With rapid development cycles and complex financial instruments, the tech sector presents unique accounting and auditing challenges. Preparing for an audit isn’t just about compliance it’s about ensuring your financial statements accurately reflect the value and risks of your business.
In this article, we’ll explore common accounting errors in the tech sector and offer practical guidance to help you prepare for a smooth and successful audit.
Development costs: Capitalisation vs. expense
Tech businesses often invest heavily in software development, and determining whether costs should be capitalised or expensed under FRS 102 requires careful judgement. This is one of the most scrutinised areas during an audit.
Key considerations for CFOs:
- Clear accounting policies: Define how you distinguish between research, development, and ongoing maintenance.
- Robust time tracking: Use timesheets or system reports to accurately capture development effort.
- Strong documentation: Clearly demonstrate how capitalised costs meet the recognition criteria under FRS 102.
- Useful life assessments: Base asset lives on evidence such as historical usage or the expected longevity of the underlying code.
- Annual policy review: Reassess your approach regularly to ensure it remains appropriate as the business evolves.
Impairment testing of intangible assets:
FRS 102 requires companies to assess annually whether intangible assets may be impaired. For tech companies, estimating the recoverable value of capitalised development costs can be particularly challenging.
Best practice approach:
- Value-in-use models: Prepare discounted cash flow forecasts to support recoverable amounts.
- Well-supported assumptions: Clearly document growth rates, margins, overhead allocations, and discount rates.
- Specialist support: For complex models, consider engaging valuation experts.
- Audit-ready workings: Ensure calculations and assumptions are complete and defensible before the audit begins.
Share based payments: more than just options
Equity incentives are common in tech, and share based payments can arise even where formal options are not in place — for example, when shares are issued below market value.
Common risk areas:
- Redeemable shares: These are often classified as liabilities.
- Fixed or non discretionary dividends: May indicate a liability rather than equity.
- Distributable profits clauses: These do not automatically make dividends discretionary — the full terms must be assessed.
What CFOs should watch for:
Correct recognition: Record an expense in the P&L with a corresponding credit to equity. For share options, measure fair value at the grant date and recognise the cost over the vesting period.
Clear documentation: Ensure all share issues, valuations, and terms are properly documented and approved.
Preference shares: equity or liability?
Misclassification of preference shares is a frequent audit issue. The correct treatment depends on the specific rights attached to the shares, particularly around redemption and dividends.
Accounting for R&D expenditure credits (RDEC)
Research and Development Expenditure Credit. (RDEC) is often incorrectly treated in tech company accounts. Under FRS 102, it should be accounted for as a government grant and recognised “above the line”
Correct treatment includes:
- Pre tax recognition: Include the gross credit in pre tax income, either separately or within other income.
- Deferred income: Where R&D costs are capitalised, the RDEC should be recorded as deferred income and amortised over the useful life of the related intangible asset (not netted against the asset).
- Balance sheet presentation: Recognise the net tax credit receivable as a debtor.
Why proactive audit preparation matters for Tech CFOs
For CFOs in the tech sector, audit readiness is about more than ticking boxes — it’s about credibility, transparency, and building confidence with investors, boards, and auditors.
Addressing key judgement areas early helps streamline the audit, reduce risk, and avoid last-minute surprises. Don’t wait until year-end to discuss policy changes or complex transactions with your auditors. Early engagement makes a measurable difference.
Whether it’s development cost capitalisation, impairment testing, share-based payments, or R&D credits, successful audits come down to clear judgement supported by robust documentation. Equip your finance team with strong policies, reliable systems, and expert support where needed — and your next audit will be far closer to seamless.
Audits don’t need to be stressful. Our Menzies audit team works closely with tech CFOs to tackle complex accounting areas early and keep the process efficient and transparent. With real tech-sector expertise, we help you get audit-ready.
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