IFRS Viewpoint Configuration or customisation costs in a cloud computing arrangement - Grant Thornton International
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Accounting
Advisory
Global
IFRS Viewpoint
Configuration or customisation costs in a cloud computing
arrangement
What’s the issue?
The International Financial Reporting Interpretations Committee (IFRIC),
received a request addressing how a customer should account for costs
of configuring or customising a supplier’s application software in a Cloud
Computing or Software as a Service (SaaS) arrangement. Significant diversity
in practice had developed and the IFRIC determined it was appropriate for an
agenda decision to be issued.
The IFRIC determined sufficient guidance exists within the relevant accounting
standards and therefore no amendments to accounting standards were
required. The rationale for arriving at this conclusion, which forms
part of the interpretation of IFRS, is set out in the agenda decision.
Our ‘IFRS Viewpoint’ series provides insights from our global
IFRS team on applying IFRS in challenging situations. Each
edition will focus on an area where the Standards have proved
difficult to apply or where there is a lack of specific guidance.
Relevant IFRS
IAS 38 ‘Intangible Assets’
IFRS 15 ‘Revenue from Contracts with Customers’
IAS 36 ‘Impairment of Assets’
IAS 8 ‘Accounting Policies, Change in Accounting Estimates and Errors’
IAS 1 ‘Presentation of Financial Statements’What is cloud computing?
Cloud computing is a confusing term that can be interpreted
in a variety of ways, with differing consequences. Generally,
computing arrangements can be broken into three broad
categories.
In the first two categories, a license to
Software Agreement Categories
use the software as the purchaser sees
fit is typically granted. This includes In the third category – widely described
Licensed software on premise as SaaS (software as a service) – the
an ability to choose where and how
the software operates, and whether it purchaser has been granted a right
operates at all. In the first category, to access software and use it for their
Licensed software off premise
the software operates in environments purposes. No right to transfer the
owned and operated by the entity software to another platform or to control
Software as a service acquiring the license – for instance, the method of operation of the software
a local operating system on a desktop is granted beyond what is contractually
computer. In the second category, the agreed.
purchaser has chosen (but not been
The IFRIC agenda decision issued in
forced) to operate the software in a
March 2021 relates to this third category
third party’s environment. This may be
SaaS.
selected to operate an ERP or other
business critical platform on the basis of
guaranteed uptime, distributed backups,
and guarantees of otherwise unavailable
levels of data security.
Owned software is able to be controlled by the purchaser – including
Owned
selection of updates and hardware.
Software with a right of access is unable to be controlled by the
Right of
purchaser – the provider chooses hardware, application of updates,
access
etc., within limits of contract.
A hosted environment is one where the purchaser does not control the
Hosted
hardware upon which the software operates.
2 IFRS Viewpoint 12: September 2021What was the diversity
in practice?
In its consultation on the issue, the IFRIC identified various
approaches to customisation and configuration costs for cloud
computing arrangements were utilised by companies depending
on internal policy. These policies varied from expensing all costs
in full to capitalisation of all costs in full, with most entities taking
a more nuanced approach in their capitalisation policy and
differentiating between expenditure with different underlying
fact patterns.
In its agenda decision, the IFRIC
determined a nuanced approach
indicating IAS 38 ‘Intangible Assets’ was Non-conformity
appropriate depending on the facts and
circumstances of the projects undertaken
and the rights and obligations of the Expense NuanceCapitalise
entity as it relates to the individual
elements of the projects.
IAS 38 Conformity
Many entities will find their historic policies,
though nuanced, will not conform to the
principles as described by the IFRIC.
Example 1a: Example 1b: Example 1c:
Strict expense policy Strict capitalisation Capitalisation per the
An entity has a strict policy – any
policy conceptual framework
expenditure related to a potential An entity has a strict policy – any An entity has established a policy
intangible asset is expensed expenditure related to a potential that requires the recognition of an
without application of IAS 38 to the intangible asset is capitalised asset per the requirements of
transaction. Such transactions are without application of IAS 38 to the IAS 38. Where an IAS 38 asset does
non-compliant with IAS 38 on the transaction. Such transactions are not exist, it applies the Conceptual
basis a transaction that was an non-compliant with IAS 38 on the Framework for Financial Reporting
intangible asset was expensed. basis a transaction that was not an (‘CF’) and recognises certain
intangible asset was capitalised. elements of expenditure as an
The accounting standards do
‘Other Asset’ amortised over the life
not permit overly conservative The accounting standards do not of the SaaS agreement.
accounting policies. permit overly aggressive policies.
IAS 38 requires expenditure that
does not qualify for capitalisation to
be expensed. The CF cannot override
what is specifically set out in an
International Accounting Standard.
IFRS Viewpoint 12: September 2021 3What does the agenda decision require? The agenda decision requires management to capitalise those elements of expenditure that meet the definition of an intangible asset as defined by IAS 38 and recognise any additional amounts as an expense as the entity benefits from the expenditure – either by applying IAS 38 or applying another accounting standard. The agenda decision clarified: • the nature of expenditure that met the definition of an intangible asset • the methods of differentiating between intangible assets and expenses, and • the pattern in which the entity benefits from expenditure that does not qualify as an intangible asset. 4 IFRS Viewpoint 12: September 2021
Intangible asset vs expense
The IFRIC identified the disparity in practice was caused in
part by confusion over the definition of an intangible asset
and whether costs incurred met the criteria to be recognised
as an intangible asset.
To assist with this confusion, the IFRIC An intangible asset is recognisable when The IFRIC also addressed the potential
identified two general ‘buckets’ of it has the following characteristics: for customisation costs to meet the
implementation cost incurred in a cloud • the asset is separable and definition of an intangible asset. The
computing arrangement: transferable from the entity, or arises IFRIC identified in certain situations,
• configuration costs, and from contractual or other legal rights customisation costs may be required to
• customisation costs. • the asset is a resource controlled by be capitalised. This will be applicable
the entity, and where the entity has engaged resources
Configuration costs were defined as • the entity has the power to obtain (internal or external) to create software
‘involving the setting of various ‘flags’ economic benefits flowing from the to which the entity retains intellectual
or ‘switches’ within the application resource and restrict the access of property rights. We note this is generally
software, or defining values or others to those benefits. not the case where code is created
parameters, to set up the software’s for operation ‘in the cloud’ as such
existing code to function in a specified From the above, the IFRIC communicated additional enhanced functionality
way’. Customisation was defined as it is typical the software underlying a generally remains the property of the
‘involving modifying the software code cloud computing arrangement is not third part cloud computing provider.
in the application or writing additional transferred to a customer, and the setting
code. Customisation generally changes, of flags (ie configuration) in third party
or creates additional, functionalities software does not provide a separable An intangible asset
within the software.’ (emphasis added). and transferable, or contractual, right requires a legal right
to an asset as no asset that is separate
from the software has been created.
being assigned (a
license) or the right
to transfer ownership
Configuration involves (copyright) that the
using existing code. entity controls.
Customisation modifies
or adds new code.
The entity must, through the exercise of
its rights, be able to prevent others from
accessing the benefits of the asset.
IFRS Viewpoint 12: September 2021 5When is an intangible asset most likely to be created?
How is the pattern of benefit recognised?
An intangible asset is most likely to be created where the
entity is investing in specific technology to bridge a gap in Is the transaction Expense as services
capability – and rights to that investment are retained by the distinct? No
delivered
entity. Generally, the rights related to technology developed
by a supplier where the supplier also provides the platform will Yes
not vest with the customer. Specific negotiation is generally
Include as
required to retain the rights to the developed software, often at
prepaid SaaS
increased cost. The transfer of rights may also be incomplete
as the software may also be developed using intellectual
property which is retained by the counterparty.
The IFRIC identified the deferring of expenditure over the life
Is an intangible asset created? of the cloud computing arrangement is inappropriate as
IAS 38 requires expenditure on services that is not capitalised
Is new code created? be recognised as an expense when it receives the services. The
judgements then applied by the entity relate to the timing and
Yes
value of these non-qualifying services.
Not an
Does the entity control
intangible In arriving at this conclusion, the IFRIC considered the nature
the code? No
asset of SaaS arrangements and concluded they are, service
Yes
arrangements as suggested by their name – Software as a
Does the code create Service. In a service arrangement, the benefit of the arrangement
an economic benefit? is generally received over the period of use of the service. As the
Yes period of use is generally the period of the contract, this is used
as a proxy for the period of benefit.
Intangible asset
The IFRIC further identified certain contracts will contain services
that are separate to the underlying SaaS arrangement and able
to be accounted for separately to the arrangement – services
that are ‘distinct’ – and services that are unable to be separated
Notwithstanding this, there are certain hypothetical examples from the arrangement – services that are ‘not distinct’.
where an intangible asset may be created:
• development of a legacy platform/SaaS integration, or Generally, services ‘not distinct’ are unable to be separated from
• modification of systems in order to utilise SaaS output. the SaaS arrangement and recognised as an expense on the
same pattern as the SaaS arrangement. However, services that
Where an intangible asset does not exist: The pattern are ‘distinct’ are recognised as the benefit is received. Refer to
of benefit table on page 7.
Certain entities had identified an intangible asset did not
exist for all or part of expenditure related to configuration Services provided by a third party are often distinct from
and/or customisation of a cloud computing arrangement. the SaaS arrangement as per the definition of ‘distinct’ in
Disparity in practice existed as to the recognition of expense IFRS 15 ‘Revenue from Contracts with Customers’, so
in relation to this expenditure; certain entities recognising judgement needs to be applied.
the expenditure as an expense when incurred, while others
were recognising the expenditure as an ‘other asset’ and
recognised the expenditure as an expense over the life of the
cloud computing arrangement.
6 IFRS Viewpoint 12: September 2021Is a Service Arrangement distinct?
Who is performing the configuration or customisation services?
3rd Party (engaged by 3rd Party (engaged by
SaaS Supplier Customer
SaaS Supplier) Customer)
Determine whether distinct
Can customer benefit Is promise to transfer Distinct
from service on own Yes service separately Yes
or together with other identifiable from other
readily available? promises in contract? Not distinct
No No
What is meant by distinct? IFRS 15 defines a good or service as As noted above, services offered by a
As identified on the previous page, distinct if both of the following criteria third party may or may not be distinct.
the IFRIC has referenced concepts are met: If engagement is by the customer, they
first introduced in IFRS 15 in providing • the customer can benefit from the will not be distinct as it demonstrates the
guidance on the timing of expenditure good or service either on its own or SaaS platform is able to be benefited
for these services. Where the services are together with other resources that from without additional services by that
considered ‘distinct’ from other elements are readily available to the customer supplier. If engaged by the SaaS supplier,
of the contract, they are addressed as (ie the good or service is capable of they can be considered an extension of
a separate element and are expensed being distinct), and the SaaS supplier and IFRS 15 should be
as and when the services are provided • the entity’s promise to transfer the applied.
– typically in a relatively short time good or service to the customer is
period. Where the services are not Transactions with elements of both
separately identifiable from other
considered distinct from other elements intangible asset and expense
promises in the contract (ie the
of the contract – ie other performance It will be common to encounter situations
promise to transfer the good or service
obligations as defined by IFRS 15 – they where a contract (or contracts) with a
is distinct within the context of the
are required to be bundled with those supplier will include elements that both
contract).
other elements and recognised as an do and do not meet the definition of an
expense in the same pattern as those Such determinations are widely covered intangible asset – and also situations
other elements. in IFRS 15 guidance and as a result where a transaction with a supplier
we will not expand in detail in this contains elements that both are and are
publication, other than to note the not distinct from the underlying cloud
application of this guidance requires the computing arrangement.
customer to consider a transaction from
The IFRIC did not provide additional
the supplier’s perspective in addition to
guidance on the identification of value,
their own.
however other guidance exists that is
applicable in this instance – specifically,
we recommend a relative-value approach
be utilised for the elements identified.
IFRS Viewpoint 12: September 2021 7Error or change in policy?
The IFRIC has identified disparity in practice exists and has
issued an agenda decision on the basis of clarifying which
policies are acceptable. In our view, it is appropriate in this
instance to consider the correction of any related recognition
and measurement arising from the application of the agenda
decision as a change in accounting policy as opposed to a
restatement due to an error.
While the form of restatement of prior In the instance of a change in policy, the • if retrospective application is
periods is similar, it is appropriate in this appropriate disclosures are described impracticable for a particular prior
instance to refer to a change in policy as in IAS 8 ‘Accounting Policies, Changes period, or for periods before those
a result of the IFRIC agenda decision as in Accounting Estimates and Errors’ and presented, the circumstances that led
opposed to a restatement due to a prior include: to the existence of that condition and
period error. • the nature and change in accounting a description of how and from when
policy the change in accounting policy has
• the reasons why applying the new been applied.
accounting policy provides reliable
and more relevant information
• for the current period and each
prior period presented, to the extent
practicable, the amount of the
adjustment:
– for each financial statement line
item affected, and
– if IAS 33 ‘Earnings per Share’
applies to the entity, for basic and
diluted earnings per share
– the amount of the adjustment
relating to periods before
those presented, to the extent
practicable, and
8 IFRS Viewpoint 12: September 2021When should the policy be
implemented?
For certain entities, the adoption of the new policy will result in
minimal impact as a result of known limitations in the volume of
contracts within the scope of the IFRIC agenda decision.
For other entities, the impact will be A general expectation has been
broader and may require significant communicated that all entities will
projects to be undertaken to obtain, have adopted the new policy by
collate, and make judgements on the 31 December 2021. We do note, however,
underlying information. It is therefore that accuracy is paramount. While an
generally accepted the agenda decision entity should seek to expedite adoption,
may require effort to determine the corporate governance will require
impact of the agenda decision and appropriate controls to be implemented
adjust the financial statements of an to ensure accuracy in adoption which
entity; it may also be appropriate for may require a more deliberate approach
entities to expedite the adoption of a to ensure material accuracy.
revised policy in response to the agenda
decision.
Our view is the adoption of an accounting
policy is governed by IAS 8 which does
not allow for an ‘incomplete’ adoption
of a policy. Any adoption should be
completed in a single step and not involve
restatement over multiple periods.
IFRS Viewpoint 12: September 2021 9Additional considerations
Disclosure prior to adoption of new We also recommend disclosures being Disclosure when there is adoption of
policy applied by analogy, where IAS 8 requires the new policy
IAS 8 does not address circumstances disclosures of the following (or, if in IAS 8 defines the required disclosures for
where the IFRIC has released an agenda brackets, analogising to): entities that have implemented a new
decision that impacts an entity’s choice • the title of the new International accounting policy in a period, and its
of accounting policies and the entity Accounting Standard (IFRIC agenda requirements are as follows:
is in the process of determining the decision) • the nature of the change in
impact of the change in policy. In such • the nature of the impending change accounting policy
a situation, where an entity suspects the or changes in accounting policy • the reasons why applying the new
mandatory change in policy may be • the date as at which it plans to apply accounting policy provides reliable
material to its financial statements, in the International Accounting Standard and more relevant information
our view it is appropriate for the entity (IFRIC agenda decision) initially, and • for the current period and each
to disclose sufficient information for • either: prior period presented, to the extent
users to understand the potential impact – a discussion of the impact practicable, the amount of the
the change in policy may have on the the initial application of the adjustment:
financial statements. These disclosures International Accounting Standard – for each financial statement line
are recommended to take a form similar (IFRIC agenda decision) is item affected, and
to those described in IAS 8 and include: expected to have on the entity’s – if IAS 33 applies to the entity, for
• how the agenda decision impacts the financial statements, or basic and diluted earnings per
entity – if the impact is not known or share.
• whether the agenda decision has not reasonably estimable, a statement This will require the period of change
been implemented as a change in to that effect. in policy be calculated under both the
policy, and historic and new policies
• known or reasonably estimable • the amount of the adjustment relating
information relevant to assessing the to periods before those presented, to
possible impact that application of IAS 8 should be applied the extent practicable, and
the change in policy will have on the by analogy – including • if retrospective application is
entity’s financial statements in the disclosure of potential impracticable for a particular prior
period of initial application. period, or for periods before those
impacts of the new presented, the circumstances that led
policy. to the existence of the condition and a
description of how and from when the
change in accounting policy has been
applied.
IAS 8 requires, in a
change of policy,
information for the
current period be
presented as complying
with both policies (in
the notes).
10 IFRS Viewpoint 12: September 2021What is meant by ‘impracticable’?
In certain situations, it is impracticable Example 2a: Example 2c:
for entities to obtain information in Practicable Impracticable
sufficient detail to determine the impact
of historic transactions when applying a An entity has entered into contracts An entity has undertaken significant
new policy. This situation may arise, for over a period of time that may give investment in SaaS platforms,
instance, where records are no longer rise to an intangible asset. The entity creating internally developed
retained by the entity. has sufficiently detailed records of integrations with these platforms.
transactions entered into with third- The cost incurred was monitored
In our experience, it is not unusual for party providers, however these are via a detailed timekeeping system,
information in records to be difficult to stored in hard copy in archive. however records are not retained
obtain – for instance, due to archiving. In past seven years in line with
such a situation, it is not ‘impracticable’ Accessing the information will corporate governance requirements.
but ‘inconvenient’. An example of data be time consuming and incur a
that is ‘impracticable’ to obtain is given significant cost. It is impracticable for the entity to
by IAS 8 as: “data [that] may not have calculate the value of intangible
Accessing the information is assets created as it relates to costs
been collected in the prior period(s)…”.
practicable. incurred more than 7 years prior to
(emphasis added). In our opinion, data
that ‘may not have been collected’ transition to the new policy.
is data that does not exist or was not
retained – for instance, the number of Example 2b:
simultaneous users where the fields Impracticable Example 2d:
were not added to a database. Data
An entity has undertaken significant
Impracticable
retained in invoice or other form that is
not structured organised is data that is investment in SaaS platforms, An entity does not retain
collected but not collated – such data is creating internally developed documentation for the legally
not impracticable to be obtained due to integrations with these platforms. required seven year period but for
the ability to obtain the information with The cost incurred was not monitored three years only. It is impracticable
sufficient effort. and supporting documentation does for the entity to calculate the value
not exist. of intangible assets created as it
relates to costs incurred more than
The Oxford Dictionary It is impracticable for the entity
three years prior to transition to the
to identify the value of intangible
defines ‘Impracticable’ assets created as it relates to
new policy.
as ‘impossible to carry internal costs.
out, not feasible’.
Example 2e:
We note ‘difficult’ or Impracticable
‘expensive’ is not within An entity stored its hard copy source
the definition. documents in a container which was
lost in a factory fire.
It is impracticable for the entity to
calculate the value of intangible
assets.
IFRS Viewpoint 12: September 2021 11Practical application –
navigating the process
Developing a materially correct Capturing the required data Ideally, each project would be
statement of financial position when Where activity has been identified for considered as a series of sub-projects.
addressing historic transactions can be assessment, it may be appropriate Information that may be required to be
difficult as it requires understanding: to involve expertise outside of the captured includes:
• the period for which information is accounting function – for example, • project name
available operations or information technology – in • project sponsor
• the projects implemented, or being order to ensure data captured is correct • project goal
implemented, at a particular point in and accurate. Additional complexity • impacted systems
time will arise in ensuring the information • developer (eg external provider,
• the relative impact of historic collected is auditable. As the totality of internal coders)
transactions on the balance sheet expenditure increases towards being • assessment of whether any potential
and income statement for all periods material, the quality of information intangible assets exist
presented in restated financial required to demonstrate the allocation of • assessment of whether any potential
statements, and transactions or portions of transactions non-distinct expenditure exist
• completing the above without the to either expenditure or intangible assets • references to supporting information
influence of hindsight. needs to carefully assessed. (contracts, invoices, MSAs, etc)
• preparer of collated information
• reviewer of collated information
(subject matter expert)
• reviewer of collated information
(appropriately qualified finance
professional)
• invoices associated
• total expenditure
• the related data points associated,
including:
– third party contracts
– third party invoices
– internally incurred costs (payroll,
etc)
– whether each element of
expenditure qualified for
capitalisation at the point in time
– whether a non-capitalisable item is
distinct or not from the underlying
cloud computing arrangement,
and
– the value capitalised (or expensed)
that will require reassessment.
12 IFRS Viewpoint 12: September 2021By logging this information, management Navigating consequential accounting
will then be able to demonstrate a clear considerations
understanding of the value received in While it can reasonably be expected
exchange for the expenditure on the for most entities, the value of qualifying
project. Management can then focus its projects that are not yet available for use
attention on projects where additional may be immaterial, in certain situations
judgement may be required to be – eg large scale implementations and
applied. Information captured in this integrations – material intangible assets
process may include: may be recorded at a reporting date
• description of sub-projects that are not yet in production.
• systems impacted IAS 36 ‘Impairment of Assets’ requires
• direct costs incurred on the intangible assets that are not yet
sub-project available for use to be tested for
• discussion of the sub-project and the impairment at least annually – including
application of IAS 38 in the year of their acquisition.
• expected useful life of the project
Management should therefore ensure
(if capitalised), or
any material balances are tested for
• contractual life of the cloud
impairment as required by IAS 36.
computing arrangement (if not
distinct).
We recommend entities undertaking
large numbers of cloud computing
projects develop a robust, IAS 38
accounting policy and related decision
templates to ensure full compliance with
this Standard.
IFRS Viewpoint 12: September 2021 13Calculating the impact Materiality
Calculating the impact of a change Certain entities, by reference to their Example 3
in accounting policy involves a full internal metrics, may determine the
An entity has undertaken significant
restatement of historic financial impact on the financial statements of
investment in SaaS platforms,
information presented in the financial the change in policy to be immaterial
creating internally developed
statements – including restating historic historically. While this may be true for
integrations with SaaS platforms. All
results that are presented as adjustments internal reporting purposes – especially
the cost incurred with third parties
to retained earnings. for entities whose internal performance
was expensed as incurred.
measures are not impacted by the
This requires the entity to understand change in policy – it will not necessarily Certain projects completed 8 years
the financial statement impact for be true for all stakeholders, particularly prior to reporting date resulted in
each period impacted – in other words those external to the entity. Generally, intangible assets as defined by
as every period in which transactions there is an expectation materiality should IAS 38, however the relevant records
impacted by the entity have occurred. be measured based on the lens through were destroyed in accordance with
which those external parties would view corporate policy.
Understanding the nature of transactions
the financial statements.
and the expected maximum useful life of
The entity is unable to calculate
any intangible assets created will allow It may therefore not be appropriate the impact of the change in policy
an entity to create a maximum period of to consider transactions as ‘material’ for these historic transactions and
look-back. This period of look-back may or ‘immaterial’ by reference to purely therefore limit its look-back period to
also be limited by data retention policies internal metrics, but instead consider the seven years.
that have been in place. impact on other metrics such as total
assets or net profit after tax.
IAS 1 ‘Presentation of Financial
Statements’ provides a comprehensive
definition of ‘Material’.
Definition of materiality in IAS 1
“Information is material if omitting,
misstating or obscuring it could
reasonably be expected to influence
decisions that the primary users of
financial statements make on the
basis of those financial statements,
which provide financial information
about a specific reporting entity.”
14 IFRS Viewpoint 12: September 2021Identifying period-to-period impact Definition of distinct
An element of a transaction is
Assess elements of
distinct from (or capable of being
transactions for being
intangible assets or distinct from) the underlying SaaS
being not distinct contract if the entity can benefit
from either element of the contract
Assign value to
without the other.
different elements
by reference to costs If a third party delivers a service,
incurred it cannot be included as a part of
the SaaS contract and should be
considered a ‘Distinct element’ in the
Intangible asset elements Distinct elements Elements not distinct flow chart.
Expense when services Identify SaaS contract Definition of systematic
Identify useful life
received period Generally, matching to the pattern
of benefit received (eg relative
volume or time based).
Calculate amount Calculate value
of amortisation to end of expense for each
of each presented presented reporting
reporting date on a date on systematic
systematic basis basis
Assess materiality of impact after identifying and demonstrating
period-to-period impact of new policy for all financial information presented
IFRS Viewpoint 12: September 2021 15How we can help
We hope you find the information in this IFRS Viewpoint helpful in giving you some insight into a complex IFRS area.
If you would like to discuss any of the points raised, please speak to your usual Grant Thornton contact or visit
www.grantthornton.global/locations to find your local member firm.
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