However, in order to conclude that the customer receives a software asset at contract commencement, the customer must also assess whether it has the right to direct the use of the asset throughout the contract term. A customer receives a software asset if the customer obtains control of software at the contract commencement date or the contract contains a software lease. Based on KPMGâs analysis and the specific assumptions used, the report finds the alternative options have considerable potential to ensure that shareholders do not face an earnings disincentive when moving away from traditional in-house projects. A company also presents amortization of the implementation costs in the same line item in the income statement as the expense for fees for the associated arrangement. Depending on a number of factors, including the amount of data to be migrated and complexity of a company’s existing applications and data, these implementation costs may be significant. The infrastructure comprises a collection of hardware and software, including network, servers, operating systems and storage. These rights are similar to the criteria provided in US GAAP described above, and therefore a similar conclusion might be reached under both US GAAP and IFRS. Our multi-disciplinary approach and deep, practical industry knowledge, skills and capabilities help our clients meet challenges and respond to opportunities. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Thereâs a broad spectrum of cloud adoption across Canadian utilities. Preliminary project stage . KPMG LLP is a Delaware limited liability partnership, ... reporting entity to “apply its existing policy for capitalization thresholds…” In order to apply a capitalization threshold to any asset, a reporting entity needs measure the cost of to asset. Therefore, to make this determination, the customer evaluates the terms and conditions of the arrangement considering the control concept in the intangible assets and leases guidance. internal-use software that cannot be capitalized under Subtopic 350-40, such as training costs and certain data conversion costs, also cannot be capitalized for a hosting arrangement that is a service contract. IFRS does not have specific guidance on SaaS arrangements, and therefore it is often difficult to assess whether the customer should recognize the right to use the software as an intangible asset or should account for the arrangement as a service contract. usage-based) and the rates could change from period to period or could include tiered pricing based on volume. Obtain substantially all the economic benefits from use of the asset; and. We want to make sure you're kept up to date. Internal use software is software that is acquired or internally developed to meet an entity’s internal needs. Reaching a capitalization conclusion typically requires judgment and may have far-reaching consequences on business ratios. In other words, software that you plan to market outside of your own company generally does not qualify as a capital asset. For more detail about the structure of the KPMG global organization please visit https://home.kpmg/governance. New IUS challenges brought by changes in IUS development practices since the issuance of SFFAS 10; and c. Management's role in applying SFFAS 10. As dual reporters begin to adopt the new US GAAP guidance, it may be a good time to consider how SaaS arrangements are accounted for under IFRS. 5. Near unanimous consensus that Canadian utilities should be allowed to defer cloud costs and earn a regulated return (consisting of a debt and equity return) similar to on-premise IT investments. Corporate strategy insights for your industry, Explore Corporate strategy insights for your industry, Financial Services Regulatory Insights Center, Explore Financial Services Regulatory Insights Center, Explore Risk, Regulatory and Compliance Insights, Explore Corporate Strategy and Mergers & Acquisitions, Customer service transformation & technology. The January edition, co-authored with Martin Karamon, discusses the enactment of the original federal research credit in 1981 under Internal Revenue Code (IRC) Section 41, and the recent federal regulatory developments related to internal use software. See IFRS vs. Entities often license internal-use software from third parties. All costs incurred during the preliminary stage of a development project should be charged to expense as incurred. Under ASC 985, until a technology has reached technological feasibility, all cost incurred up to that point will need to be expensed when incurred. Improving business performance, turning risk and compliance into opportunities, developing strategies and enhancing value are at the core of what we do for leading organizations. Capitalization of software development costs is an area in which a lot of questions arise, whether it is uncertainty on whether the underlying software is intended for internal use or to be sold, leased, or marketed, or a question of what costs can be capitalized and at what points during development. To thrive in today's marketplace, one must never stop learning. © 2020 KPMG LLP, an Ontario limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. consultant) or incurred internally. As cloud computing technology has matured, so too has the market for cloud services, which now covers the entire spectrum of electric utility services, operations and value proposition. Software to be sold, leased or marketed. Find out how KPMG's expertise can help you and your company. IFRS does deal with capitalization of development costs for intangible assets to be used internally. Join us for upcoming webcast events. We want to ensure that you are kept up to date with any changes and as such would ask that you take a moment to review the changes. The IFRS Interpretations Committee recently issued an Agenda Decision clarifying that if the customer receives a software asset at the commencement of a SaaS arrangement, either in the form of an intangible asset or a software lease, the customer recognizes an asset at the date it obtains control of the software. Software for internal-use (ASC 350-20) These standards have a set of different accounting rules by which costs are to be capitalized or expensed. Otherwise, the arrangement is a service contract. A SaaS arrangement is a type of cloud computing arrangement in which the supplier (the cloud service provider) provides the customer access to application software residing on the supplier’s or a third-party’s cloud infrastructure. IFRS has specific requirements for government grants that apply to all entities; US GAAP has limited guidance for ‘business entities’. Unfortunately, current economic regulatory models can disincentivize the adoption of cloud services by Canadian electric utilities because cloud investments fall outside of the rate base. Here we offer our latest thinking and top-of-mind resources. In summary, they can be a valuable tool for regulators who want to encourage the move to alternative computing arrangements. Examples of Capitalizable and … An arrangement that grants the customer exclusive use of software for the contract term conveys to the customer the right to obtain substantially all the economic benefits from use of the software. 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