Businesses that enter into cloud computing arrangements need to consider the appropriate accounting treatment for the costs incurred.
Cloud computing has become increasingly popular in recent years as companies have looked for efficient and secure ways to store, manage and process their data.
This type of arrangement is based on networks of remote servers, usually accessed over the internet, with service models encompassing infrastructure, platforms and software. The customer accesses and uses the software on an as-needed basis.
Transitioning to the cloud or implementing a new cloud computing arrangement can involve significant costs for companies, and there are implications for how these costs are accounted for.
Accounting standards do not, however, provide explicit guidance on this. Businesses need to use judgement and may need to apply various IFRS standards, including IFRS 16 Leases and IAS 38 Intangible Assets.
Businesses entering into these cloud computing arrangements need to understand whether this is an acquisition of an intangible, a right of use, or a contract to receive services. The financial reporting implications are significantly different depending on the answer. When the question was put to the IFRS Interpretations Committee, guidance was provided on how to make the distinction.