Accounting for software license fees

For companies reporting under IFRS, it is vital to work with your auditors to make sure you interpret the guidance correctly. Usage of cloud-based software was already on the rise before the pandemic.

Non-public entities are required to follow the new guidance for all annual reporting periods beginning after December 15, Prior to the issuance of ASC , two different accounting treatments for software contracts existed:. With cloud computing contracts, oftentimes the buyer is purchasing a service, and not a license. Because of a lack of clarity in the guidance, it was common to treat all costs related to these contracts as expenses incurred, leading organizations to miss out on the opportunity to capitalize certain fees.

But purchasing a SaaS product can have far-reaching benefits that eclipse the income statement concerns. The FASB, partially in recognition of how the lack of clarity in the standard was unfairly affecting these buying decisions, issued ASC The new guidance clarifies the treatment of cloud computing arrangements — those including and not including software licenses.

Read our blog providing a more in-depth explanation of the new guidance, as well as a step-by-step example of service contract accounting , including journal entries. Similar to private organizations, government entities vary widely in their approach to accounting for cloud computing contracts. The new rules are effective for all reporting periods starting after June 15, Government entities are required to record a right-to-use subscription asset and corresponding subscription liability.

The standard also provides guidance for cash outlays, such as implementation fees, to prevent future disparities in how government entities report on non-subscription costs. Therefore, even though companies will generally reach consistent answers about whether a software hosting arrangement gives rise to a software intangible asset, differences exist from IFRS Standards on the treatment of implementation costs in SaaS arrangements.

In our experience, the accounting for SaaS and other cloud computing arrangements is of increasing importance given their growing prevalence.

Customers entering into software hosting arrangements should ensure they have appropriate processes and controls in place to make these determinations; additionally, dual preparers should remain vigilant about significant GAAP differences in this area. Scott Muir. Amit Singh. Sign up now. Learn more. What is a SaaS arrangement? A agenda decision distinguishes hosting arrangements in which a customer receives a software intangible asset from those that do not, and therefore are service contracts i.

SaaS arrangements. Does the software hosting arrangement give rise to a software asset? Implementation costs: capitalize or expense? Arrangement gives rise to a software intangible asset In a software hosting arrangement that gives rise to a software intangible asset, the cost of that software asset is determined based on the guidance in IAS Arrangement does not give rise to a software intangible asset In a SaaS arrangement, upfront implementation costs are often required to be expensed when the related implementation services are performed.

An exception arises when either: the implementation services are not distinct from the SaaS; or the cost gives rise to a separate tangible or intangible asset — e. These changes have a significant potential impact on the financial results and reporting of for organizations.

In the past, the perpetual software licensing model involved clients purchasing and owning a license to use the software in perpetuity. An upfront software fee was paid and capitalized on the balance sheet and an annual maintenance fee was incurred and expensed every year.

Recently, a new subscription-based Software as a Service SaaS model has emerged in the software licensing industry where clients subscribe to a service that includes access to software, support and maintenance. Unlike the perpetual license, the SaaS model provides updates and support throughout the life of the subscription. Although this model offers benefits to both customers and vendors, its major drawback is that all SaaS costs are treated as operating expense as they are incurred.

An entity must provide disclosures related to capitalized implementation costs of a hosting arrangement that is a service contract consistent with those required for internal-use software, and also should make the disclosures in Subtopic as if the capitalized implementation costs were a separate major class of depreciable asset.

Effective Date and Transition The amendments are effective for public business entities for fiscal years beginning after December 15, , and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for annual reporting periods beginning after December 15, , and interim periods within annual periods beginning after December 15, Early adoption is permitted, including adoption in any interim period, for all entities.

The amendments should be applied prospectively to all implementation costs incurred after the date of adoption or retrospectively. Transition disclosures depend on the transition method selected. Have Questions? Contact Us. Create a BDO Account to manage your subscriptions.