Connecting you with accounting changes from an era of digital transformation
There has been an evolution in the technological architecture of entities across New Zealand. This has resulted in potentially significant accounting changes for entities that have entered into cloud-computing arrangements.
- The IFRS Interpretations Committee (IFRIC®) has published two agenda decisions clarifying how arrangements in respect of a specific part of cloud technology, Software-as-a-Service (SaaS), should be accounted for. The agenda decisions do not address the accounting for other components of cloud technology such as Infrastructure-as-a-Service and Platform-as-a-Service
- The first agenda decision, published in March 2019, concludes that SaaS arrangements are likely to be service arrangements, rather than intangible or leased assets. This is because the customer typically only has a right to receive future access to the supplier’s software running on the supplier’s cloud infrastructure and therefore the supplier controls the intellectual property (IP) of the underlying software code
- The second agenda decision, published in April 2021, deals with specific circumstances in relation to configuration and customisation costs incurred in implementing SaaS:
- In limited circumstances, certain configuration and customisation activities undertaken in implementing SaaS arrangements may give rise to a separate asset where the customer controls the IP of the underlying software code. For example, the development of bridging modules to existing on-premise systems or bespoke additional software capability
- In all other instances, configuration and customisation costs will be an operating expense. They are generally recognised in profit or loss as the customisation and configuration services are performed or, in certain circumstances, over the SaaS contract term when access to the cloud application software is provided
This conclusion could result in a reduction in profit in a particular year, impacting measures such as earnings before interest and tax (EBIT), earnings before interest, tax, depreciation and amortisation (EBITDA) and profit before tax (PBT)
- Where a change in accounting policy is required, comparative financial information should be retrospectively restated to derecognise previously capitalised costs, where material, in accordance with NZ IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
- There may be several consequential impacts beyond the immediate accounting implications arising from the IFRIC agenda decisions that should be considered, e.g. the impact on business metrics and targets linked to profit measures.
- Although specific to for-profit entities, public benefit entities (PBEs) should also consider the implications of the agenda decisions for their SaaS arrangements. The first agenda decision as to whether the arrangement meets the definition of an intangible or a service is directly relevant since PBE IPSAS 31 Intangible Assets is based on NZ IAS 38 Intangible Assets and has consistent definitions. The second agenda decision is also relevant in determining whether there is an asset or an expense for configuration and customisation costs and when to recognise the expense (when the service is delivered).
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