The configuration or customisation service may be performed by the cloud vendor, the entity’s internal personnel or a third party – e.g., a consulting company. When the cloud vendor performs these services in addition to providing access to the software, a question arises about how the customer identifies the services that it receives.
The IFRS Interpretations Committee discussed how a customer identifies the services that it receives from the cloud vendor (including cases in which the cloud vendor subcontracts services to a third party). The Committee noted that the requirements of IFRS 15 deal with similar and related issues to those faced by the customer; therefore, the customer assesses whether the configuration or customisation service is distinct from the access to the software or is part of the service of receiving access to the software.
In the context of cloud computing arrangements, if the customisation service requires the cloud vendor to significantly modify the software, then a customer might conclude that the promises to transfer the software and the customisation service are not distinct within the context of the contract. However, the conclusion could be different in a case when a cloud vendor provides configuration services which are not likely to significantly modify the software. So, the IFRS 15 guidance should be carefully analysed in each scenario.
If the implementation service provided by the cloud vendor is distinct from the access to the software, then it is not part of the service of receiving access to the software. Therefore, it is expensed when it is received – i.e., when the service is performed by the cloud vendor – unless it gives rise to a separate intangible asset. If the expenditure gives rise to a separate intangible asset, then it should be accounted for under the requirements of IAS 38 – capitalise and amortise.
Conversely, if the implementation service is not distinct from the access to the software, then the related expense is recognised over the period during which the supplier provides access to the software – i.e., it is part of the cost of the service of receiving access to the software. If an entity pays for this service of receiving access to the software in advance, then it recognises a prepayment asset.
This assessment is not necessary for configuration or customisation services performed internally or by a third party other than the cloud vendor because these services are generally distinct from the service of receiving access to the software provided by the cloud vendor. These services are capable of being distinct because they could be provided separately by a third party other than the cloud vendor or performed internally and are not integrated with the customer’s ability to derive its intended benefit from the software.
If a cloud arrangement includes multiple distinct services that are received over different periods, then a company may need to allocate the total consideration paid to each service – e.g., based on the relative standalone price of each service.
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