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CA Final · Financial Reporting · Accounting and Technology

Kaveri Textiles Ltd. uses a cloud-based ERP under a Software-as-a-Service (SaaS) arrangement. It pays Rs 12 lakh as annual subscription and Rs 3 lakh to a consultant to configure the vendor's software. Kaveri has no control over the underlying software code and cannot take possession of the software. Under the IFRIC agenda decision followed in Ind AS practice, how should the configuration cost be treated?

The configuration cost is expensed as the services are received. In a SaaS arrangement the customer has no control over the software, so no intangible asset exists. Capitalisation is allowed only if the customisation creates a separate identifiable asset that the entity itself controls.

  1. ACapitalise it as an intangible asset under Ind AS 38 because the ERP gives future benefits
  2. BCapitalise it as property, plant and equipment under Ind AS 16
  3. CRecognise it as an expense when the configuration services are received, unless the services create a separate intangible asset controlled by KaveriCorrect
  4. DDefer it as a prepaid expense over the life of the vendor's business

Explanation

In a SaaS arrangement the customer receives a service, not a software asset, because it has no control over the code. Configuration costs are therefore expensed as the services are received, unless they create a separate asset controlled by the entity. Capitalising under Ind AS 38 is wrong because control of the software is absent.

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