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  • Accounting Alert September 2021

Accounting for SaaS arrangements – Public Benefit Entities

In March 2019, the IFRS Interpretations Committee (“the Committee”), which is responsible for interpreting the application of International Financial Reporting Standards (“IFRS”) and providing advice on financial reporting issues not specifically addressed in IFRS, considered the issue of how a customer should account for its contractual right to access a software as a service (“SaaS”) application. Under a SaaS arrangement, a customer contracts to pay a fee in exchange for a right to receive access to the supplier’s application software for a specified term. The supplier’s software runs on cloud infrastructure that is managed and controlled by the supplier and the customer accesses the software on an as-needed basis over the internet. 

The Committee concluded that a SaaS contract that conveys to the customer only the right to receive future access to the supplier’s application software is a services contract (which consequently should be expensed), rather than an intangible asset or a lease of an intangible asset. This decision by the Committee was an agenda decision (the Committee publishes agenda decisions when, following consultation, it has decided that standard-setting is not required to deal with a question from stakeholders).

In March 2021, the Committee considered an additional issue in relation to SaaS licences, namely, how to account for configuration and customisation expenditure incurred in relation to such licences. The Committee concluded, again via an agenda decision, that, as the software being customised is not the asset of the customer, configuration and customisation costs must be expensed unless they:

  • Create an intangible asset, separate from the software, that the customer controls; or
  • Are paid to the supplier of the cloud-based software for significant customisation work, in which case the costs are recorded as a prepayment for services and amortised over the expected term of the SaaS arrangement.

This decision of the Committee is examined in greater depth in the May 2021 edition of Accounting Alert

As New Zealand equivalents to IFRS (“NZ IFRS") and NZ IFRS Reduced Disclosure Regime (“NZ IFRS RDR”), which are applied, respectively, by Tier 1 and Tier 2 for-profit entities in New Zealand, have identical recognition and measurement requirements to IFRS, these two Committee decisions apply to for-profit entities in New Zealand.  However, consideration needs to be given to whether the two Committee decisions apply to public benefit entities (“PBEs”).

Tier 1 PBEs report under PBE Standards (and Tier 2 PBEs report under PBE Standards RDR, which have identical recognition and measurement requirements to PBE Standards).  PBE Standards are based on International Public Sector Accounting Standards, which are themselves based on IFRS. 

The PBE Standard that addresses the accounting for intangible assets is PBE IPSAS 31 Intangible Assets (“PBE IPSAS 31”). PBE IPSAS 31 is based on IPSAS 31 Intangible Assets (“IPSAS 31”) and is consistent with IPSAS 31 in relation to all matters that are relevant to accounting for SaaS arrangements and associated configuration and customisation costs. IPSAS 31 is based on IAS 38 Intangible Assets (“IAS 38”), which is the financial reporting standard that the two Committee decisions referred to above relate to. IPSAS 31 is consistent with IAS 38 in relation to all matters that are relevant to accounting for SaaS arrangements and associated configuration and customisation costs. 

Thus, the requirements in PBE Standards in relation to SaaS arrangements and associated configuration and customisation costs are consistent with those in IAS 38, which is the financial reporting standard that the two Committee decisions referred to above relate to. In addition, PBE IPSAS 3 Accounting Policies, Changes in Accounting Estimates and Errors notes that it is appropriate to consider decisions made by the Committee when developing accounting policies.

For these reasons, it is appropriate to conclude that the decisions of the Committee in relation to SaaS and associated configuration and customisation costs apply to PBEs and that, consequently, PBEs should:

  • Expense licence fees paid in relation to SaaS arrangements
  • Expense configuration and customisation costs associated with SaaS arrangements unless those costs:
    • Create an intangible asset, separate from the software, that the customer controls; or
    • Are paid to the supplier of the cloud-based software for significant customisation work, in which case the costs are recorded as a prepayment for services and amortised over the expected term of the SaaS arrangement.

 

For more on the above, please contact your local BDO representative.


 

This publication has been carefully prepared, but is general commentary only. This publication is not legal or financial advice and should not be relied upon as such. The information in this publication is subject to change at any time and therefore we give no assurance or warranty that the information is current when read. The publication cannot be relied upon to cover any specific situation and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact the BDO member firms in New Zealand to discuss these matters in the context of your particular circumstances.
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