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CA Final · Financial Reporting · Accounting and Technology

Orbit Cloud Services Ltd. pays Rs 24 lakh upfront on 1 April for a three-year right to access a vendor's software-as-a-service (SaaS) platform. The vendor hosts the software, and Orbit cannot take possession of the code or run it on its own hardware. Under current ICAI/IFRIC-based treatment, how should Orbit account for the payment?

Orbit should treat the payment as a service contract, recording a prepayment of Rs 24 lakh and expensing it over three years. It has no right to take possession of the software, so there is no controlled intangible asset, lease or property, plant and equipment.

  1. AAs a service contract, recognising a prepayment of Rs 24 lakh expensed over three yearsCorrect
  2. BAs an intangible asset of Rs 24 lakh amortised over three years
  3. CAs a finance lease right-of-use asset under Ind AS 116
  4. DAs property, plant and equipment depreciated over three years

Explanation

Because Orbit has no right to take possession of the software or control it, there is no identifiable intangible asset or lease. The arrangement is a service contract, so the upfront payment is a prepayment expensed as the service is received, Rs 8 lakh per year. Treating it as an intangible, lease or PPE would wrongly assume control of an asset.

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