On 8 November 2021, the Financial Supervisory Authority (FIN-FSA) published in its Market Newsletter 1/2021 the article ‘IFRS IC agenda decision on cloud services costs’¹. The article explained the content of the April 2021 agenda decision on the treatment of cloud computing configuration and customisation costs in financial statements (Configuration of Customisation Costs in a Cloud Computing Arrangement). Earlier, in March 2019, IFRS IC had already published the first agenda decision related to cloud services (Customer’s Right to Receive Access to the Supplier's Software Hosted on the Cloud).

The earlier agenda decision from 2019 provided guidance on how a customer recognises for the fees it pays based on a software agreement that are compensation for the right to receive access to software for a certain period. According to the agenda decision, agreements that do not meet the definition of a lease under IFRS 16 or an intangible asset under IAS 38 are service contracts. In order to ensure the correct accounting treatment of software agreements, the criteria and characteristics of a lease under IFRS 16 or an intangible asset under IAS 38 must be evaluated carefully with regard to cloud service contracts. For example, cloud migrations of ERP systems are assessed on the basis of the 2019 agenda decision.

Agenda decisions often clarify how IFRS standards are applied in certain situations. IFRS standards must be applied in accordance with agenda decisions as soon as possible after their publication, taking into account sufficient preparation time. Changes in the company’s financial statements caused by agenda decisions are mostly treated as a change in accounting principles in accordance with IAS 8² (retroactive application).

Little information given to date on effects of applying agenda decisions

Based on the two published agenda decisions, companies may have to change their accounting principles to comply with the agenda decisions. In some cases, this may mean recognising fees paid for services immediately or through prepayment accruals as expenses instead of as intangible assets on a previous balance sheet. In an ongoing cloud migration, the changes might have material significance for companies’ financial statements.  

The FIN-FSA reviewed the 2021 financial statements of 30 listed companies with regard to what the companies stated about SaaS services in relation to the said agenda decisions.

From around one third of the companies’ financial statements, it was clearly apparent whether the 2021 agenda decision, concerning configuration and customisation expenses, had an impact on a company’s financial statements. Of these companies, the majority stated that the agenda decision had no significant impact on the financial statements. Information in euros was often not given. A few of the 30 companies in the sample considered the matter to be so material for the financial statements that they presented in the income statement and balance sheet the magnitude of the effects in euros.

There were only a few references to the 2019 agenda decision in financial statements. Based on the reviewed material, there were no significant changes in euro amounts, reported as a change of accounting principles, that would have arisen from the 2019 agenda decision.   

As for the companies that did not mention anything about the application of the agenda decisions, it remains unclear whether the issue was not topical or whether the issue was immaterial. The FIN-FSA draws attention to the fact that if, as a result of the application of the agenda decisions, the impact of the change in an accounting principle is material, it is necessary to present sufficiently extensive disclosures about the change. A reconciliation calculation in matrix form, for example, showing the effects of the changes on the different items of the financial statements and on the entire financial statements, as well as the situation before and after the change, may be considered to be good presentation practice. In addition, the FIN-FSA considers it important that a documented impact analysis is prepared on the application of the agenda decisions.

Cloud migrations of companies’ main ERP systems just beginning

The large-scale migration to cloud services in companies is only in its early stages, and the FIN-FSA estimates that the most significant migrations in the future will be related to transitioning entire ERP systems to cloud services. These might be related to contractual changes, which may have material significance for the values of intangible assets on the companies’ balance sheets. With regard to new and replacement contracts, a sufficiently precise assessment must always be made as to whether software licenses meet the criteria of IAS 38 or IFRS 16. When evaluating the criteria of IAS 38, a critical aspect may be the definition of control over the software. If the characteristics of an intangible asset under IAS 38 or a lease under IFRS 16 are not met in the contract, then a service contract is involved.

The FIN-FSA is monitoring the impact of cloud migration on companies’ reporting and, in its company-specific supervision, will request from companies an analysis of compliance with the agenda decisions, if necessary.

For further information, please contact

• Riitta Pelkonen, Senior IFRS Accounting Expert, riitta.pelkonen(at)fiva.fi
• Sirkku Palmuaro, Senior IFRS Accounting Expert, sirkku.palmuaro(at)fiva.fi

¹ SaaS - Software as a Service.
² IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, see IAS 8. 19-27 Implementing changes in accounting policies.