Software intangible gaap

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. Instead, these costs should be expensed when they are incurred i. The costs of data conversion and data migration generally do not create a separate intangible asset.

In addition, expenditure on training activities is required to be expensed as incurred under IAS Therefore, even though companies will generally reach consistent answers about whether a software hosting arrangement gives rise to a software intangible asset, differences exist from IFRS Standards on the treatment of implementation costs in SaaS arrangements.

In our experience, the accounting for SaaS and other cloud computing arrangements is of increasing importance given their growing prevalence. Customers entering into software hosting arrangements should ensure they have appropriate processes and controls in place to make these determinations; additionally, dual preparers should remain vigilant about significant GAAP differences in this area.

Scott Muir. Amit Singh. Sign up now. Learn more. What is a SaaS arrangement? A agenda decision distinguishes hosting arrangements in which a customer receives a software intangible asset from those that do not, and therefore are service contracts i. SaaS arrangements. Does the software hosting arrangement give rise to a software asset? Implementation costs: capitalize or expense? Arrangement gives rise to a software intangible asset In a software hosting arrangement that gives rise to a software intangible asset, the cost of that software asset is determined based on the guidance in IAS Arrangement does not give rise to a software intangible asset In a SaaS arrangement, upfront implementation costs are often required to be expensed when the related implementation services are performed.

An exception arises when either: the implementation services are not distinct from the SaaS; or the cost gives rise to a separate tangible or intangible asset — e. Are the implementation services performed by the SaaS provider?

To be clear, accounting guidance for computer software in general was published, but nothing specifically addressed internally developed software for sale. The accounting profession has progressed rapidly since the s, as has business and commerce. Several additional rules have either been published or amended relating to software as our use of software has become more prevalent and the types of software arrangements offered has expanded.

Most recently ASC Intangibles — Goodwill and Others was originally published in early to be effective beginning in However, stakeholders requested further clarification during the comment period and after applying the updated rules throughout The updates to ASC are effective for public entities for fiscal years beginning after December 15, , and interim periods of public entities within those fiscal years. Therefore, a public entity with a calendar year end adopted the amended ASC as of January 1, For non-public entities, the amended ASC is effective for annual reporting periods beginning after December 15, The history of software capitalization for state and local governments is similar to that of FASB.

Issued June , GASB 51, Accounting and Financial Reporting for Intangible Assets provides a summary for rules regarding software capitalization to provide consistency for how organizations should account for the intangible assets. However, the evolution of technology and increased use of software required additional standards and clarification. As alluded to above, the accounting treatment for software has evolved as software offerings have increased and advanced as well.

When reviewing accounting treatment of software, three main types should be considered:. Software first appeared to the consumer or medium- and small-sized businesses as an intangible asset to purchase. It was developed and sold by very few companies, such as HP and IBM, who had experience with computer technology and were the first pioneers of the technological revolution.

In the very early days, computer software was purchased on a floppy disk or diskette. The disk itself had no significant value, but the information or coded instructions on the disk could be an intangible asset. This terminology is applied when no customizations or enhancements are needed for the software to be used by the purchaser. When software is purchased by an entity and used directly out of the box, under US GAAP it is recorded on the balance sheet as an intangible asset at purchase price and amortized over its economic or legal life, whichever is shorter.

The economic life is the period over which the intangible asset contributes to the cash flows of an organization. The legal life is the contractual term of the intangible asset.

If the asset has an indefinite useful life, it is not amortized, but must be analyzed periodically for impairment of value. Factors that lead to a presumption that the entity doing the research will pay back the funding party include: an indicated intent to repay; severe economic consequences for non-payment; a significant related party relationship; or the project is essentially complete when the arrangement is entered into; the apparent absence of an ability to repay the funding party does not overcome this presumption.

IFRS Internal-use software There are no special requirements for the development of internal-use software. IFRS Website development costs Costs associated with websites developed for advertising or promotional purposes are expensed as they are incurred. Cloud computing An entity entering into a cloud computing arrangement assesses whether it receives a software asset or a service over the contract term. It receives a software asset if: the arrangement contains a software lease under the guidance in the leases standard see chapter 5.

Cloud computing Unlike IFRS Standards, there are specific criteria for determining whether a cloud computing arrangement includes both a licence of software and services or just services see forthcoming requirements. To the extent that the arrangement includes a licence of software, the customer capitalises the fee attributable to the licence when the criteria for the capitalisation of internal-use software are met see above.

To the extent that the arrangement does not include a licence of software, the customer accounts for the arrangement as a service contract and expenses the cost as the services are received.

Goodwill may include an amount that is attributable to NCI if an entity elects to initially measure such interests at fair value see Business combinations. IFRS Items that are expensed as they are incurred Expenditure associated with the following costs is expensed as it is incurred, regardless of whether the general criteria for asset recognition appear to be met: internally generated goodwill ; start-up costs, unless they qualify for recognition as part of the cost of property, plant and equipment see Property, plant and equipment ; training activities; advertising and promotional activities see below ; and relocating or reorganising part or all of an entity.

US GAAP Items that are expensed as they are incurred Like IFRS Standards, expenditure associated with the following costs is expensed as it is incurred, regardless of whether the general criteria for asset recognition appear to be met: internally generated goodwill ; start-up costs, unless they qualify for recognition as part of the cost of property, plant and equipment see property, plant and equipment ; training activities; and relocating or reorganising part or all of an entity.

Expenditure on advertising and promotional activities is recognised as an expense when the benefit of those goods or services is available to the entity. This requirement does not prevent the recognition of an asset for prepaid expenses , but a prepayment is recognised only for payments made in advance of the receipt of the corresponding goods or services.

Unlike IFRS Standards, direct-response advertising expenditure is capitalised if certain criteria are met see below. Advertising production costs may be expensed as they are incurred or capitalised until the first time that the advertisement is shown, at which time the amount is expensed, unlike IFRS Standards; other advertising and promotional activities are expensed as they are incurred, like IFRS Standards.

IFRS Amortisation Acquired goodwill is not amortised, but instead is subject to impairment testing at least annually see impairment of non-financial assets. The useful life of intangible assets other than goodwill is either finite or indefinite. Intangible assets with indefinite useful lives are not amortised, but instead are subject to impairment testing at least annually see impairment of non-financial assets.

Like IFRS Standards, the useful life of intangible assets other than goodwill is either finite or indefinite. Like IFRS Standards, intangible assets with indefinite useful lives are not amortised, but instead are subject to impairment testing at least annually; the method of impairment testing differs in certain respects from IFRS Standards see impairment of non-financial assets.

An intangible asset with a finite life is amortised on a systematic basis over its useful life. Like IFRS Standards, an intangible asset with a finite life is amortised on a systematic basis over its useful life. There is no specific guidance on the amortisation of defensive intangible assets see above and the general principles apply.

Accordingly, such assets are not written off immediately but are amortised over their useful lives and tested for impairment within the relevant CGU see impairment of non-financial assets. Because IFRS Standards have no explicit guidance on the accounting for defensive intangible assets, differences may arise in practice.

The amortisable amount of an intangible asset with a finite useful life is determined after deducting its residual value. The residual value of an intangible asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal , if the asset were of the age and in the condition expected at the end of its useful life. Like IFRS Standards, the amortisable amount of an intangible asset with a finite useful life is determined after deducting its residual value.

Residual value is the estimated fair value of an intangible asset at the end of its useful life to an entity, less any disposal costs; although this wording differs from IFRS Standards, we would not generally expect significant differences in practice.

The residual value of an intangible asset is reviewed at least at each annual reporting date. The residual value of an intangible asset is reviewed each reporting period, which is more frequent than IFRS Standards for an entity preparing interim reports.

If control of an intangible asset is based on legal rights that have been granted for a finite period, then the useful life cannot exceed that period unless: the legal rights are renewable; there is evidence to support the conclusion that they will be renewed; and the cost of renewal of such rights is not significant.

In the absence of historical experience, the entity considers the assumptions that market participants would use about renewal or extension terms, consistent with the highest and best use of the asset by market participants , adjusted for entity-specific factors; the effects of obsolescence, demand, competition or other economic factors; and the level of maintenance expenditure required to obtain the expected future cash flows from the asset.

An entity reviews the classification in each annual reporting period to decide whether the assessment made about the useful life of an intangible asset as indefinite or finite is still appropriate. An entity reviews the classification each reporting period to decide whether the assessment made about the useful life of an intangible asset as indefinite or finite is still appropriate; this is more frequent than IFRS Standards for an entity preparing interim reports.

The method of amortisation , which is reviewed at each annual reporting date, reflects the pattern of consumption of the economic benefits. Unlike IFRS Standards, there is no requirement to review the method of amortisation at each annual reporting date; rather, it is reviewed whenever events or changes in circumstances indicate that the current estimate is no longer appropriate. Like IFRS Standards, the method of amortisation reflects the pattern of consumption of the economic benefits.

In our view, an entity cannot simply assume that the consumption of economic benefits is based on revenue ; it should be able to demonstrate the high correlation. As an exception, for software developed with an intent to sell or license, amortisation on the basis of revenues is used such that the annual amortisation charge is the greater of the amounts determined on the following bases: the ratio that current gross revenue for a product bears to the total current and anticipated future gross revenues for that product; and straight-line amortisation over the remaining estimated economic life of the product, including the current period.

There is no explicit requirement for the change in estimate to be justified by its preferability in the same way as a voluntary change in accounting policy. Like IFRS Standards, a change in the method of amortisation is accounted for prospectively as a change in accounting estimate.

The amortisation of intangible assets with finite lives begins when the intangible asset is available for use — i. Like IFRS Standards, the amortisation of intangible assets with finite lives begins when the intangible asset is available for use, which may be before the asset is brought into use.

Amortisation ceases at the earlier of the date when the asset is classified as held-for-sale see chapter 5. Like IFRS Standards, amortisation ceases at the earlier of the date when the asset is classified as held-for-sale see chapter 5. IFRS Subsequent expenditure Subsequent expenditure to add to, replace part of or service an intangible asset is recognised as part of the cost of the intangible asset if an entity can demonstrate that the items meet: the definition of an intangible asset see above ; and the general recognition criteria for intangible assets see above.

Therefore, capitalisation after initial recognition is limited to development costs that meet the recognition criteria see above. IFRS Revaluations Intangible assets may be revalued to fair value only when there is an active market , which requires a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis see Fair value measurement.

If an intangible asset is revalued, then fair value is measured in accordance with the standard on fair value measurement see Fair value measurement.

IFRS Retirements and disposals When an operation to which goodwill relates is disposed of, goodwill allocated to that operation via CGUs is included in calculating the gain or loss on disposal. US GAAP Retirements and disposals Like IFRS Standards, when a portion of a reporting unit is disposed of, goodwill of that reporting unit is included in the carrying amount of the portion of the reporting unit in calculating the gain or loss on disposal.

The amount of goodwill included in the carrying amount of the operation being disposed of is based on the relative values of the operation to be disposed of and the portion of the CGU that will be retained, unless the entity can demonstrate that another allocation method is preferable.

If the operation being disposed of does not constitute a business , then goodwill is not included in the carrying amount of the operation being disposed of, unlike IFRS Standards. When an intangible asset is disposed of or when no further economic benefits are expected from its use, it is derecognised. If an intangible asset is disposed of as part of a sale-and-leaseback transaction, then the requirements in the leases standard apply see Leases. Like IFRS Standards, when an intangible asset is disposed of or when no further economic benefits are expected from its use, it is derecognised.

The gain or loss on derecognition is the difference between: any net proceeds received; and the carrying amount of the asset.