As technology continues to advance, existing accounting standards often lag in their requirements. The proliferation of Software as a Service (SaaS) and other Cloud computing arrangements has been no different. There is no specific accounting standard that directly applies to these arrangements by customers and instead existing standards are applied with significant judgements necessary. The issue was ultimately escalated to the IFRS Interpretations Committee (IFRIC) who consider the accounting for these arrangements in IFRIC Agenda decisions in March 2019 and March 2021.
WHAT ARE CLOUD COMPUTING OR SaaS ARRANGEMENTS?
Cloud computing or SaaS arrangements are when, rather than organisations purchasing software outright and installing it on their own machines, the software supplier instead hosts the software on their own systems and the customers log into the system via a browser. The customer organisations are still able to tailor the software to their own needs and configure it to meet their requirements. This can be done by selecting options within the software itself and also by writing custom code. These SaaS arrangements are typically arranged on a subscription basis and when the organisation stops paying their subscription, they will no longer have access to the SaaS system.
HOW SHOULD ORGANISATIONS ACCOUNT FOR CLOUD COMPUTING AND SaaS ARRANGEMENTS?
Organisations usually account for these transactions as service contracts and recognise the expense straight line as they access the service. However, there may be limited circumstances when other approaches might be required. IFRIC discussed this in their Agenda Decision in March 2019 and indicated that organisations must consider:
- Whether the arrangement contains a lease accounted for under AASB 16 Leases
- Whether the arrangement can be capitalised as an intangible under AASB 138 Intangible Asset
As SaaS arrangements are unlikely to give customers control over the underlying software they are unlikely to meet the definition of a lease or intangible asset. Hence, these arrangements are typically service contracts.
ACCOUNTING FOR CONFIGURATION COSTS
Many different costs are incurred in setting up a Cloud computing or SaaS arrangements, well beyond the payment of the regular access payments to the supplier. It is important to assess each of these costs separately to determine whether or not they can be capitalised under AASB 138 as an intangible asset.
This analysis of costs is complicated where the organisation pays the supplier of the SaaS for these configuration services. IFRIC considered how to separate services and the associated costs within a contract in their March 2021 Agenda Decision.
IFRIC determined that in lieu of any guidance in AASB 138, entities should instead apply the guidance in AASB 15 Revenue from Contracts with Customers paragraph 27 by analogy to determine whether the configuration services provided by the supplier are distinct from the SaaS service or not. That is, are they akin to separate performance obligations under AASB 15.
There are two decisions that need to be considered before it can be determined whether the Configuration service and the SaaS are distinct or not:
- Can the customer benefit from the configuration service and the SaaS separately on their own?
- Can the Configuration service and the SaaS be separately identified in the context of this contract?
If you answer No to either of these questions the configuration service is not distinct and separate from the SaaS service. As they are not distinct, all amounts paid, including any amounts identified on invoices as relating to the configuration service, are considered to be consideration paid for the SaaS. As consideration for the SaaS the amount should be recognised as the access to the SaaS is provided.
Where the costs are not considered to be part of the costs of the SaaS arrangement, or where the organisation has undertaken the configuration work independently of the supplier, the organisation will have to apply the normal rules of AASB 138, to determine if the costs are able to be capitalised as intangible assets.
Further information
Accounting for Cloud Computing and SaaS arrangements can be complex and will require careful analysis of each of the underlying costs and service. Please download our guide for more information. If you need personalised advice or assistance please contact your local Moore Australia Advisor.