Handling the complexity of cloud computing in financial reporting

Cloud computing provides computing and technology services through web-based tools and applications. PHOTO | SWIMMING POOL

Cloud computing provides computing and technology services through web-based tools and applications.

These services include servers, storage, databases, networks, software and analytics, to name a few.

The adoption of cloud computing has increased in recent years as organizations seek to improve customer service, cost efficiency, collaboration and flexibility, among other things.

READ: Five reasons why companies should use hybrid cloud

These arrangements are ubiquitous today, and organizations grapple with some pertinent accounting issues that affect their financial reporting.

One notable cloud computing arrangement is a software as a service (SaaS), in which an organization (customer) has the right to access a provider’s application software over the contract term.

The software typically resides on the vendor’s hardware, and the buyer will only access the software via an Internet connection.

Organizations will typically incur a fee for the SaaS arrangement and an additional amount to set up and customize those services to their specific requirements before receiving them.

These configurations and customizations (CC) can be performed by the customer, the SaaS provider, or a third party and are often a significant cost compared to the total cost of the SaaS arrangement.

The complexity for organizations includes determining whether these CC costs should be capitalized as intangible assets, prepaid on the balance sheet, or expensed when incurred.

Some considerations include determining whether the CC costs meet the definition of intangible assets in IAS 38, ‘Intangible asset’.

In addition, organizations should evaluate whether the CC services differ from the SaaS arrangement and whether the third-party service provider is a subcontractor of the SaaS provider where a third party provides the customization.

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The other area of ​​complexity is accounting for costs incurred by organizations before selecting the software solution.

Furthermore, accounting for the costs incurred by organizations related to design documentation leading to intellectual property can be complicated for the organization.

Organizations will also need to understand the nuances between various activities, such as configuring the SaaS to configure the software’s existing code, modifying the SaaS code to change or create extra functionality, and adding additional code on top of the developing original SaaS code.