The hot topic for this financial year appears to be the implications of the IFRS Interpretations Committee’s (IFRIC’s) agenda decision Configuration or Customisation Costs in a Cloud Computing Arrangement (April 2021)1. Cloud computing covers software-as-a-service (SaaS) arrangements.
This agenda decision follows on from the IFRIC agenda decision Customer’s Right to Receive Access to the Supplier’s Application Software Hosted on the Cloud (IAS 38) (March 2019)2. Under that decision, IFRIC concluded that such a contract was not a lease of the software code, or an intangible asset of the software code; rather, the contract was a service contract. This decision considered the accounting for configuration and customisation costs for those service contracts, with the effect being that entities should expense most such costs unless they meet the criteria as an intangible asset or prepayment.
There is not the usual one-to-two-year transition period, which causes difficulties in performing a thorough assessment and implementation for the 30 June 2021 financial year.
Entities subject to the Financial Reporting Requirements
Agencies subject to the Financial Reporting Requirements (FRRs) do not have to apply the decision this year. This will allow them sufficient time to determine changes and will support whole‑of‑government consistency. If an agency expects the effect to be material (refer FRR 2B Materiality), it should disclose the future effect in the notes to the 2020–21 financial statements.
Entities not subject to the Financial Reporting Requirements
For entities not subject to the FRRs (including government owned corporations and local governments), the FRRs are a good resource that may provide guidance.
We will discuss the agenda decision with the Department of State Development, Infrastructure, Local Government and Planning to help support a whole‑of‑sector position, and we will encourage the department to provide guidance using a similar approach to Queensland Treasury.
Each entity should assess whether it is able, in the time available to finalise 2020–21 financial statements, to adopt the IFRIC decision. This will depend on the complexity and volume of costs they incur and the complexity of their circumstances. We will support deferring the application of the agenda decision to the 2021–22 financial statements; however, if an entity defers, it should explain this in its 2020–21 financial statements.
We flagged this issue in our February 2021 Technical audit update. However, at that time we were not sure if IFRIC would finalise the proposals exactly as they were drafted, or what Queensland Treasury’s approach to implementing them would be. It was only at the end of April 2021 that the International Accounting Standards Board (IASB) approved the agenda decision.
While IFRIC agenda decisions are not separate legislative instruments like Australian standards and Australian interpretations, they are effectively considered mandatory when complying with International Financial Reporting Standards (IFRSs).
Queensland Treasury has updated section 1.4.2 Configuration (or Customisation) Costs in a Cloud Computing Arrangement in the 2020–21 FRRs3 in relation to this issue.
The effect of the IFRIC agenda decision is that entities may have to change their accounting policy and not capitalise such costs on those information technology (IT) projects. The issue is not as simple as writing off all previously capitalised IT costs. Depending on the circumstances, entities:
- may be able to continue capitalising some costs for those IT projects
- may be required to reclassify some previously capitalised costs as a prepayment they will expense over time
- must expense the remaining costs as they incur them.
Entities have ‘sufficient time’ to determine whether they need an accounting policy change and to implement any changes to their systems. When applied, the accounting policy change will be retrospective, requiring the adjustment of comparatives. If the changes are relatively small (for example, affecting only one balance sheet item), then the entity may not require a ‘third balance sheet’.
Identifying the changes
Queensland Treasury has asked Queensland government agencies to contact its accounting policy team if they require assistance in applying this agenda decision. Agencies who identify material amounts of intangible assets to write off due to this change are also asked to contact Treasury to discuss the transitional impact.
Queensland Treasury has suggested the following actions for agencies to consider:
- Identify what costs your agency has capitalised for which projects, and whether the projects are SaaS/cloud computing.
- If a project involved SaaS/cloud computing, do the costs relate to software assets that your agency controls?
- Where is the software located, for example on your agency’s own hardware or in the cloud?
- Does your agency have the power to obtain future economic benefits from the software and restrict others from access to those benefits?
The above actions will help determine whether agencies have an intangible asset under AASB 138 Intangible Assets, per the agenda decision, that they can capitalise. Under the agenda decision, the cloud computing arrangement is not considered an intangible asset for the underlying software code. In addition, an intangible asset does not exist for any other rights under the arrangement, such as the right to enforce the provision of the software services for the arrangement term. An intangible asset may exist for software code an agency controls.
If an agency cannot recognise an intangible asset, it then needs to determine when it recognises an expense for the customisation or configuration services it receives. This is not as simple as expensing the costs when the agency incurs them. The agenda decision applies a complex approach of the customer (agency) ‘mirroring’ the accounting of what the supplier would do in applying IFRS 15 Revenue from Contracts with Customers (AASB 15 for Australia) with its associated complexity in determining ‘distinct’ performance obligations.
There are two broad scenarios:
- If the supplier would recognise revenue from the customisation or configuration services upfront, then that is deemed to be when the services are provided. The customer (agency) would recognise the expense for the services upfront.
- If the supplier would recognise revenue from the customisation or configuration services over time (that is, the activities were not a ‘distinct’ performance obligation), then it is deemed that the services are provided over time (even if the activities took place upfront). The customer (agency) would recognise the expense over time (by first recognising a prepayment asset if the costs were paid upfront).
Queensland Treasury has suggested the following actions for agencies to consider:
- Who is providing the configuration/customisation services? Is it the SaaS/cloud computing company, or a third party?
- When has your agency received the services? By applying the principles of AASB 15, consider
- ‘distinct goods or services’ requirements in AASB 15, paragraphs 26–30
- ‘setup activities’ guidance in AASB 15, paragraphs 25 and B51
- whether the SaaS/cloud computing company provides the services, as this may indicate they are not distinct and likely to be over time, thus giving rise to prepayment
- whether a third party provides the services, as this may indicate they are distinct and likely to require expensing upfront.
The above actions will help agencies to determine when they need to recognise an expense for customisation or configuration services. The actions will also help agencies determine whether they have a prepayment for customisation or configuration services that they have paid for upfront and will recognise under the agenda decision over time.
Areas to focus on
We suggest entities focus on the following areas when applying Queensland Treasury’s recommended actions, or similar actions:
- Determine whether your software arrangements are the previously common approach of perpetual licence and regular updates, or the more recent approach of SaaS/cloud computing.
- Determine whether any of your previously capitalised costs relate to a software arrangement that has moved from a perpetual licence to a SaaS/cloud computing arrangement.
- Determine whether your capitalised costs relate to an asset that can be capitalised—have you met the requirements of AASB 138 (per the IFRIC agenda decision)? These costs may be internal employee costs, cloud computing company costs or third-party costs.
- Apply AASB 15 from the viewpoint of the customer and determine when to recognise an expense.
- Document your approach and decisions.
- Assess materiality and whether you need to disclose the likely effect in the current year financial statements.
3 Financial Reporting Requirements for Queensland Government Agencies, Queensland Treasury