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CA Final · Financial Reporting · Accounting and Technology

Kaveri Textiles Ltd. uses a cloud-based ERP under a subscription contract. The vendor hosts the software and Kaveri has only a right to access it during the contract term; it cannot take possession of the software or run it on its own hardware. Kaveri paid Rs 12 lakh for a 3-year subscription at the start. As per the IFRIC agenda decision applied in Ind AS practice, how should the subscription fee be treated?

The fee is a service contract cost expensed over the 3-year access period, with the unexpired portion shown as a prepayment. Kaveri has no control over the hosted software, so it does not meet the intangible asset definition under Ind AS 38 and cannot be capitalised.

  1. ARecognised as an intangible asset and amortised over 3 years
  2. BRecognised as a service contract expense over the access period, with any advance shown as a prepaymentCorrect
  3. CRecognised as property, plant and equipment and depreciated over 3 years
  4. DRecognised as an expense in full in the year of payment

Explanation

A SaaS arrangement gives a right to access, not control of the software, so it is not an intangible asset under Ind AS 38. It is a service contract, and the cost is expensed as the service is received. The advance is a prepayment, so full expensing on day one is wrong because the service is received over 3 years.

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