Cloud computing arrangements based on IFRS

As per IFRS 16, a contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for a consideration. IFRS 16 further explains that the right to use an asset, throughout the period of use, is when a customer has both – the right to obtain substantially all the economic benefits from use of the identified asset and the right to direct the use of that asset. Cloud computing arrangements generally do not meet the definition of a lease under IFRS 16. This is because the right to receive future access to the supplier’s software does not in itself give the entity any decision-making rights about how and for what purposes the software is used. If a cloud computing arrangement does contain a lease, then an entity applies the provisions of IFRS 16.

An entity should evaluate whether a cloud computing arrangement includes a right to use tangible assets – for example, servers. If this is the case, the lease of the tangible asset will be accounted for separately under IFRS 16.

As per IAS 38, an intangible asset is ‘identifiable’ if it arises from contractual or other legal rights or if it is separable. In addition, an entity must control the intangible asset. In some limited circumstances, features of a cloud computing arrangement that may indicate that the entity obtains control of a software intangible asset include:

• The right to take possession of the software and run it on the entity’s own or a third party’s own infrastructure, or
• Exclusive rights to use the software or ownership of the intellectual property for customised software – i.e., the vendor cannot make the software available to other customers.

In our experience, cloud computing arrangements usually do not give rise to an intangible asset under IAS 38. This is because a right to receive future access to the supplier's software does not in itself give the entity the power to obtain the future economic benefits flowing from the software and to restrict others' access to those benefits.

If the cloud computing arrangement does not provide the customer with an intangible asset for the software, and does not contain a lease, then the right to access the software over the contract term in the future is a service contract. 

The first agenda decision published in March 2019 considers whether a customer receives a software asset at the contract commencement date or a service over the contract term.

Fact pattern - An entity (customer) may enter into a contract under which it pays a fee in exchange for software services hosted by the supplier, commonly referred to as ‘software as a service’ arrangements or ‘cloud computing’ arrangements. The supplier’s software runs on cloud infrastructure managed and controlled by the supplier. The customer accesses the software on an as-needed basis over the internet or via a dedicated line. The contract does not convey to the customer any rights over tangible assets. At the contract commencement date, a question arises about whether the entity receives a software asset or a service over the contract term.

Conclusion – this agenda decision concludes that SaaS arrangements are likely to be service arrangements, rather than intangible or leased assets. This is because the customer typically only has a right to receive future access to the supplier’s software running on the supplier’s cloud infrastructure and therefore the supplier controls the intellectual property (IP) of the underlying software.

The second agenda decision, published in March 2021, deals with specific circumstances in relation to configuration and customisation costs incurred in implementing SaaS.

Fact pattern - A customer enters into a SaaS arrangement with a supplier. The contract conveys to the customer the right to receive access to the supplier’s application software over the contract term. That right to receive access does not provide the customer with a software asset and, therefore, the access to the software is a service that the customer receives over the contract term. The customer incurs cost of configuring or customising the supplier’s application software to which the customer receives access.

Configuration involves the setting of various ‘flags’ or ‘switches’ within the application software, or defining values or parameters, to set up the software’s existing code to function in a specified way.

Customisation involves modifying the software code in the application or writing additional code. Customisation generally changes, or creates additional, functionalities within the software.

Analysis and Conclusion

In analysing the request, the IFRS Interpretations Committee considered the following questions:

1. Does the customer recognise an intangible asset under IAS 38 in relation to configuration or customisation of the application software.
2. If an intangible asset is not recognised, how the customer accounts for the configuration or customisation costs.

In the fact pattern, the supplier controls the application software to which the customer has access. The assessment of whether configuration or customisation of that software results in an intangible asset for the customer depends on the nature and output of the configuration or customisation performed. The Committee observed that, in this SaaS arrangement, the customer often would not recognise an intangible asset because it does not control the software being configured or customised and those configuration or customisation activities do not create a resource controlled by the customer that is separate from the software. However, in some circumstances, 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, in determining whether to recognise the additional code as an intangible asset, the customer assesses whether the additional code is identifiable and meets the recognition criteria in IAS 38.