Considerations for cloud arrangements

Considerations for cloud arrangements – Cloud services arrangements may include the cloud services (such as software-as-a-service (SaaS)) or other products or services. These arrangements also frequently include a licence of the software, for which the customer may (or may not) have the right to take possession.

Cloud services entities also frequently offer professional services, such as implementation, data migration, business process mapping, training and project management services, in addition to the cloud service itself. These professional services may be required for a customer to begin using the cloud services in the manner described in the contract.

Considerations for cloud arrangements Considerations for cloud arrangements

Considerations for cloud arrangementsIFRS 15 provides a framework for identifying the performance obligations in a contract. When an entity determines that the promised goods or services are distinct, it will need to determine whether it is providing a software licence (as a separate performance obligation from the hosting service) or a service (a licence and hosting services that, together, are a single performance obligation because the two promises are not distinct from one another). Considerations for cloud arrangements

In some contracts, the assessment of whether the licence is distinct will be relatively straight-forward. For example, an entity may provide a customer with a software licence, but only in conjunction with a hosting service. In addition, the customer cannot take control of the licence or use the software without the hosting service. In this example, the customer cannot benefit from the licence on its own and the licence is not separable from the hosting services. Therefore, the licence is not distinct and would be combined with the hosting service.

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However, many arrangements are more complex. For example, in some contracts, some of the software (enabling certain functionality) resides on the customer’s premises, and the customer has the ability to take control of that software. However, other functionality is provided by the hosting service and the customer cannot take control of that software. As a result, this determination may require significant judgement, depending on the terms of the contract. Considerations for cloud arrangements

There are various types of cloud computing arrangements. One of them is Software as a Service (SaaS) arrangements. In these arrangements, the capability provided by the supplier (the cloud service provider) to the customer is access to the supplier’s application software (end-user software not anything like system software) running on the supplier’s cloud infrastructure. The cloud infrastructure is a collection of hardware and software including network, servers, operating systems, storage, and individual software capabilities. Considerations for cloud arrangements

The customer accesses the supplier’s software on an as-needed basis over the internet or via a dedicated line, and does not manage or control the underlying cloud infrastructure.

Contracts are often for an initial non-cancellable period (for example, two years), with options within the contracts for the customer to extend. The contracts often include other services, such as technical support, implementation, data migration, business process mapping, training, and project management. The fees are generally paid on a monthly or yearly basis and are all inclusive, meaning they cover the right to access the software as well as these other services. This example focuses only on: Considerations for cloud arrangements

  1. the customer’s access to the supplier’s application software without these other products and services; and Considerations for cloud arrangements
  2. the fees paid or payable to the supplier for that access. Considerations for cloud arrangements

This example is a contract that gives the customer only the right to receive access to the supplier’s application software over the contract term in exchange for payment, the contract is a service contract and the customer accounts for it accordingly. The customer receives the service—access to the software—over the contract term. If the customer pays the supplier before it receives the service, that prepayment gives the customer a right to future service and is an asset for the customer.

IFRS 15 licences

IFRS 15 includes application guidance on licences. The requirements distinguish between licences that grant the customer (a) a right to use the supplier’s intellectual property at it exists when the licence is granted, and (b) a right to access the supplier’s intellectual property as it exists throughout the licence period. Considerations for cloud arrangements

Applying IFRS 15, a supplier transfers a right-of-use licence (and the customer obtains control of that licence giving it the right to use the supplier’s intellectual property) at the date the licence is granted. In this case, the customer receives a right to use the intellectual property at the start of the contract.

In contrast, the supplier transfers a right-of-access licence (and the customer receives the access to the supplier’s intellectual property) over the licence term. In this type of arrangement, it is expected that the supplier will undertake activities that significantly affect the intellectual property. In this case, the customer does not receive a right to use the intellectual property at the start of the contract. Considerations for cloud arrangements

IFRS 15 applies only to a supplier’s accounting for its contracts with customers—it is not applicable to the customer’s accounting for SaaS arrangements. Nonetheless, IFRS 15 requires the recognition of revenue when the supplier transfers goods or services to the customer (assessed based on when the customer obtains control).

The application guidance in IFRS 15 B58-B62 regarding right-of-use and right-of-access licences provides the guidance to assess whether a SaaS arrangement (that conveys rights beyond a right to future access to software) contains a software lease.

Considerations for cloud arrangements

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