An international accounting ruling is set to shake up the end of financial year results for companies that implemented cloud computing supplier arrangements, potentially hitting IT budgets for next year.
The warning comes from consulting giant KPMG, which said that the ruling by the global accounting standards body IFRS' Interpretations Committee – which has been adopted in Australia – found that cloud computing costs will likely be expensed as service contracts.
What this means, according to Andrew King, KPMG Australia partner, is that these costs will now be included in pre-tax earnings (EBITDA).
“Many companies prior to this decision capitalised implementation costs incurred with implementing SaaS [software-as-a-service] arrangements on their balance sheets, particularly given IFRS standards did not contain explicit guidance on a customer’s accounting for cloud computing arrangements,” he told ARN.
“When capitalised, this cost was amortised (amortisation expense, excluded from EBITDA) over the contract term of the SaaS arrangement. Following this decision, more customisation and configuration costs incurred with respect to SaaS arrangements will be recognised immediately as operating expenses in the P&L [profit and loss] (included in EBITDA).”
The outcome of this, King continued, is that more expenses will be recognised in a company’s profit or loss account during the installation or implementation phase of cloud computing arrangements, usually when customisation or configuration work is taking place.
This also covers data migration services, testing and training costs.
“We advise that Australian companies which use cloud computing or SaaS arrangements urgently consider the implications of this ruling,” King said. “For those entities with a 30 June financial year-end, there is limited time to understand what amounts have been capitalised previously and to perform an assessment on how they should be treated under the new guidance.
“If a company has an April or May financial year-end and its financial statements are yet to be signed, they will also need to apply the changes.”
If companies cannot apply the changes by the end of their end of financial year statements, such as situations where they claim there is not enough time to calculate the impact, they will need to include additional disclosures about the potential impact and mention it to their auditor.
King hypothesised that the ruling could have a flow-on impact on planned IT investment budgets, which may have been prepared on the basis that implementation costs related to new cloud arrangements could be considered capital expenditure (CAPEX).
“Given the next financial year is now less than a month away, many companies will have finalised their IT investment budgets for next year and these may now need to be revisited. It will also lead to a change in how future business cases for investment are prepared,” he said.
Not only will it impact the present and the future, but the ruling is also retrospective, meaning that previous results may need to be altered.
“The ruling is retrospective, which will also lead to companies having to reassess previously-capitalised costs and consider whether they actually met the identifiability and control criteria to be recognised as intangible assets,” King said.
“If not, those costs may have been incorrectly capitalised in the past under the new guidance. Any costs capitalised with respect to cloud computing arrangements in prior periods may need to be adjusted against the company’s retained earnings.”
In fact, the consulting giant claims the ruling will be a “catalyst” for companies to review and update IT investment accounting policies, including the revision of operational expenditure (OPEX) and CAPEX existing decision criteria.
“Given the accounting standard that relates to capitalising IT software costs (AASB 138 Intangible Assets) has not changed significantly in more than a decade, this review will be timely for many companies,” King said.