation requires a valuation report — in particular on certain categories of transaction, on contributions of property to share capital in the cases prescribed, and in other cases of mandatory valuation — a document prepared by a suitably qualified valuer is required. Such work is performed jointly with the valuation practice: the technical part of the examination is carried out by specialists of this practice, while the conclusion as to value is issued by the valuer in the prescribed form.
Where a determination of value is required within proceedings, the procedural setting applies: Computer forensic examination →.
Timescales
Determination of cost for a single software product ordinarily takes three to six weeks, depending on the volume of code, the completeness of project materials and the availability of those who developed it. Assessment of the alignment of information technology with the needs of the organisation takes four to eight weeks.
Frequently asked questions
Is a calculation possible where no project documentation exists
Yes. In the absence of materials, the composition of work is reconstructed from the actual result: the program code, the data structures, the functionality implemented and the history of changes. The absence of documentation is recorded as a circumstance bearing on precision and is reflected in the width of the range stated.
Is a single figure given, or a range
The calculation yields a range with an expected value. A single figure without stated assumptions would convey a precision this method cannot attain.
How are borrowed components and open source treated
Borrowed components are isolated and the cost of creating them is excluded. The work of selecting, integrating, configuring and maintaining them is included, as are the terms of the relevant licences.
Is the report a valuation report
The report is prepared under agreed-upon procedures. Where legislation requires a valuation report, the document is prepared jointly with a suitably qualified valuer.
May the calculation be used for accounting and tax purposes
The cost calculation may be used in establishing the initial carrying amount of an intangible asset. Recognition and measurement are governed by the applicable standards and are agreed with the accounting function of the organisation and its auditor.