Handling the complexity of cloud computing in financial reporting

Cloud computing delivers computing and technology services through web-based tools and applications. PHOTO | POOL   

By AKINYEMI AWODUMILA More by this Author

Cloud computing delivers computing and technology services through web-based tools and applications.

These services include servers, storage, databases, networking, software and analytics, to name a few.

The adoption of cloud computing has increased in the last few years as organisations seek to improve customer service, cost-efficiency, collaboration, and flexibility, among others.

READ: Five reasons companies should use hybrid cloud 

These arrangements are ubiquitous today, and organisations grapple with some pertinent accounting matters that impact their financial reporting.

One notable cloud computing arrangement is a software as a service (SaaS), in which an organisation (customer) has the right of access to a supplier's application software over the contract term.

The software typically remains on the supplier's hardware, and the buyer would only access the software via an Internet connection.

Organisations would usually incur a fee for the SaaS arrangement and an additional amount to configure and customise those services to their specific requirements before receiving them.

These configurations and customisations (CC) could be carried out by the customer, the SaaS provider or a third party and is often a substantial cost compared to the total cost of the SaaS arrangement.

The complexity for organisations includes determining whether these CC costs should be capitalised as intangible assets, prepayments in the balance sheet, or expensed when incurred.

Some considerations include assessing whether the CC costs meet the definition of intangible assets in IAS 38, 'Intangible Asset'.

In addition, organisations should evaluate whether the CC services are distinct from the SaaS arrangement and whether the third-party service provider is a sub-contractor of the SaaS provider where a third party provides the customisation.

READ: Qhala's tailor-made tools digitise firms for future

The other area of complexity is accounting for costs incurred by organisations before the software solution is selected.

Furthermore, accounting for the costs incurred by organisations related to design documentation that results in intellectual property for the organisation could be complex.

Organisations would also need to understand the nuances between various activities, such as configuring the SaaS to set up the Software's existing code, modifying the SaaS code to change or create extra functionalities and developing additional code over and above the original SaaS code.