Accounting for ‘Software as a Service’ cloud computing arrangements

Cloud computing solutions, often packaged as “Software as a Service – SaaS” arrangements, are commonly used due to their flexibility and scalability features. In a cloud computing arrangement, software is usually accessed through the internet, rather than on local servers.  

Such arrangements generally do not require customers to download or take possession of the underlying software.  Instead, software is stored on cloud computing infrastructure that is managed by the software provider, and accessed on an as-needed basis, with software updates and maintenance services being managed by the software provider.

A recent IFRIC agenda decision has clarified some aspects of accounting for cloud-based SaaS arrangements.

Configuration or Customisation Costs in a Cloud Computing Arrangements

In April 2021, the IFRS Interpretations Committee (IFRIC) issued a final agenda decision in relation to Configuration or Customisation Costs in a Cloud Computing Arrangement. The decision focused on the appropriate accounting treatment for configuration or customisation costs from cloud computing arrangements.

In the circumstances described in the request, a customer enters into a SaaS arrangement with a supplier. The contract conveys to the customer the right to access the supplier’s application software over the contract term. That right to receive access does not provide the customer with a software asset. Therefore, access to the software is a service the customer receives over the contract term. The customer incurs costs of configuring or customising the supplier’s application software.

Configuration

Configuration involves the setting of various ‘flags’ or ‘switches’ within the application software, or defining values or parameters, to set up the software’s existing code to function in a specified way.

Customisation

Customisation involves modifying the software code in the application or writing additional code. Customisation generally changes or creates additional functionalities within the software.

The IFRIC considered the following questions in analysing the request:

• Whether applying IAS 38, the customer recognises an intangible asset in relation to configuration or customisation of the application software.
• If an intangible asset is not recognised, how does the customer account for the configuration or customisation costs.

When can an intangible asset be recognised?

The IFRIC decided that in the circumstances described in the request configuration and customisation usually would not meet the definition of intangible assets under IAS 38 Intangible Assets. 

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