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Accounting for Software-as-a-Service (SaaS) arrangements

The IFRS Interpretation Committee’s (IFRIC) has released an Agenda Decision “Configuration or Customisation Costs in a Cloud Computing Arrangement” in April 2021 [1].  Cloud computing covers Software-as-a-Service (SaaS) arrangements. This IFRIC Agenda Decision applies to financial reporting periods ended 30 June 2021.

This Agenda Decision follows on from the IFRIC Agenda Decision Customer’s Right to Receive Access to the Supplier’s Application Software Hosted on the Cloud (IAS 38) released in March 2019 [2].  Under that decision, IFRIC concluded that entering into a standard SaaS contract was not a lease of the software code, or an intangible asset of the software code.  Rather, the contract was a service contract.

The IFRIC Agenda decision released in April 2021 considers accounting for the situation where an entity incurs costs to configure and / or customize the application software as part of a SaaS arrangement. It is important to read the facts of the IFRIC Agenda Decision to determine if they are the same or similar to your arrangements however the effect of the IFRIC Agenda Decision is that most configuration or customization costs should be expensed unless they meet the criteria as an intangible asset or prepayment.

Application of IFRIC Agenda Decisions

While IFRIC Agenda Decisions are not separate legislative instruments like Accounting Standards and Interpretations, they are effectively considered mandatory when complying with International Financial Reporting Standards (IFRSs). If your organization has incurred material costs to configure or customize software under a SaaS arrangement, you should comply with the requirements of the IFRIC Agenda Decision regardless of the type of financial report you are preparing (general purpose, general purpose reduced-disclosure or special purpose financial report). This is because all financial reports should, at the minimum, adopt the recognition and measurement aspects of Accounting Standards and other authoritative pronouncements.

How Does This IFRIC Agenda Decision Affect Your Financial Reporting

Some organisations may have capitalised configuration and customisation costs under an SaaS arrangement.The effect of the IFRIC Agenda Decision issued in April 2021 is that entities may have to change their accounting policy and not capitalise such costs on configuring or customizing software under a SaaS arrangement.  The issue is not as simple as writing off all previously capitalised IT costs. Depending on the circumstances, entities:

  • may be able to continue capitalising some costs for those IT projects
  • may be required to reclassify some previously capitalised costs as a prepayment to be expensed over time
  • have to expense the remaining costs as incurred.

When applied, the accounting policy change will be retrospective, requiring the adjustment of comparatives.

Identifying the changes

To determine the impact of the IFRIC Agenda Decision on your financial report we suggest the following actions:

  • Consider the content of both IFRIC Agenda Decisions mentioned above to determine their application to your organisation
  • Identify what costs have been capitalised for which projects, and are the projects SaaS / cloud computing (as opposed to are the previously common approach of perpetual licence and regular updates)?
  • Are the costs material to your financial reporting?
  • If so, do the costs relate to software assets that your organisation controls?
    • Where is the software located? – on the organisation’s own hardware or in the cloud?
    • Does your organisation have the power to obtain future economic benefits from the software AND restrict the access of others to those benefits?

The above actions will help determine whether you have an intangible asset under AASB 138 Intangible Assets, that can be capitalised.

If you cannot recognise an intangible asset, you then need to determine when you recognise an expense for the customisation or configuration services received. This is not as simple as expensing the costs when incurred.  The Agenda Decision applies a complex approach of the customer ‘mirroring’ the accounting of what the supplier would do in applying AASB 15 Revenue from Contracts with Customers with its associated complexity in determining ‘distinct’ performance obligations.  There are two scenarios:

  1. If the supplier would recognise revenue from the customisation or configuration services upfront, then that is deemed to be when the services are provided, and then the customer (your organisation) would recognise the expense for the services upfront.
  2. If the supplier would recognise revenue from the customisation or configuration services over time (i.e. the activities were not a ‘distinct’ performance obligation), then it is deemed that the services are provided over time (even if the activities took place upfront), and then the customer (your organisation) would recognise the expense over time (by first recognising a prepayment asset if the costs were paid upfront).

We recommend you undertake the following actions when determining how to account for costs covered by the IFRIC Agenda Decision:

  • Who is providing the configuration/customisation services? – the SaaS / cloud computing company, or a third party?
  • When are the services received? By applying the principles of AASB 15, consider–
    •  “Distinct good or service” requirements in AASB 15 para 26 to 30
    •  “Setup activities” guidance in AASB 15 para 25 & B51
    •  Are the services provided by the SaaS / cloud computing company? This may indicate they are not distinct and likely to be over time, thus giving rise to prepayment; or
    • Are the services provided by a third party? This may indicate they are distinct and likely to be requiring expensing upfront.

The above actions will help determine when your organisation needs to recognise an expense for the customisation or configuration services.  The actions will also help you determine whether you have a prepayment for customisation or configuration services that you have paid for upfront, but recognised under the Agenda Decision over time.

Contact your TNR Audit & Assurance team member if you require assistance.

References

[1] https://www.ifrs.org/content/dam/ifrs/project/configuration-or-customisation-costs-in-a-cloud-computing-arrangement/configuration-or-customisation-costs-in-a-cloud-computing-arrangement-mar-21.pdf
[2] https://www.ifrs.org/content/dam/ifrs/supporting-implementation/agenda-decisions/ias38-customers-right-to-receive-access-to-the-suppliers-software-hosted-on-the-cloud-mar-19.pdf

Important: The information contained in this post / article is not advice. Readers should not act solely on the basis of material contained in this post. Items herein are general comments only and do not constitute or convey advice per se. We recommend that our formal advice be sought before acting on anything contained in this post.