Cloud Computing Arrangements

Cloud computing arrangements (CCAs) are arrangements where the Commonwealth entity does not possess the underlying software or hardware assets, but rather can access and use it as needed. CCA’s encompass software as a service (SAAS), infrastructure-as-a-service and other hosting, file sharing and data storage arrangements.

In SAAS arrangements:

• the entity has the right to access the supplier’s application software over the contract term, usually over the internet or a dedicated line
• the software is run on the information technology (IT) infrastructure of the provider or a third party
• the entity may incur costs associated with the configuration or customisation of the application software, either by the supplier or a third party.

The International Financial Reporting Standards (IFRS) Interpretations Committee (the ‘Committee’) issued two Agenda Decisions in March 2019 and April 2021 that provide guidance on accounting for SAAS arrangements.

In its March 2019 Agenda Decision, the Committee considered that SAAS contracts are:

• not intangible assets under AASB 138 Intangible assets (AASB 138), where the customer does not control the application software
• not a lease under AASB 16 Leases, where the customer does not obtain decision-making rights about how and for what purpose the application software is used.

SAAS arrangements often only provide customers with a right to receive access to the supplier’s application software and are regarded as service contracts.

• Costs associated with these SAAS arrangements should be expensed.
• Where the customer pays fees in advance of receiving the contracted service, a prepayment should be recognised.

After having regard to AASB 138 and AASB 16, SAAS contracts may be able to be capitalised if, for example, both:

• there is a contractual right to take possession of the application software at any time during the hosting period without significant penalty
• the customer has the right to and can feasibly either run the application software on their own hardware or contract another party, unrelated to the vendor, to host the software.

For configuration or customisation of application software in a SAAS contract, an entity recognises an intangible asset only if the expenditure meets both the definition and recognition criteria in AASB 138 (paragraphs 11-17 and 21-23 respectively).

SAAS costs that do not represent a lease or intangible asset are usually service costs, and are expensed as the service is received.

There may be costs to customise or configure the supplier’s cloud-based software for the entity’s specific use. These costs may be capable of capitalisation where they constitute an intangible asset in their own right, such as, have future economic benefits controlled by the entity.

• Where changes are made to the underlying application software code in the SAAS arrangement, which is not controlled by the entity, those costs would be expensed.
• If the code could be used by the entity in other arrangements, or the entity retains the intellectual property rights the costs may be capitalised.
  • For example, the development of bridging modules to existing customer systems or dedicated additional software capability. 
• All other costs would typically be expensed, such as training, data conversion, testing and research costs (paragraph 54 of AASB 138).

For customisation and configuration expenses, the service is normally received and hence expensed when the software changes are made.

However, where the

• supplier does the customisation/configuration (or has its own contractors do it); and
• configuration/customisation services are not distinct from the other SAAS services (AASB 15 provides guidance on distinct and indistinct services).

then the costs may be treated as a prepayment and expensed over the remainder of the contract term (as an integral part of the total arrangement).