Cloud computing

Accounting considerations for software as a service

What is cloud computing?

Cloud computing is essentially a model for delivering information technology services in which resources are retrieved from the internet through web-based tools and applications, rather than a direct connection to a server. Data and software packages are stored in servers. Cloud computing structures allow access to information as long as an electronic device has access to the internet. This type of system allows employees to work remotely. Cloud computing is so named because the information being accessed is found in the ‘clouds’, and does not require a user to be in a specific place to gain access to it. Companies may find that cloud computing allows them to reduce the cost of information management, since they are not required to own their own servers and can use capacity leased from third parties. Additionally, the cloud-like structure allows companies to upgrade software more quickly.

Cloud computing
SaaS image

What is SaaS?

SaaS is a software distribution model in which the customer does not take possession of the supplier’s hardware and application software. Instead, customers accesses the supplier’s hardware and application software from devices over the internet or via a dedicated line. In these types of arrangements, the customer does not manage or control the underlying cloud infrastructure, including the network, servers, operating systems, storage, and even individual application software capabilities, with the possible exception of limited user-specific application software configuration settings, nor is the customer responsible for upgrades to the underlying systems and software.

What are the key issues to consider?

In practice, we have observed various application issues relating to the customer’s accounting in SaaS arrangements. These arrangements may often be bundled with other products and services, such as implementation, data migration, business process mapping, training, and project management.

For simplicity, this publication only focuses on accounting for arrangements for the customer’s access to hardware and application software and, more specifically, on fees paid to the supplier for the customer’s access to the supplier’s application software. The key accounting issues identified with these arrangements arise as result of a change in the business model.

The original business model, before the implementation of SaaS, involved an entity using its own servers and applications, resulting in the recognition of property, plant and equipment as well as intangible assets on the entity’s balance sheet. Under the new business model, SaaS, there is the possibility of recognising these cash flows as operating expenses. This is illustrated by the examples  here.

It is recommended that companies should provide information to investors to assist them in understanding that although the change in the business model could result in different accounting that has an impact on profit and loss and the balance sheet, there is no fundamental change to the company’s business.

International Financial Reporting Interpretations Committee (IFRIC) discussion

The Committee received a request about a customer’s accounting for SaaS arrangements. Specifically, the request asked how a customer applies IAS 38 Intangible Assets and IFRS 16 Leases in accounting for fees paid to access the supplier’s application software running on the supplier’s cloud infrastructure. This was discussed during the September 2018 meeting. Tentative observations from this meeting are included in the attached publication.

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Renitha Dwarika
Partner/Director, PwC South Africa
Tel: +27 (11) 797 4920
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