The Canadian IFRS Discussion Group recently returned to the issue of cloud computing arrangements, revisiting its previous discussion in the light of new IFRS 16, among other things.
The group had already provided the following examples of such arrangements:
- Software as a service – This arrangement is a software distribution model where applications are hosted by the service provider and the purchaser has access to the software through a network. The customer maintains all infrastructure and hardware.
- Platform as a service – This arrangement is a model where the cloud provider delivers both hardware and software tools needed for application development. The provider hosts the hardware and software such that the customer does not need to perform installation or purchase in-house hardware and software. This model does not replace the full infrastructure of the customer’s needs.
- Infrastructure as a service – This arrangement is a model where virtualized computing resources are provided over the internet. The third party provider hosts the hardware, software, servers, storage and other components on behalf of its users.
They built their discussion this time around the following reference points:
- A right to access non-dedicated supplier hardware and supplier application software (Scenario 1).
- Same as Scenario 1 except the customer has a right to possess a copy of the application software (Scenario 2).
- Same as Scenario 1 except the customer specifies particular application software configuration settings (Scenario 3).
The group first considered: do these arrangements create intangible assets within the scope of IAS 38? It doesn’t sound like any of the scenarios create a right to control the hardware. Scenario 2 may create a right to control the application software though, reflecting the customer’s right to possess a copy of the software and to restrict the access of others to benefit from that specific copy. In Scenario 3, it would depend on whether the rights granted to the customer extend to being able to create an identifiable version of the software to obtain future economic benefits and to restrict the access of others to those benefits.
The group then considered whether the arrangements create a lease under IFRS 16. You’ll recall that this requires that a contract convey the right to control the use of an identified asset for a period of time – encompassing both the right to obtain substantially all of the economic benefits from using the identified asset, and the right to direct its use. It doesn’t seem likely here that scenario 1 conveys such a right, given that others are also drawing on the application’s economic benefits. Scenario 2 may create a lease of the application software though; for scenario 3, it again depends.
Next, even if one or more of the scenarios does create a lease under IFRS 16, does that lease fall under the standard’s scope exclusion applying to “rights held by a lessee under licensing agreements within the scope of IAS 38 for such items as motion picture films, video recordings, plays, manuscripts, patents and copyrights.” The group discussed whether this scope exemption applies strictly to the items listed, or whether the reference to “such items as” means it might apply more widely, such as to licensing agreements involving software. It seems the group mostly thought it’s reasonable to apply it more widely. The next question then, pulling these steps together, is: if an arrangement gives rise both to an intangible asset and to a lease, how do you determine that it constitutes a “licensing agreement,” such that the scope exclusion applies and IFRS 16 can be set aside?
The group found it difficult to reach a clear view on this. But if we assume, for the sake of moving on, that a particular arrangement is analyzed as falling within IAS 38 rather than IFRS 16, the consequent task of measuring the intangible asset may also raise a bunch of issues – “determining the term, which payments to include in the measurement of the liability, allocating payments to different components, etc.” The group doesn’t seem to have much headway on discussing these; the meeting report solemnly notes only that “that there are many measurement issues to consider.” They did acknowledge though that the arrangements may often be executory contracts, defined in IAS 37 as contracts “under which neither party has performed any of its obligations or both parties have partially performed their obligations to an equal extent,” the accounting for which doesn’t entail recognizing assets or liabilities beyond everyday prepayments and accruals. The trouble is that there’s no specific guidance on identifying such contracts – it’s usually sufficient to apply a “you know it when you see it” test. If nothing else: “Some Group members thought that it may be reasonable to treat a cloud computing arrangement as an executory contract when there are no rights of possession or extensive customer-specified configuration settings.”
The group passed all of this on to the Accounting Standards Board to consider raising it to the IASB or the IFRIC; the AcSB chose the latter, but nothing has come of it at the time of writing. In the meantime, the discussion at least indicates that the more the cloud computing arrangement involves non-standard terms, customizations, rights of access and so forth, the more carefully the accounting needs to be considered, with a view to identifying possible assets or liabilities. Beyond that, the answers for now remain somewhere in the clouds…
The opinions expressed are solely those of the author