Customer accounting for software-as-a-service arrangements

From the IFRS Institute – September 5, 2025

Authors: Scott Muir, Valerie Boissou and Paulina Kumah

Customers in software-as-a-service (SaaS) arrangements face complexity in determining the appropriate accounting under IFRS® Accounting Standards for fees paid to the cloud service provider and related implementation costs. Agenda decisions of the IFRS Interpretations Committee provide some clarity and confirm differences with US GAAP. In this article we summarize financial reporting considerations and provide a framework for accounting for the related implementation costs.

What is a SaaS arrangement?

A SaaS arrangement, like those for platform-as-a-service (PaaS) and infrastructure-as-a-service (IaaS), is a cloud computing arrangement. A SaaS arrangement is also one type of software hosting arrangement. In a software hosting arrangement, a customer obtains access to software hosted by the software vendor (or a third party on its behalf). In some hosting arrangements, the customer’s right to access the hosted software gives rise to a software intangible asset (i.e. a license). In others, no software intangible asset is obtained, which are commonly referred to as SaaS arrangements.

IFRS Accounting Standards

IFRS Accounting Standards do not explicitly address the customer’s accounting for fees paid to SaaS providers or implementation costs incurred in SaaS arrangements. However, two IFRS Interpretations Committee agenda decisions provide a framework for the accounting.

A 2019 agenda decision distinguishes hosting arrangements in which a customer receives a software intangible asset from those that do not and therefore are service contracts (i.e. SaaS arrangements).¹
A 2021 agenda decision includes guidance on customer accounting for implementation costs incurred in a SaaS arrangement.²

The accounting framework outlined in the remainder of this article is consistent with these agenda decisions.

Does the software hosting arrangement give rise to a software asset?

At the start date of a hosting arrangement, a question arises about whether the customer receives a software intangible asset under IAS 38³ or solely SaaS (i.e. a service). In our experience, software hosting arrangements usually do not give rise to an intangible asset under IAS 38. This is because the right to receive future access to the vendor’s software does not in itself give the customer the power to obtain the future economic benefits flowing from the software and to restrict others’ access to those benefits.

However, in some circumstances, a customer may reach a different conclusion; features of a hosting arrangement that we believe may indicate the customer obtains control of a software intangible asset include:

the right to take possession of a copy of the software and run it on its own or a third party’s computer infrastructure; or
exclusive rights to use the software or ownership of the intellectual property for customized software – i.e. the software vendor cannot make the software available to other customers.

Determining whether the right to take possession of a copy of the software constitutes control of a software intangible asset may require judgment. We believe key factors to consider include financial barriers, such as penalties or additional costs; operational barriers, like reduced software functionality or lack of available third-party hosting providers; and restrictions on timing, such as rights that can only be exercised at specific times or on the occurrence of specific events.

If a customer determines that a hosting arrangement does not give rise to an intangible asset, it recognizes the related expenditure as it receives the SaaS – i.e. over the period it has access to the software under the SaaS agreement. If a customer pays for the SaaS in advance, it recognizes a prepaid asset. Conversely, if a customer receives access to the software in advance of paying for it, it recognizes a financial liability.

Implementation costs: capitalize or expense?

In conjunction with a software hosting arrangement, a customer may incur various upfront implementation costs. Common examples include testing, data conversion and migration, interfacing, configuration and customization costs. The accounting for implementation costs depends on whether the customer receives a software intangible asset under IAS 38.

Arrangement gives rise to a software intangible asset

In a software hosting arrangement that gives rise to a software intangible asset, the cost of that asset is determined under IAS 38. The cost of the asset includes the directly attributable costs of preparing the software for its intended use. Consistent with an on-premise software license, many implementation costs are therefore capitalized as part of the cost of the software asset – e.g. internal employee payroll and benefits costs and external professional service fees incurred to configure and test the software.

Arrangement does not give rise to a software intangible asset

In a SaaS arrangement, upfront implementation costs are often required to be expensed when the related implementation services are performed. This is because the customer’s right to access the hosted software is not an intangible asset. An exception arises when either:

the implementation services are not distinct from the SaaS; or
the costs give rise to a separate tangible or intangible asset – e.g. the purchase of IT equipment or the development of a software interface the customer controls.

We believe the following framework should be applied to determine the appropriate accounting for implementation costs in a SaaS arrangement.

Are the implementation services performed by the SaaS provider?

In some SaaS arrangements, the SaaS provider may perform implementation services in addition to providing the SaaS. In that case, a customer should assess the implementation services and determine whether they are distinct from the SaaS. The performance obligation guidance in IFRS 15⁴ provides a relevant framework to determine whether implementation services are distinct from the SaaS.

We believe services provided by the SaaS provider that could be performed internally or by a third party other than the SaaS provider are generally distinct from the SaaS. In that case, the SaaS provider’s implementation services are not integral to the customer’s ability to derive its intended benefit from the SaaS offering because substantially similar services can be obtained elsewhere. Contractual restrictions requiring the customer to obtain the services from the SaaS provider do not alter this assessment. In our experience, most implementation services (e.g. configuration, installation, testing) usually could be performed by a third party that is not the SaaS provider.

If the implementation services are distinct from the SaaS, the related costs are expensed as the services are provided unless they give rise to a separate intangible asset under IAS 38. In contrast, the implementation costs are expensed over the SaaS period (as part of the cost of that service), if the implementation services are not distinct from the SaaS – i.e. when only the SaaS provider can perform them and they are integral to the customer’s ability to derive its intended benefit from the SaaS. If the customer pays for the implementation services in advance (e.g. through an upfront fee), it recognizes a prepaid asset.

Does an implementation expenditure give rise to a separate intangible asset?

Implementation costs related to a SaaS arrangement (whether provided by the SaaS service provider or not) are often significant. However, in our experience, there are limited circumstances in which such costs represent a separate intangible asset under IAS 38 that can be recognized.

The directly attributable costs of preparing software for its intended use are capitalized only when a company acquires and recognizes a software intangible asset. A SaaS arrangement that is a service contract does not itself include such an asset and therefore the costs of preparing that software for its intended use (e.g. configuration and testing) are not capitalized. Instead, these costs are expensed when they are incurred (i.e. when the service is received) unless, as outlined above, the implementation service is not distinct from the SaaS.

The costs of data conversion and data migration generally do not create a separate intangible asset. This is because a customer’s data – e.g. historical transactions recorded in a legacy software system or database – does not meet the recognition criteria under IAS 38. In addition, expenditure on training activities is required to be expensed as incurred under IAS 38.

However, we believe that an expenditure to create a new interface between a customer’s existing software and the hosted software may result in the creation of a separate intangible asset under IAS 38 – e.g. writing new software code that the customer controls.

Comparison to US GAAP

Unlike IFRS Accounting Standards, US GAAP has explicit guidance⁵ on accounting for cloud computing arrangements, including SaaS arrangements, whereby:

subscription fees paid to the SaaS provider are generally expensed over the SaaS period; and
implementation costs incurred by a customer in a SaaS arrangements are capitalized and recognized over the ‘term of the hosting arrangement’ if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance⁵. That guidance applies to implementation costs whether the implementation services are provided internally, by the SaaS provider or by a third party.

Therefore, even though companies will generally reach consistent answers about whether a software hosting arrangement gives rise to a software intangible asset, differences exist from IFRS Accounting Standards on the treatment of implementation costs in SaaS arrangements. Companies will generally capitalize fewer SaaS implementation costs under IFRS Accounting Standards than under US GAAP.

See our article R&D costs: IFRS® Accounting Standards vs. US GAAP, for a discussion of IFRS capitalization criteria for intangible assets compared to US GAAP.

The takeaway

In our experience, the accounting for SaaS (and other cloud computing) arrangements is of increasing importance given their growing prevalence. Reaching appropriate conclusions about whether a software hosting arrangement gives rise to a software asset, whether implementation services are distinct from the SaaS, and whether an intangible asset is created by implementation activities can have significant effects on a company’s earnings. Customers entering into software hosting arrangements should ensure they have appropriate processes and controls in place to make these determinations; additionally, dual preparers should remain vigilant about significant differences with US GAAP in this area.