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Capitalizing SaaS related work

We are looking at capitalizing Saas related implementation cost and SaaS related customization cost (on the SaaS company side). Are there specific rules related to implementing SaaS software?

Answers

Phil Murray
Title: VP of Finance & Administration
Company: Kimbia, Inc.
(VP of Finance & Administration, Kimbia, Inc.) |

My answer below assumes you:

1. Are the SaaS company
2. Are performing implementations and customizations of your SaaS tool for your customers.

The expense recognition is fairly straightforward; you will need to recognize costs as incurred, and assuming most of those costs will be employee costs, there is no real question there. There may be some situations where you could defer some of the implementation/customization costs if subcontractors are performing some of the work and there are performance contingencies in their agreements, etc. But there is no situation I am aware of where capitalization would be permitted.

In SaaS companies, R&D expenses relating to your core product can be capitalized in certain situations, however in most professional services-related development that is custom for a particular client, that would not be appropriate.

Practically speaking I have not seen where smaller/medium-sized SaaS companies are even capitalizing their R&D expenses related to their core product even though they could in some cases, as capitalization is not required and most feel like there is more transparency in their business not to capitalize, because SaaS software by definition is more readily/easily updated and built upon, and so such expenses will be ongoing. I'd recommend you speak with your auditors or other CPA firm to develop a better understanding.

Also note that REVENUE recognition for professional services (implementation, training, customization, etc.) in a SaaS business gets pretty complex. You will want to research that further.

Jim Kruchowski
Title: Manager Financial Systems
Company: Aimia Inc.
(Manager Financial Systems, Aimia Inc.) |

Actually we are the purchaser of the SaaS service but have implementation research and development that needs to be done on our side to implement this solution. Aso, we are asking the SaaS service firm to do some customization development on their side for which we are paying. Are any of these type of costs capitalizable?

Topic Expert
Sunil Thukral
Title: Controller/Technical Accounting Advisory..
Company: Consultant
(Controller/Technical Accounting Advisory/ SEC Reporting, Consultant) |

Hi Jim - from the customer perspective, there is no specific guidance, so there is a diversity in practice on this issue. Some of the options are:

a) Apply the guidance under ASC 340-10 for pre-paid expenses/ other assets (i.e. you might be able to defer)
b) Capitalize based on internally-developed software guidance (ASC 350-40)
c) ASC 350-30 - General intangible asset accounting (other than goodwill)

Further, as you pointed out that there is some implementation work for this implementation for the SaaS product. How you structure in the agreement might also might make a difference. For example, (i) the contract might provide to pay this implementation upfront (i.e. expense at the time of payment) or (ii) built in the pricing to defer the implementation over the 3-year contract term (i.e. the implementation fees gets deferred over the 3-year life).

So it will depend how well you write your contract and your position paper. :)

You can expect some additional guidance on this issue sometime in Q2-2015 as FASB issued an exposure draft to address certain guidance under ASC 350-40.

Just to add some icing on the cake, it gets more complicated if you are one of the companies who manages its business based on EBITDA basis. If you were to buy a software and amortize it, it will not impact your EBITDA. However, if you used a SaaS based solution and expense it, it will reduce your EBITDA. Note that economic benefit to the customer is the same in both cases, but the EBITDA will be different, which will impact valuation of the companies.

Please feel free to contact me and I can provide you with more insights on it.

Jeff Tchir
Title: Founder and Technical Advisor, RevRec.NE..
Company: RevRec.NET
LinkedIn Profile
(Founder and Technical Advisor, RevRec.NET, RevRec.NET) |

Yea, that new guidance introduced for ASC 350-40 serves to draw a clear line as to when implementation of a SaaS/cloud solution could/would be capitalized. Unless the SaaS/cloud service is deemed to contain a license, there is no asset and therefore no implementation costs can be capitalized around it. And in order to be deemed to contain a license you have to have the contractual ability to take possession of the software (which is exactly how cloud offering do not work). Best to have your vendor recover their implementation efforts via an increase in their on-going monthly fee.

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