Software, websites and cloud computing costs

Companies moving their finance, sales or HR systems to the cloud often spend more on implementation than on the subscription itself, and many capitalised those costs until the IFRS Interpretations Committee clarified the rules. This guide explains how SaaS, configuration, customisation and other implementation costs are treated, with an ERP example.

By Mirza Fahad Baig, Chartered Accountant. Reviewed by Hamza Fida, Chartered Accountant. 3 minute read.

Short answer

Cloud computing costs under IFRS depend on what the customer controls. A software-as-a-service (SaaS) arrangement that gives only a right to access the supplier's software is a service contract, not an intangible asset, so the fees are expensed as the service is received. Following IFRIC agenda decisions in 2019 and 2021, configuration and customisation costs are expensed too, unless they create a separate intangible asset the customer controls; if the supplier performs them and they are not distinct from the SaaS access, they are a prepayment expensed over the contract term.

At a glance

SaaS access
Usually a service, expensed
Software the company controls
Intangible asset
Configuration by supplier, not distinct
Prepayment over the term
Distinct implementation services
Expensed as performed
Code the company owns
May be capitalised
Agenda decisions
March 2019 and April 2021
Software, websites and cloud computing costsSaaS access: Usually a service, expensed; Software the company controls: Intangible asset; Configuration by supplier, not distinct: Prepayment over the term; Distinct implementation services: Expensed as performed; Code the company owns: May be capitalised; Agenda decisions: March 2019 and April 2021.KEY FACTS AT A GLANCESoftware, websites and cloud computing costsSaaS accessUsually a service,expensedSoftware the company controlsIntangible assetConfiguration by supplier, notdistinctPrepayment over the termDistinct implementation servicesExpensed as performedCode the company ownsMay be capitalisedAgenda decisionsMarch 2019 and April 2021Tax BakersSoftware, websites and cloud computing costsSaaS access: Usually a service, expensed; Software the company controls: Intangible asset; Configuration by supplier, not distinct: Prepayment over the term; Distinct implementation services: Expensed as performed; Code the company owns: May be capitalised; Agenda decisions: March 2019 and April 2021.KEY FACTS AT A GLANCESoftware, websites and cloudcomputing costsSaaS accessUsually a service, expensedSoftware the company controlsIntangible assetConfiguration by supplier, not distinctPrepayment over the termDistinct implementation servicesExpensed as performedCode the company ownsMay be capitalisedAgenda decisionsMarch 2019 and April 2021Tax Bakers
Key facts at a glance, as set out in this guide.

How are cloud computing costs treated?

Cloud computing: asset or expense?Cloud computing: asset or expense?Does the company control thesoftware, not just access it?YesIntangibleassetNoDoes the work create a separateasset the company controls?YesCapitalisethat assetNoIs the configuration servicedistinct from the SaaS access?YesExpense asperformedNoPrepayment, expensed over the term
Most SaaS implementation costs end up as expenses, timed by whether the service is distinct.

The first question is control of the software itself. A company controls it if it has the right to take possession of the software and run it on its own hardware or with another supplier without significant penalty, or otherwise controls the code. A typical SaaS subscription gives only a right to access the supplier's software on the supplier's infrastructure: a service received over time.

What about configuration and customisation costs?

  • Configuration sets up existing capabilities of the software, such as flags, workflows and user roles.
  • Customisation modifies the software code or writes additional code that changes or creates functions.

The IFRS Interpretations Committee's April 2021 agenda decision concluded that, in a SaaS arrangement, such costs are usually expensed, because the customer does not control the software being configured. The question is when: if the supplier performs services that are distinct from the SaaS access, they are expensed as performed; if they are not distinct, for example because only the supplier can configure the software and it is part of the access service, the payment is a prepayment, expensed over the contract term. Only code that creates a resource the customer controls, such as a separate interface it owns, can be an intangible asset.

A worked example: a cloud ERP implementation

CostCUTreatment
SaaS subscription, 3 years at 100,000 a year300,000Expensed each year as the service is received
Configuration by the SaaS supplier, which only it can perform90,000Prepayment, expensed over 3 years: 30,000 a year
Data migration by an independent consultant40,000Expensed as performed
Interface code written by the company's developers, which it owns and runs60,000Intangible asset if the IAS 38 development criteria are met
Staff training15,000Expensed

Before the agenda decisions, many companies would have capitalised most of the 205,000 of implementation costs. Now only the 60,000 of company-owned code may be capitalised.

What about software the company buys or builds?

A perpetual or term licence for software installed on the company's own servers is an intangible asset under IAS 38, measured at cost and amortised over its useful life. Software developed internally follows the research and development rules; see research and development costs. Software integral to a piece of hardware, such as the operating system of a machine, is part of the property, plant and equipment.

How are website costs treated?

Under SIC-32, planning costs are expensed; application, infrastructure and graphic design development costs are capitalised if the website will generate probable future economic benefits, such as taking orders, which a website used mainly for advertising does not. Content development is capitalised only if it is for the website's use in generating revenue; operating costs are expensed.

How does US GAAP differ?

US GAAP allows customers in cloud computing arrangements that are service contracts to capitalise certain implementation costs, under ASC 350-40, and expense them over the term of the arrangement. That is a real difference from IFRS. See IAS 38 vs ASC 730 and IAS 38 explained.

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Questions people ask

Are SaaS costs an intangible asset under IFRS?

Usually not. A right to access the supplier's software is a service contract, so the fees are expensed as the service is received.

How are configuration and customisation costs treated in a cloud arrangement?

They are expensed, unless they create a separate intangible asset the customer controls; the timing depends on whether the service is distinct from the SaaS access.

What did the 2021 IFRIC agenda decision conclude?

That configuration and customisation costs in SaaS arrangements are generally expensed, either as performed or over the contract term.

Does US GAAP treat cloud implementation costs differently?

Yes. ASC 350-40 lets customers capitalise certain implementation costs of hosting arrangements and expense them over the term.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IAS 38 Intangible Assets

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

IAS 38IAS 38 intangible assets explainedIAS 38Research and development costs under IAS 38IFRS vs US GAAPIAS 38 vs ASC 730: research and development costs

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This guide is general information. It is not tax or legal advice for your situation.