David H.

Last year’s hot topic has carried forward to this financial year—the implications of the IFRS Interpretations Committee’s (IFRIC’s) agenda decision Configuration or Customisation Costs in a Cloud Computing Arrangement (April 2021).   

Cloud computing covers software-as-a-service (SaaS) arrangements. In our July 2021 post, we discussed the background to the issue, the impact on the financial statements, and implications for 30 June 2021 reporting.  

In summary, there is new reasoning for determining which costs can be capitalised for SaaS arrangements. The underlying interpretation is that a SaaS contract often does not meet the definition of an intangible asset under AASB 138 Intangible Assets, because the software vendor controls the computer code. Consequently, costs previously capitalised in customising or configuring SaaS arrangements can no longer be capitalised. On the other hand, costs related to computer code that you control and that meets the definition of an asset (for example, enhances, modifies, or creates additional capability for existing systems) can continue to be capitalised.

While some entities adopted the changes for 30 June 2021, many did not and now need to assess whether the decision has a material impact on them and adopt the changes this financial year. 

Therefore, the issue is not as simple as writing off all previously capitalised information technology (IT) costs. Depending on the circumstances, you: 

  • may be able to continue capitalising some costs for SaaS related and other IT projects 
  • may be required to reclassify some previously capitalised costs as a prepayment you will expense over time 
  • must expense the remaining costs as you incur them. 

Questions for entities and governance committees to consider when assessing impact on their financial statements 

We suggest entities and their governance committees consider the following questions when trying to understand the impact on their financial statements. 

  • How have we determined what relevant projects and costs have been capitalised? 

  • Have we determined whether our software arrangements are a perpetual licence with regular updates, or SaaS/cloud computing? 

  • Have we assessed whether we have other similar arrangements like ‘platform as a service’ and ‘infrastructure as a service’? 

  • Have we reassessed the useful life of capitalised perpetual licence and updates; particularly when the vendor has announced the software will move to a cloud computing arrangement. 

  • Have any of our arrangements recently transitioned from a perpetual licence to a SAAS arrangement? 

  • How did we determine whether capitalised costs relate to an asset that can be capitalised under AASB 138 (per the IFRIC agenda decision)? These costs may be internal employee costs, software vendor / SaaS company costs or third-party costs. 

  • Have we determined what costs were paid to the software vendor / SaaS company, or one of its partners, as these will often need further investigation to determine over what period the costs will need to be expensed? 

  • Do we believe the changes are material, and how will we disclose the changes in our financial statements? 

Applying the decision 

This accounting policy change must be applied retrospectively. That is, for the 30 June 2022 year end, adjustments are made to: 

  • the opening balance sheet for 30 June 2020 / 1 July 2020 (for example, writing off costs no longer eligible for capitalisation against retained earnings) 
  • the prior year results (reversing of amortisation of carry-forward costs no longer eligible for capitalisation, expensing prior year costs not eligible for capitalisation) 
  • last year’s closing balance sheet (for the above changes) 
  • apply the new policy for this financial year. 

Entities with 31 December year-ends apply the policy change from 31 December 2020 / 1 January 2021. 

We suggest entities include known qualitative and quantitative changes in their pro-forma financial statements. 

Further resources 


Related article