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CA Final · Financial Reporting · Accounting and Technology

Nirmaan Infra Ltd. has a cloud-hosted ERP contract (SaaS) for 5 years. It paid Rs 10 lakh upfront for configuring the ERP, which is not distinct from the access service, and the vendor performs the configuration. It also built, in-house, a separate interface with its own on-premise software controlled by Nirmaan, at a cost of Rs 6 lakh that meets the Ind AS 38 criteria. Subscription Rs 20 lakh per year is paid annually in arrears. Using the IFRIC approach, what is the total amount recognised as an intangible asset and the treatment of the Rs 10 lakh configuration?

Only Rs 6 lakh is recognised as an intangible asset, being the interface Nirmaan controls. The Rs 10 lakh configuration done by the vendor is not distinct from the SaaS access, so it is a prepayment expensed over the 5-year access period.

  1. ARs 16 lakh asset; configuration capitalised with the interface
  2. BRs 6 lakh asset; configuration expensed over the 5-year access period as a prepaymentCorrect
  3. CRs 10 lakh asset; configuration capitalised and interface expensed
  4. DRs 0 asset; both expensed immediately

Explanation

Configuration by the vendor that is not distinct from access is part of the service, so it is a prepayment recognised as an expense over the 5-year term. The interface is code that Nirmaan controls and that meets Ind AS 38 criteria, so Rs 6 lakh is capitalised. Capitalising Rs 16 lakh wrongly treats the vendor service as an asset.

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