Are you in Control of your Cloud Computing Arrangements?

By Hayley Keagan
Technical Director
26 October 2021
  • Cloud computing
  • Software services

With the increasing popularity of cloud-based computer services, it is now time to consider a shift from regular purchase or lease transaction services to a cloud-based software agreement “Software as a Service”, likely known as SaaS.

Recently, the IFRS Interpretations Committee (IFRIC) has released decisions regarding the treatment of costs associated with SaaS agreements, to clarify the accounting associated with this style of arrangement. In particular, the related costs of configuration or customisation of the software that are able to be capitalised.

The IFRIC decision outlines that where the software being configured or customised is not an asset of the business, the costs generally cannot be capitalised. Whether the costs can be capitalised will depend on whether an intangible asset exists as per the requirements of AASB 138: ‘Intangible Assets’.

AASB 138, allows recognition of intangible assets where the business has ‘the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits’ (Paragraph 13 of AASB 138).

So, how do you determine this?

  • The first step would be to identify the potential asset. Sometimes costs can relate to the cloud-based software and in other circumstances it may be possible that costs have been incurred in creating other software such as bridging applications.
  • The second step would be to identify any contractual terms that demonstrate your business owns that software. These terms should ideally be in the agreement for them to be enforceable, or in the case of internally generated software, exclusive access to the software code.
  • Finally, it is important to assess the costs associated with the identified intangible asset. AASB 138 has stringent rules regarding what can and cannot be capitalised when it comes to intangible assets, and if any costs cannot be fully demonstrated to be attributable to the asset, then they must be expensed.

After this process, your business should have an understanding of what assets are able to be recognised and the costs associated with those assets. 

Any costs that are not able to be capitalised will need to be further analysed to identify the period in which they will be expensed. In most instances, this will be when the configuration and customisation services are performed.

Potential impacts for future financial reports include:

  • Disclosures for a change in accounting policy;
  • Retrospective adjustment so that the expense is recorded in the correct year (or in some instances in retained earnings); and
  • Inclusion of a third balance sheet, showing the opening balance of the earliest comparative period, being 1 July 2019.

The rules for capitalising intangible assets are quite detailed and can be difficult to navigate. PKF have specialised staff on hand if you need help understanding the implications to your business. Please reach out to your local PKF Audit and Assurance team to learn more.