IAS 38 Intangible Assets—Cloud computing arrangements (Agenda Paper 5)

Background

In September the Committee discussed a submission about how a customer accounts for cloud computing arrangements (e.g. Software as a Service (SaaS) arrangements). The submitter asks how the customer applies IFRS Standards in accounting for fees paid to the supplier to access the supplier’s application software running on the supplier’s cloud infrastructure. In such arrangements the capability provided by the supplier (the cloud service provider) to the customer is to access the supplier’s application software running on the supplier’s cloud infrastructure.

In the absence of specific requirement in IFRS Standards, the submitter asks about the accounting treatment and the staff has analysed the appropriate treatment by considering (a) whether the rights to access software are within the scope of IAS 38 Intangible Assets or IFRS 16 Leases from the customer’s perspective; (b) whether or not SaaS arrangements create an intangible asset for the customer; and (c) if the customer has an intangible asset, how should the customer measure that intangible asset and any liability related to its acquisition.

There were a lot of debates over the topic when it was discussed in September. The Committee members generally agreed that (a) rights held by a customer under licensing agreements (including licences of software) are within the scope of IAS 38, and not IFRS 16; (b) if a contract gives the customer only the right to receive access to the supplier’s application software over the contract term in exchange for payment, the contract is a service contract and the customer accounts for it accordingly; and (c) some contracts might convey at contract commencement rights to software (beyond a right to receive future access) that create an intangible asset for the customer. The Committee did not support the wording of the proposed tentative agenda decision and the Committee will continue its discussion in the coming meeting.

Staff analysis

The staff considered the Committee's discussion at its September meeting and relooked at the applicable requirements in IFRS Standards for clarifying the submitter's questions.

The staff analyse that at contract commencement date, a contract that conveys to the customer only the right to receive access to the supplier’s application software in the future is a service contract based on the analysis that: (a) the contract is not a lease contract and not accounted for under IFRS 16 because the customer does not have the right to direct the use of an asset by having decision-making rights to change how and for what purpose the asset is used throughout the period of use; and (b) the contract does not constitute the recognition of an intangible asset because a right to receive future access to the supplier’s software does not, at the contract commencement date, give the customer the power to obtain the future economic benefits flowing from the software itself and to restrict others’ access to those benefits.

The staff further analyse that, if the customer has the right to use software, it recognises that right-of-use as an intangible asset at the contract commencement date (subject to the recognition criteria in IAS 38:21) because a software lease is a licensing agreement within the scope of IAS 38, and not IFRS 16.

If the customer recognises an intangible asset applying IAS 38, the next step would be to measure the asset. The staff analyse that in the absence of specific requirements in IAS 38, the customer applies paragraphs 10–11 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors in developing and applying an accounting policy that results in information that is relevant to the economic decision-making needs of users and reliable.

Staff recommendation

The staff did not recommend to add this matter to its standard-setting agenda since the staff think the existing IFRS Standards provide an adequate basis for such accounting treatment. Instead, the staff recommended that the Committee publish an agenda decision that explains how an entity applies IFRS Standards in accounting for its rights to the supplier's software in a SaaS arrangement.

Discussion

In general, the Committee members agreed with the staff analysis. One Committee member questioned whether the SaaS arrangement will always be a service contract especially in the case of a private clouding system where it is believed that the customer has control over the software. The staff has responded and reiterated that the critical point is on whether or not the customer has ability to direct the use of the software.

In the staff analysis, the conclusion is that such a right to access the software is classified as an intangible asset. One Committee member asked whether it meets the requirement in IAS 38:13 that requires an entity to have the power to obtain the future economic benefits flowing from the asset and restrict the access of others to those benefits. It appears that the underlying resource does not yet exist and the entity still has no right to obtain the future economic benefit from the 'asset'. The staff noted the comment and will make changes to the tentative agenda decision to make clear that the right to access the software is in the future which is not yet delivered. The Committee decided, by a majority of votes, not to add this matter to the Committee's standard-setting agenda but to publish an Agenda Decision.

In respect of the wording set out in the Agenda Decision, a Committee member suggested adding a flowchart in the agenda decision to help stakeholders understand the background because the terminology used are too industry-technical. Another Committee member suggested dropping the third question (i.e. the measurement of the intangible asset and lease liability). Another Committee member suggested adding analysis of whether the contract contains a lease by extracting paragraph B31 of IFRS 16 that may be helpful. On the basis of these changes mentioned as well as some editorial changes, all the Committee members agreed, by votes, with the wording adopted in the Agenda Decision.