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IAS 38 — Configuration or customisation costs in a cloud computing arrangement

Date recorded:

Background

In its December 2020 meeting, the Committee discussed the accounting for a customer's costs of configuring or customising the supplier's application in a ‘Software as a Service’ (SaaS) arrangement. In the fact pattern described, the contract conveys to the customer the right to receive access to the software in the future, which is considered a service contract. The customer incurs upfront costs of configuring and customising the suppliers' application software to which it receives access. The submitter asked whether the customer recognises such costs as: (a) an intangible asset, (b) a prepayment asset or (c) an expense when incurred. The Committee members generally agreed with the analysis that no intangible asset is recognised and with the accounting for the expenditure on configuration or customisation. However, there were extensive discussions about the linkage/reference to IFRS 15 when identifying distinct services and the timing of recognition of services provided by the supplier.

Out of the 19 comment letters received, only five respondents agreed with the analysis and conclusion in the tentative agenda decision. Some respondents disagreed with, or expressed concerns about, different aspects of the technical analysis. Many of them considered the principles and requirements in IFRS Standards do not provide an adequate basis for a customer to determine its accounting and suggested adding a standard-setting project to the work plan.

Staff analysis

Regarding the question of whether the customer recognises an intangible asset in relation to configuration or customisation of the applicable software, the respondents who disagreed with the Committee’s observation said that any configuration and customisation is generally identifiable through legal and contractual rights. Customers are able to obtain future economic benefits and restrict others’ access to those benefits. The staff acknowledged that the customer may obtain control of the software itself where an intangible asset may be recognised in some arrangements. However, the staff continued to support the Committee’s observation that no intangible asset is recognised in the fact pattern described because the ability to obtain benefits from the configuration or customisation does not mean the customer has the power to obtain future economic benefits flowing from the underlying resources and to restrict others’ access. Other respondents suggested to clarify that the right to receive access to the supplier’s application software does not provide the customer with a software at any point in time during the contract. The staff agreed and considered this could distinguish it from cases where customers have control over the software.

Most of the respondents were concerned about the reference to the requirements in IFRS 15 to account for the configuration or customisation costs. They are of the view that it is not necessary or appropriate to refer to IFRS 15 in applying IAS 38:68-70 to the services rendered by the suppliers. Some of them considered the agenda decision may unintentionally deliver the message that the customer's accounting must mirror the accounting applied by the supplier under IFRS 15 in the absence of specific requirements for services received. The staff still considered it useful to refer to IFRS 15 because IAS 38:68-70 does not have clear guidance on identification of services and the timing of the recognition. IFRS 15's requirements relating to identifying distinct services could address similar and related issues to those faced by the customer. They clarified that they do not mean a customer would always look to IFRS 15 in the absence of specific requirements relating to a particular transaction. The tentative agenda decision was clear that the reference to IFRS 15 is for the particular fact pattern described, which IFRS 15's requirements could address.

Some of the respondents asked whether the analysis is different between situations in which the supplier of the application software or a third party configures or customises the software. A few respondents suggested to clarify who provides such services in the fact pattern described while some considered the assessment is indifferent regardless of who performs the configuration services. The staff clarified that they assumed a third-party supplier entered into a contract with the customer to deliver such services in which the customer could assess a supplier's performance in the context of the contract to deliver the services. Therefore, it is straight-forward to identify the distinct services and when the third party performs them. However, the assessment would not differ solely based on who supplies such services, the customer might conclude that the services are distinct even when provided by the supplier of the application software but more judgements are likely to be required in such assessments.

Many respondents suggested adding a standard-setting project because they considered the principles and requirements in the IFRS Standards are inadequate in determining the accounting in the fact pattern described which the staff did not agree with. In addition, some of the respondents disagreed with the outcome resulting in recognising configuration and customisation costs as an expense upfront, which would change existing practice of capitalising those costs. The staff also disagreed with this because the tentative agenda decision did not rule out the possibility of recognising an intangible asset.

Staff recommendation

The staff asked whether the Committee agrees with their recommendation to finalise the agenda decision with changes to drafting suggested.

Discussion

Committee members generally agreed with the analysis in the tentative agenda decision that no intangible asset is recognised in the fact pattern described. Nonetheless, there was extensive discussion on the analysis related to the provision of the configuration or customisation services by a third-party supplier.

Some Committee members expressed concern about the analysis that the configuration or customisation services might be provided by a third-party supplier and the customer recognises the costs as an expense as the third-party supplier performs the service. They considered specifically analysing the services by a "third-party" supplier might imply that the basis of accounting would be different if it were the application software supplier providing such services. They were of the opinion that in determining the accounting treatment of the configuration services, who provides such services should not matter. However, other Committee members were comfortable with or did not object to keeping that paragraph because it only illustrated that such distinct services could be provided by a third-party supplier. In their opinion, that analysis was neutral and would not result in unintended consequence that indicates who provides the services does matter in determining the accounting.

A few Committee members commented that the fact pattern in the agenda decision may be too simplified. In reality, a tri-party arrangement may be entered into between the customer, application software supplier and a third-party supplier in which the third party provides such services. In that case, judgement may need to be applied to determine the unit of account, whether such service agreement is a standalone one or needs to be assessed with the application software contract on a combined basis. In that scenario, the agenda decision’s analysis may not be adequate to address it. Other Committee members admitted that the arrangement in some cases may be more complicated, but bringing complexity to the fact pattern in the agenda decision may result in readers over-reading the analysis. The staff also responded that the aim of the agenda decision is to simplify the fact pattern so that the analysis could be understood by readers.

The Committee decided, by a vote of 13:1, to finalise the agenda decision. With regard to the suggested edits by the staff after hearing the comments raised by the Committee members during the meeting, most of the Committee members agreed with amendments.

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