Software === Money?

The other day I was reading the financial statement of a company I have been familiar with for a few years. I tend to skip the prose and go straight to the financial statements; it is here, I am told, that you will find objective truth, as there is no fluffy language to confuse a potential auditor.

The company was doing very well and I was pleased to see that its primary business was growing. However, I admit, I was there for a particular reason: to see how much it valued its software. Falsification be damned, I was there to prove a hunch of mine correct, mainly that businesses overvalue software on their balance sheets, and therefore the total equity available to shareholders is less than what the financial statements show.

I chose this, forever unnamed, business because I was familiar with the state of their software a few years ago, and I decided to check the financial statement for that period. In my opinion, the company had grossly overstated, at that point in time, the monetary value of their software systems. But how should they, or any other business, value their software?

The equation Software === Money says: software is equivalent to money. And this is what a business claims when it puts software as an asset on its balance sheet and adds it to the total shareholder equity. As a quick reminder, a business determines its total equity — that is, all of the capital available to shareholders — by the following equation: Equity = Assets − Liabilities. If there are five shareholders of a business with total equity of £10, then each shareholder has £2 in equity.

An asset, according to Investopedia, is:

And we can find it on the balance sheet section of a company's financial accounts.