The IFRS Interpretations Committee recently published its agenda decision on the appropriate accounting treatment of configuration and customisation costs incurred by a customer in cloud computing arrangements.
The primary matter considered by the Committee was whether it is appropriate for the customer to recognise an intangible asset for costs incurred to configure or customise the application software to which the customer receives access over the contract term. And if not, how should such costs be accounted for by the customer.
The scenario considered by the Committee is summarised as follows:
- the contract conveys to the customer the right to receive access only to the supplier’s application software over the contract term (and not the software asset itself). Therefore, access to the software is a service that the customer receives over the contract term (referred to as a ‘software as a service’ arrangement);
- the customer incurs costs of configuring or customising the supplier’s application software to which the customer receives access; and
- the customer receives no other goods or services from the supplier.
An intangible asset or an expense?
The Committee observed that in the ‘software as a service’ arrangement described in the request, the customer often would not recognise an intangible asset because the customer does not control the software being configured or customised.
If the customer does not recognise an intangible asset, the Committee concluded that the costs incurred by the customer to configure or customise the application software should be accounted for in the following manner:
- If the supplier of the application software performs the configuration or customisation services:
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- The customer recognises the costs incurred as an expense when the supplier configures or customises the application software, if the configuration or customisation services received by the customer are ‘distinct’*; OR
- The customer recognises the costs incurred as an expense when the supplier provides access to the application software over the contract term, if the configuration or customisation services received by the customer are not ‘distinct’*.
- If a third-party supplier performs the configuration or customisation services, the customer recognises the costs incurred as an expense when the third-party supplier performs those services in accordance with the terms and conditions of the service contract.
- If the customer pays the supplier of the configuration or customisation services in advance of receiving the services, the customer recognises such advance payment as a prepayment asset.
*Whether or not services received by the customer are ‘distinct’ is determined by applying the requirements of AASB 15 Revenue from Contracts with Customers.
As a result of this agenda decision, recipients of services under a ‘software as a service’ arrangement should reconsider their existing accounting treatment and, where necessary, change their accounting treatment to comply with the conclusion reached by the Committee. Subject to materiality, a change in accounting policy (e.g. to derecognise an intangible asset recognised in a prior reporting period) should be accounted for by applying the requirements of AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors.
Applying these principles to other types of service contracts
In reaching its conclusion on the appropriate timing for the recognition of an expense (when an intangible asset is not recognised by the customer), the Committee applied the requirements of AASB 15 Revenue from Contracts with Customers for identifying each performance obligation, based on whether goods or services are ‘distinct’.
This introduces an important principle that is relevant to determining the appropriate accounting treatment of costs incurred by the recipient of services under other types of service contracts.
Importantly, when recognising expenses under a service contract, the recipient of the services (i.e., the customer) recognises an expense when the supplier performs those services in accordance with the terms and conditions of the service contract. However, Australian Accounting Standards do not deal specifically with the identification of the services a customer receives (from the customer’s perspective), in order for the customer to determine when the supplier performs those services and therefore the timing for recognising the expense.
In the absence of an Australian Accounting Standard that specifically applies to a transaction, other event or condition, AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors requires the customer to use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making this judgement, the customer should refer to, and consider the applicability of, the requirements in Australian Accounting Standards dealing with similar and related issues.
In this regard, the Committee observed that suppliers apply the requirements of AASB 15 in identifying each performance obligation in a contract with a customer. This requires the supplier to consider whether goods or services are ‘distinct’, based on the criteria prescribed by AASB 15. The Committee concluded that such requirements of AASB 15 deal with issues similar and related to those faced by the customer in determining when the supplier performs the services in accordance with the terms and conditions of the service contract.
On this basis, the Committee applied the requirements of AASB 15 for identifying each performance obligation, based on whether goods or services are ‘distinct’, to the customer’s accounting treatment of the service contract. Applying this approach, the Committee concluded that the customer should recognise the costs incurred as an expense for each ‘distinct’ service (or bundle of services) it receives under the service contract, when the supplier performs each ‘distinct’ service (or bundle of services).
As a result of the conclusion reached by the Committee, recipients of services under other types of service contracts will be required to more closely examine the promises contained in service contracts to identify each ‘distinct’ service (or bundle of services), so that an expense is recognised by the customer when the supplier performs each ‘distinct’ service (or bundle of services) under the service contract.
Further information and assistance
A copy of the agenda decision is available here.
Contact your Pitcher Partners representative for further information and assistance on the accounting treatment of configuration and customisation costs incurred by a customer in cloud computing arrangements.
