The IFRS Interpretations Committee tentatively decided not to add this matter to its standard-setting agenda at its meeting in November 2018. The Committee will reconsider the following tentative agenda decision, including the reasons for not adding the matter to the standard-setting agenda, at a future meeting. The Committee encourages interested parties to submit their responses using the link below.
Tentative agenda decision
The Committee received a request about how a customer accounts for ‘Software as a Service’ cloud computing arrangements. In these arrangements, the customer contracts to pay a fee in exchange for a right to access the supplier’s application software for a specified term. The supplier’s software runs on cloud infrastructure managed and controlled by the supplier. The customer accesses the software on an as-needed basis over the internet or via a dedicated line.
Does the customer receive a software asset at the contract commencement date or a service over the contract term?
The first step is to decide whether the customer receives a software asset at the contract commencement date or a service over the contract term.
The Committee noted that a customer receives a software asset at the contract commencement date if either (a) the contract contains a software lease, or (b) the customer otherwise obtains control of software at the contract commencement date.
A software lease
IFRS 16 Leases defines a lease as ‘a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration’. Paragraphs 9 and B9 of IFRS 16 explain that a contract conveys the right to use an asset if, throughout the period of use, the customer has both:
- the right to obtain substantially all the economic benefits from use of the asset (an identified asset); and
- the right to direct the use of that asset.
Paragraphs B9–B31 of IFRS 16 provide application guidance on the definition of a lease. Among other requirements, that application guidance specifies that a customer generally has the right to direct the use of an asset by having decision-making rights to change how and for what purpose the asset is used throughout the period of use. Accordingly, in a contract that contains a lease the supplier has given up those decision-making rights and transferred them to the customer at the lease commencement date.
The Committee observed that, if a contract conveys to the customer only the right to receive access to the supplier’s application software over the contract term, the contract does not contain a lease. A right to receive future access to the supplier’s software running on the supplier’s cloud infrastructure does not give the customer any decision-making rights about how and for what purpose the software is used—the supplier would have those rights by, for example, deciding how and when to update or reconfigure the software, or deciding on which hardware (or infrastructure) the software will run.
A software intangible asset
IAS 38 defines an intangible asset as ‘an identifiable non-monetary asset without physical substance’. It notes that an asset is a resource controlled by the entity and paragraph 13 specifies that an entity controls an intangible asset if it has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits.
The Committee observed that, if a contract conveys to the customer only the right to receive access to the supplier’s application software over the contract term, the customer does not receive a software intangible asset at the contract commencement date. A right to receive future access to the supplier’s software does not, at the contract commencement date, give the customer the power to obtain the future economic benefits flowing from the software itself and to restrict others’ access to those benefits.
Consequently, the Committee concluded that a contract that conveys to the customer only the right to receive access to the supplier’s application software in the future is a service contract. The customer receives the service—the access to the software—over the contract term. If the customer pays the supplier before it receives the service, that prepayment gives the customer a right to future service and is an asset for the customer.
If the contract contains a software lease, does the customer apply the requirements in IFRS 16 or those in IAS 38?
If the contract contains a software lease, the next step would be to consider whether the customer applies IFRS 16 or IAS 38 to account for the lease.
Paragraph 6 of IAS 38 states that ‘rights held by a lessee under licensing agreements for items such as motion picture films, video recordings, plays, manuscripts, patents and copyrights are within the scope of this Standard and are excluded from the scope of IFRS 16’. Paragraph 3(e) of IFRS 16 similarly excludes such rights from its scope.
IAS 38 does not define a licensing agreement. However, IFRS 15 Revenue from Contracts with Customers specifies that a licence (including a licence of software) establishes a customer’s rights to the intellectual property of a supplier. IFRS 15 also identifies that a licence can provide the customer with a right to use the supplier’s intellectual property.
Consequently, the Committee concluded that a software lease is a licensing agreement within the scope of IAS 38, and not of IFRS 16.
Is a right to use software recognised as an intangible asset at the contract commencement date?
A right to use software is an identifiable non-monetary item without physical substance. A customer controls that right-of-use if it has the power to obtain the future economic benefits flowing from the right-of-use and to restrict others’ access to those benefits (paragraph 13 of IAS 38).
To have the right to use software, the customer must have both (a) the right to obtain substantially all the economic benefits from use of the software, and (b) the right to direct the use of that software throughout the contract term. Having those rights would mean that the entity also controls the right to use the software applying the criteria for control in IAS 38.
Consequently, the Committee concluded that, if the customer has the right to use software, it recognises that right-of-use as an intangible asset at the contract commencement date (subject to the recognition criteria in paragraph 21 of IAS 38).
Assessing whether a customer’s rights are sufficient to give it the right to use software requires judgement considering the terms and conditions of the contract. Paragraphs B58–B62 of IFRS 15 include application guidance that might be helpful in making this assessment.
How does a customer measure an intangible asset recognised applying IAS 38?
If the customer recognises an intangible asset applying IAS 38, the next step would be to measure the asset.
Paragraph 24 of IAS 38 requires intangible assets to be measured initially at cost.
The Committee concluded that the requirements in existing IFRS Standards provide an adequate basis for an entity to account for fees paid or payable to access the supplier’s application software in Software as a Service arrangements. Consequently, the Committee [decided] not to add this matter to its standard-setting agenda.
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