Are the implementation services performed by the SaaS provider?
In some SaaS arrangements, the SaaS provider may perform implementation services in addition to providing the SaaS. In that case, a customer should assess the implementation services and determine whether they are distinct from the SaaS. The performance obligation guidance in IFRS 155 provides a relevant framework to determine whether implementation services are distinct from the SaaS.
We believe services provided by the SaaS provider that could be performed internally or by a third party other than the SaaS provider are generally distinct from the SaaS. In that case, the SaaS provider’s implementation services are not integral to the customer’s ability to derive its intended benefit from the SaaS offering because substantially similar services can be obtained elsewhere. Contractual restrictions requiring the customer to obtain the services from the SaaS provider do not alter this assessment.
In our experience, most implementation services (e.g. configuration, installation, testing) usually could be performed by a third party that is not the SaaS provider.
If the implementation services are distinct from the SaaS, the related costs should be expensed as the services are provided unless they give rise to a separate intangible asset under IAS 38. In contrast, if the SaaS provider is the only company that can provide a particular implementation service and that service is integral to the customer’s ability to derive its intended benefit from the SaaS, this indicates that the implementation service is not distinct. In that case, the related implementation costs should be recognized as expense over the SaaS period – i.e. as part of the cost of that service. If the customer pays for the implementation services in advance (e.g. through an upfront fee), it should recognize a prepaid asset.
Does implementation expenditure give rise to a separate intangible asset?
Implementation costs related to a SaaS arrangement are often significant. However, in our experience, there are limited circumstances in which a separate intangible asset that can be recognized is acquired or created.
The directly attributable costs of preparing software for its intended use are capitalized only when a company acquires a software intangible asset. A SaaS arrangement does not itself include such an asset; therefore, the directly attributable costs incurred to prepare the SaaS for its intended use (e.g. configuration and testing) are not capitalized. Instead, these costs should be expensed when they are incurred (i.e. when the service is received) unless, as outlined above, the implementation service is not distinct from the SaaS.
The costs of data conversion and data migration generally do not create a separate intangible asset. This is because a company’s data – e.g. historical transactions recorded in a legacy software system or database – does not meet the recognition criteria under IAS 38. In addition, expenditure on training activities is required to be expensed as incurred under IAS 38.
However, we believe that an expenditure to create a new interface between a company’s existing software and the hosted software may result in the creation of a separate intangible asset under IAS 38 – e.g. writing new software code that the company controls.
