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21RU-005 Cloud computing arrangement costs

Accounting for cloud computing arrangement costs

Discusses how an entity which incurs cloud computing arrangement costs, including implementation costs, may account for those costs – i.e. capitalise or expense.

Michael Voogt

Director, Department of Professional Practice

KPMG Australia


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In a nutshell

Cloud computing arrangements are ones in which a customer does not have possession of the underlying software. Rather, the customer accesses and uses the software on an as-needed basis – for example, over the internet. Cloud computing arrangements are sometimes referred to Software as a Service (SaaS), infrastructure as a service or hosting arrangements.

To date, IFRS® Standards do not contain explicit guidance on a customer’s accounting for cloud computing arrangements or the costs to implement them.

An entity should evaluate whether the rights granted in a cloud computing arrangement are within the scope of IAS 38 Intangible Assets or IFRS 16 Leases. Otherwise, the arrangement is likely to be a service contract.

Cloud computing arrangement cost – flowchart

IFRS® Interpretations Committee (IFRIC) has issued a tentative agenda decision which discusses whether a customer can recognise an intangible asset in relation to configuration or customisation of SaaS arrangements. Comments on this tentative agenda decision are due 15 February 2021. After this date IFRIC will further consider this issue.

“For many cloud computing arrangements, the implementation activities can be complicated so judgement will be required to determine the split of amounts paid/payable into their respective elements. Appropriate records will be required to be maintained, including segregating employee time.

Where the cloud computing supplier also supplies implementation services it may be difficult to identify and allocate consideration to each component.

Each element that meets the definition of an intangible asset should be accounted for under IAS 38. Elements outside the scope of IAS 38 should be accounted for based on other IFRS® Standards – for example, computer hardware acquired as part of the arrangement will generally be capitalisable under IAS 16 Property, Plant & Equipment – or expensed as the customer receives the associated service.”

Michael Voogt

This Reporting Update discusses how an entity which incurs cloud computing arrangement costs, including implementation costs, may account for those costs – i.e. capitalise or expense. Refer to the PDF version of the Reporting Update for further details.

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