Software‑as‑a‑Service (SaaS) arrangements have become the dominant model for enterprise software, but their accounting treatment under IFRS particularly IAS 38 Intangible Assets is often misunderstood. The core principle is simple, SaaS does not normally create an intangible asset, because the customer receives access to software hosted by the vendor rather than control over the underlying software. This distinction drives the accounting for both subscription fees and implementation costs.

What is SaaS?

I do not want to provide technical definitions here, as I have already linked the key terms earlier in the article to reliable external sources for their technical meanings. Instead, I am sharing a single example to clarify the terminology.

Any organisation’s purchase of Microsoft 365 is a perfect example of SaaS. What if someone purchases Microsoft Office 2024, is that still considered SaaS? No, it is not classified as SaaS. The key question is what drives the difference. In general terms, the distinction is access versus use; in technical accounting terms, the decisive factor is control.

Let’s assume Bright X Co | Hybrid World purchases a Microsoft Office 2024 licence from Gates’s Tech Store. The licence allows the entity to install the software on a computer and use it. Conversely, if the entity purchases a Microsoft 365 subscription for one year, it gains access to the platform for that period. One common difference is that the Office 2024 licence is typically perpetual, whereas a Microsoft 365 subscription is time-limited. To continue using the service after a year, the entity must pay a further subscription fee, which is not the case for a perpetual Office 2024 licence. In short, Bright X Co controls Office 2024 once it purchases the licence, but it does not control Microsoft 365.

Why SaaS rarely meets the IAS 38 definition of an intangible asset

Let’s first look at the definition given by IAS 38 (Para 8):

-            An intangible asset is an identifiable non‑monetary asset without physical substance.

-            An asset is a resource:

•      controlled by an entity as a result of past events; and
•          from which future economic benefits are expected to flow to the entity.

When an intangible asset should be recognised:

IAS 38 Para 18 mentions:

The recognition of an item as an intangible asset requires an entity to demonstrate that the item meets:

• the definition of an intangible asset; and
• the recognition criteria.

 What is the recognition criteria mentioned in IAS 38:    

An intangible asset shall be recognised if, and only if:

• it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and
• the cost of the asset can be measured reliably.

In SaaS arrangements, the vendor retains control of the application software. The customer cannot restrict others’ access, nor can it obtain the underlying code or future economic benefits independently.

The IFRS Interpretations Committee confirmed this in its 2019 agenda decision on cloud computing arrangements, noting that the right to access hosted software is a service, not an asset.

Accounting for SaaS subscription fees

Because SaaS is a service, subscription fees are typically recognised as expenses over the contract term, consistent with the period in which the service is received.

If the customer pays upfront, this is recognised as a prepayment (IAS 38.70) and expensed systematically over the service period.

Configuration and customisation costs under IAS 38

The IFRS Interpretations Committee’s 2021 agenda decision clarified how to treat implementation costs such as configuration and customisation.

 

 

• Configuration: setting parameters, switches, or flags within the vendor’s software.
• Customisation: modifying or adding code to change functionality.

Key principle:

These activities usually do not create a separately identifiable resource controlled by the customer. Therefore, they do not meet IAS 38’s recognition criteria (IAS38.18, IAS 38.21–23).

Accounting treatment:

• <Capitalise> If the implementation creates a separate asset controlled by the customer -> capitalise under IAS 38.
• <Expense> If the implementation service is provided by a third party -> expense as the service is received.
• <Expense> If the implementation service is provided by the SaaS vendor (or a vendor-approved subcontractor) -> assess whether the service is distinct from the SaaS access:
• If distinct: Expense as the configuration/customisation service is performed; and
• If not distinct: Expense when the supplier provides access to the application software over the contract term (As part of SaaS expense).
• <Prepaid asset> If the customer pays the supplier of the configuration or customisation services before receiving those services, it recognises the prepayment as an asset (paragraph 70 of IAS 38).

Few examples

Example A: CRM SaaS subscription

Bright X Co. pays AUD 100,000 annually for access to a cloud‑based CRM.

• The entity does not control the CRM software.
• <Expense>The fee is recognised as an expense over the 12 months.
• <Asset>If paid upfront, recognise as a prepaid asset and amortise monthly.

Example B: Custom code developed by a third party

A consultant builds a standalone reporting module that integrates with the SaaS platform.

• <Asset> If the module is separable and the company controls it (IAS 38.12), it should be capitalised.
• <Expense>If the module only enhances the vendor’s software and cannot operate independently -> expense it.

Under IAS 38, SaaS arrangements are generally treated as service contracts, not intangible assets. Subscription fees are expensed over the service period, and most implementation costs especially configuration and customisation are also expensed unless they create a separate identifiable asset controlled by the customer.

Researched and written by Aamir Sheikh

amr.