20 Jun Accounting for Technology Costs

With significant investments in technology upgrades, remote access and cloud-based service arrangements, questions are arising as to how to best account for these types of costs.

The Accounting Standards Board (AcSB) has released an exposure draft on accounting for cloud computing arrangements, with proposed accounting guidance and related disclosure requirements. Although these standards are not yet in effect and are subject to some changes, the guidance provides a good starting point for both private and not-for-profit organizations.

Incurred costs may fall into any of the follow categories:

• software licenses or multi-year subscription access fees
• acquired contractual rights to use software for a determined period of time
• internally developed software
• multiple element service contracts with third party SaaS (Software as a Service) providers
• related implementation activities

The appropriate accounting for these costs, pending final approval by the Accounting Standards Board, is likely to fall into three broad categories: intangible capital assets, prepaid expenses, or current year operating expenses.

When considering the implication on your financial reporting, take into account the following:

Intangible capital assets

Long-term assets will be recognized on the balance sheet, which will be subject to amortization and impairment considerations under the relevant private enterprise or not-for-profit accounting guidance.  Amortization expenses, which are non-cash expenses, will be recognized over the service life of the assets and will impact your net income or surplus. This treatment will result in spreading the total expenses over the expected period of benefit.

Prepaid expenses

Where you do not have an intangible asset, simplistically defined as the ability to run the software on its own and make necessary modifications without significant penalty or additional costs, you may have prepaid expenses. These prepaid expenses would be allocated into current and long-term assets and would be recognized over the period of benefit, which may be more difficult to define than you might anticipate.

The net result of this treatment is the same as if the organization had an intangible capital asset. The difference between these two treatments is in the technicalities between owning an asset and paying for use of an asset. The total expenses are likely to be recognized over the same period of time as they would be if an intangible asset was recognized.

Annual operating costs

Some costs that an organization incurs are not considered assets under the accounting standards.  Examples of costs that would be immediately expensed include training costs, costs to clean or destroy existing data, and general maintenance costs.

Simplification election

As you can see, many decisions will need to be made along the way, and the time that will be necessary to evaluate each of the different costs incurred and their service life could be excessive. As such, the proposed standards include an election that can be taken to expense all related costs, with some additional disclosures. This guidance does not differ from that provided for organizations involved in research and development activities and is meant to allow for a cost/benefit assessment to be made.

Exposure Draft

If you would like to review the exposure draft and proposed changes for more information, you can find the document here. Remember that the guidance is not yet finalized, and changes may be made prior to final approval. However, this exposure draft will guide you through considerations when determining how to account for technology related costs.

Income tax considerations

The treatment of technology costs for income tax purposes may differ slightly from the accounting treatment. However, with designated immediate expensing rules, accelerated investment incentive rules and favorable CCA rates for software, hardware and licenses, many of these costs may be tax write-offs in the first year.

Questions? Please reach out to your contact at Clearline.