Configuration and Customisation ('CC') costs in a cloud computing arrangement

The agenda decision includes steps which entities should consider in accounting for such CC costs. This might impact entities that incur or have previously incurred CC costs associated with a Software as a Service (SaaS) cloud arrangement, and might result in a change in accounting policy. The key areas of consideration are as follows:

• Can the costs be capitalised as an intangible asset? The Committee observed that, in the SaaS arrangement described in the request, the customer often would not recognise an intangible asset because it does not control the software being configured or customised and those activities do not create an asset that is separate from the software. In some circumstances however, the arrangement may result in, for example, additional code from which the customer has the power to obtain the future economic benefits and to restrict others’ access to those benefits. In that case, the customer assesses whether the additional code is identifiable and meets the recognition criteria in IAS 38 in determining whether to recognise the additional code as an intangible asset.
• Can the costs be capitalised as a prepayment, or should the costs be expensed when incurred? The IFRS IC suggested entities should look to the criteria in IFRS 15 Revenue from Contracts with Customers to determine the nature of the services which might impact when they are performed by the supplier. An entity should understand who is performing that service (a third party or the SaaS provider) and whether the service is distinct from the SaaS performance obligation following the criteria in IFRS 15 to conclude when the service is performed. The IFRS IC concluded that if a third party supplier performs the CC those costs would typically be expensed immediately. This is because when considering IFRS 15 to determine the nature and satisfaction of the services, it is likely the third party would be considered to have performed when the third party completes the tasks per the contract. However, it would be appropriate to consider whether the third party is in substance a subcontractor of the SaaS provider and therefore, the services should be considered as being provided by a single party for the purposes of assessment under IFRS 15.

There are three steps that entities should consider when thinking about CC costs in a SaaS arrangement. The decision tree below summarises the steps:

This agenda decision might require an entity to re-evaluate the accounting for configuration and customisation costs incurred in previous reporting periods, in particular if they were capitalised. Agenda decisions often provide explanatory material which can result in voluntary accounting policy changes in accordance with IAS 8 as they arise from ‘new information’. Voluntary changes in accounting policies are applied retrospectively unless impracticable. Agenda decisions are effective immediately; an entity would be entitled to sufficient time to assess and implement any change. Practically, while it might be expected that a 31 December 2021 reporter would have sufficient time to analyse the IFRIC decision, it may not be able to do so for the 30 June 2021 financial report. Disclosure in the June 2021 financial report explaining their process and timing of any expected change should be made if this is a significant policy.

More guidance on how to assess Configuration and Customisation (‘CC’) costs in a Cloud Computing Arrangement following the March 2021 agenda decision will follow.

Read the August 2021 update here

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