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SaaS Implementations No Longer CAPEX

Since the rise of “as a service” products, accountants have somewhat scrambled to keep up with the changing technology models and their impact on accounting reporting.

IFRIC (The IFRS Interpretations Committee), has published two decisions now as to how Software as a Service (SaaS) should be accounted for. The agenda decisions do not address the accounting for other components of cloud technology such as Device as a Service and other forms of “as a Service”, but you would imagine this will be on the horizon soon.

The first decision was published in March 2019 and flew under the radar due to companies focusing on their IFRS 16 transition. It concluded that SaaS arrangements are likely to be service arrangements, rather than leases or intangibles. This is because the customer typically only has a right to receive future access to the supplier’s software, running on the supplier’s infrastructure, inherently this is also the same way it has always been treated from an accounting perspective.

The second decision was published recently in April 2021 and was a big surprise as it differs in standard practice when it comes to implementation costs. In most instances, the config and customisation costs of a SaaS implementation will now be treated as an operating expense and will be recognised in the profit or loss as performed. The exception to this is when config and customisation activities undertaken in implementing SaaS arrangements may give rise to a separate asset where the customer controls the IP of the underlying software code.

The obvious impact is that companies that were expecting to capitalise their SaaS implementation costs (as many would have already been doing) will now be taking a hit to EBITDA in the current financial year.

The impact of this was recently demonstrated in Australasia where the market guidance for the listed company A2 stated that earnings were lower due to one-off costs (approximately $8 million) associated with the implementation of the company’s new cloud-based enterprise resource planning (ERP) system. They also stated that “the recently announced interpretation of the accounting standards in relation to cloud-computing arrangements by IFRIC requires that certain project implementation costs be expensed in FY21. This was not incorporated into the prior market guidance as it was expected that the implementation costs could be capitalised and amortised over future periods.”

With this big change impacting many other companies, we will no doubt see a rise of alternative financing to address this OPEX treatment in the future. If you wish to understand more about the alternative financing options that may be available to achieve a desirable business outcome, don’t hesitate to get in touch with us.