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CA Final · Financial Reporting · Accounting and Technology

Bharat Textiles Ltd uses a cloud-based ERP under a Software-as-a-Service (SaaS) arrangement. It pays Rs 12 lakh as annual subscription at the start of the year and Rs 3 lakh to a consultant for configuring the vendor's software, which Bharat does not control. Based on the IFRIC agenda decision on SaaS arrangements, as commonly applied under Ind AS, how should the subscription be treated?

The subscription is expensed over the period in which the SaaS service is received. The customer only gets access to the vendor's software and does not control it, so there is no intangible asset, PPE or lease to recognise on the balance sheet.

  1. ARecognise as an intangible asset and amortise over the useful life of the software
  2. BRecognise as a service expense over the subscription period as services are receivedCorrect
  3. CRecognise as property, plant and equipment because the ERP is used in operations
  4. DRecognise as a finance lease right-of-use asset

Explanation

In a SaaS arrangement the customer generally has no control over the vendor's software, so there is no intangible asset or lease. The fee is a payment for a service and is expensed as the service is received. Capitalising it as an intangible asset wrongly assumes control of the software.

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