Considerations For Cloud Arrangements – FAQ | IFRS

Considerations for cloud arrangements

Cloud services arrangements may include the cloud services (such as software-as-a-service (SaaS)) or other products or services. These arrangements also frequently include a licence of the software, for which the customer may (or may not) have the right to take possession. Cloud services entities also frequently offer professional services, such as implementation, data migration, business process mapping, training and project management services, in addition to the cloud service itself. These professional services may be required for a customer to begin using the cloud services in the manner described in the contract.


IFRS 15 provides a framework for identifying the performance obligations in a contract. When an entity determines that the promised goods or services are distinct, it will need to determine whether it is providing a software licence (as a separate performance obligation from the hosting service) or a service (a licence and hosting services that, together, are a single performance obligation because the two promises are not distinct from one another).


In some contracts, the assessment of whether the licence is distinct will be relatively straight-forward. For example, an entity may provide a customer with a software licence, but only in conjunction with a hosting service. In addition, the customer cannot take control of the licence or use the software without the hosting service. In this example, the customer cannot benefit from the licence on its own and the licence is not separable from the hosting services. Therefore, the licence is not distinct and would be combined with the hosting service.


However, many arrangements are more complex. For example, in some contracts, some of the software (enabling certain functionality) resides on the customer’s premises, and the customer has the ability to take control of that software. However, other functionality is provided by the hosting service and the customer cannot take control of that software. As a result, this determination may require significant judgement, depending on the terms of the contract.

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