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IFRS Interpretation Committee's (IFRIC's) Agenda Decision Configuration or Customisation Costs in a Cloud Computing Arrangement (April 2021)

The hot topic for this financial year appears to be the implications of the IFRS Interpretation Committee's (IFRIC's) Agenda Decision Configuration or Customisation Costs in a Cloud Computing Arrangement (April 2021). Cloud computing covers Software-as-a-Service (SaaS) arrangements.

This Agenda Decision follows on from the IFRIC Agenda Decision Customer's Right to Receive Access the Supplier's Application Software Hosted on the Cloud (IAS 38) (March 2019). Under that decision, IFRIC concluded that such a contract was not a lease of the software code, or an intangible asset of the software code. Rather, the contract was a service contract. This decision considered the accounting for configuration and customisation costs for those service contracts, with the effect being that most such costs should be expensed unless they meet the criteria as an intangible asset or prepayment.

There is not the usual one to two year transition period, which causes difficulties in performing a thorough assessment and implementation for 30 June 2021 financial years.

Councils and State Government Agencies are not expected to apply the decision this year. This will allow sufficient time to determine changes and will support whole of government consistency. If the effect is expected to be material, disclosure of the future effect should be made in the notes to 2020-21 financial statements.

Background

This Agenda Decision was only approved by the International Accounting Standards Board (IASB) at the end of April 2021.

While IFRIC Agenda Decisions are not separate legislative instruments like the Standards and Interpretations, they are effectively considered mandatory when complying with International Financial Reporting Standards (IFRSs).

The effect of the IFRIC Agenda Decision is that councils may have to change their accounting policy and not capitalise such costs on those IT projects. The issue is not as simple as writing off all previously capitalised IT costs. Depending on the circumstances, councils:

  • may be able to continue capitalising some costs for those IT projects
  • may be required to reclassify some previously capitalised costs as a prepayment to be expensed over time
  • have to expense the remaining costs as incurred.

In not applying the decision to the 30 June 2021 financial year, councils have 'sufficient time' to determine whether an accounting policy change is needed and to implement any changes to their systems.

When applied, the accounting policy change will be retrospective, requiring the adjustment of comparatives. If the changes are relatively small (for example by affecting only one balance sheet item), then a 'third balance sheet' may not be required.

Identifying the changes

The department suggests the following actions:

  • Identify what costs have been capitalised for which projects, and are the projects SaaS / cloud computing?
  • If so, do the costs relate to software assets that the council controls?
    • Where is the software located? – on council's own hardware or in the cloud?
    • Does the council have the power to obtain future economic benefits from the software AND restrict the access of others to those benefits?

The above actions will help determine whether the council has an intangible asset under AASB 138 Intangible Assets, that can be capitalised. Under the Agenda Decision, the cloud computing arrangement is not considered an intangible asset for the underlying software code. In addition, under the Agenda Decision, an intangible asset does not exist for any other rights under the arrangement, such as the right to enforce the provision of the software services for the arrangement term. An intangible asset may exist for software code controlled by the agency.

If the council cannot recognise an intangible asset, it then needs to determine when it recognises an expense for the customisation or configuration services received.

This is not as simple as expensing the costs when incurred. The Agenda Decision applies a complex approach of the customer 'mirroring' the accounting of what the supplier would do in applying IFRS 15 Revenue from Contracts with Customers (AASB 15 for Australia) with its associated complexity in determining 'distinct' performance obligations. There are two scenarios:

  1. If the supplier would recognise revenue from the customisation or configuration services upfront, then that is deemed to be when the services are provided, and then the customer (council) would recognise the expense for the services upfront.
  2. If the supplier would recognise revenue from the customisation or configuration services over time (i.e. the activities were not a 'distinct' performance obligation), then it is deemed that the services are provided over time (even if the activities took place upfront), and then the customer (council) would recognise the expense over time (by first recognising a prepayment asset if the costs were paid upfront).

The department suggests councils consider the following:

  • Who is providing the configuration/customisation services? – the SaaS / cloud computing company, or a third party?
  • When are the services received? By applying the principles of AASB 15, consider–
    • "Distinct good or service" requirements in AASB 15 para 26 to 30
    • "Setup activities" guidance in AASB 15 para 25 & B51
    • Are the services provided by the SaaS / cloud computing company? This may indicate they are not distinct and likely to be over time, thus giving rise to prepayment; or
    • Are the services provided by a third party? This may indicate they are distinct and likely to be requiring expensing upfront.

The above actions will help determine when the council needs to recognise an expense for the customisation or configuration services. The actions will also help the council determine whether it has a prepayment for customisation or configuration services that it has paid for upfront, but recognised under the Agenda Decision over time.

Last updated: 17 Aug 2022