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

Date recorded:

IAS 38 Intangible Assets — Configuration or customisation of costs in a cloud computing arrangement (Agenda Paper 5)

Background

The Committee received a submission about a customer's accounting for 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 staff ask if the Committee agrees with the analysis presented in the agenda paper and the recommendation not to add a standard-setting project to its agenda.

Staff analysis

The staff performed outreach on the matter and noted that incurring material configuration and customisation costs is common in some countries. Many respondents said entities are generally able to identify and distinguish such costs from other fees payable to the supplier but some said it can be challenging to do so. Moreover, there was diversity in the accounting treatments of such costs. All three views described could be possible depending on the fact and circumstances.

The staff concluded that in determining the accounting for such costs, a customer considers whether they could recognise them as an intangible asset applying IAS 38. Applying IAS 38:13, they consider a customer typically could not recognise an intangible asset because they would not have the power to obtain the future economic benefits flowing from the underlying resources and to restrict the access of others to those benefits arising from the supplier's application software. Only in a few situations in which the customer could control the asset resulting from the configuration or customisation (e.g. when such customisation results in writing additional code that is accessible only by the customer) can the costs be recognised as an intangible asset if they also meet the criteria in IAS 38:21-23.

If the customer does not recognise an intangible asset, IAS 38:68-70 are applied. Applying IAS 38:69, the customer recognises the costs as an expense when it receives the related services. IAS 38 does not include requirements on the identification of the services received and the assessment of when the supplier performs those services. Using the IAS 8 hierarchy, the staff considered IFRS 15's requirements on identifying and satisfying performance obligations. If the configuration and customisation service is distinct, the customer recognises the costs as an expense when the supplier configures and customises the application software. If the service is not distinct, the customer recognises the costs as an expense when the supplier provides access to the application software over the contract term. For the upfront payment before the services are rendered, a prepayment is recognised as an asset.

Furthermore, when the disclosure is relevant to an understanding of the customer's financial statements, the customer discloses its accounting policy for configuration or customisation cost applying IAS 1:117-124.

Staff recommendation

Based on the above analysis, the staff concluded that the principles and requirements in IFRS Standards provide an adequate basis to determine the accounting for expenditure on configuration or customisation in the fact pattern described and not to add the matter to the Committee's standard-setting agenda.

Discussion

Committee members generally agreed with the analysis of the accounting for expenditure on configuration or customisation in the fact pattern described. The Committee spent a lot of time discussing the linkage/reference to IFRS 15 when identifying distinct services and the timing of recognition of services provided by the supplier.

Only one Committee member was uncomfortable with the exclusive emphasis of the analysis on identifying distinct service and timing of recognition using IFRS 15, which he considers may not be the only relevant guidance. He considered that such analysis goes beyond what has been asked in the question, in terms of whether such cost is an expense or an asset. He also made reference to the March 2019 Committee analysis of a SaaS contract which did not go further to use IFRS 15 to analyse the accounting treatment. The staff replied that the focus of the issue raised in the March 2019 meeting is determining if such contract is a lease, an intangible asset or a service and thus it did not go further to conduct the analysis using IFRS 15. Moreover, the analysis using IFRS 15 is to tackle the question asked by the submitter regarding the treatment of "upfront payment". In order to analyse if it is a prepayment asset, the components and timing of recognition of the services needs to be discussed.

All other Committee members supported the reference or linkage to IFRS 15 and considered this approach very helpful and a valid approach for development of the relevant accounting policies in the fact pattern described. Some pointed out that IAS 38:69A gives specific instructions for what to do next in order to assess when a supplier performs a service in accordance with the contract. IFRS 15 would be the most relevant Standard to deal with recognition of the services provided by the supplier. One Committee member supported having an exclusive analysis using IFRS 15 because it provided useful guidance to those who are looking at the agenda decision and may raise further questions.

All the Committee members agreed not to add the matter to the Committee's standard-setting agenda and agreed with some of the proposed drafting amendments to the agenda decision that were suggested during the meeting.

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