Annual license fees on software
Question
We have bought SAP system for accounting from a vendor and we need to pay annual license fees to maintain this software.
Kindly advise whether we can capitalise annual license fees?
Answer
If it is a software that is not necessary for the computer to run (i.e. is not an operating system itself), then the licenses are intangible asset. Thus you would capitalize all cost to purchase such a license in line with IAS 38.
However if they fees are payable just annually, then you need to expense them right in profit or loss, because in most cases the fee relates to the relevant year.
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Hi Silvia,
How is this impacting the new Saas rule that came in? Working around how the implementation cost and annual running cost should be accounted for?
Hi, Silvia!
Could you please tell which relevant points of the IAS 38 have you applied when concluded the following:
If the fees are payable just annually, then you need to expense them right in profit or loss, because the fee relates to the relevant year?
Well, the question itself is about the “license fees to maintain the software” – in most cases, these fees relate to the maintenance of the relevant year and, even if you stretch the definition of the intangible asset and say that these fees are intangible asset, then you still need to amortize them over their useful life – which is one year, since the next year, fees will be payable again.
Silvia, thank you a lot for your response. Could you, please, also tell what would be the correct recognition in such case: intangible asset (all criteria for being IA and recognition criteria are met) or prepaid expenses? Couldn’t find an answer to this question in IFRS. May be it’s not IA, because it’s usually classified as non-current asset, and the license for the software is annual?
Also, if, according to the agreement, the vendor has a unilateral right to cease the agreement with notice period of 20 days, will it be correct to recognise an IA and amortise it 100% in the first month as there is no information whether the vendor is up to cease the agreement and when. The fees for the software are annual as well.
Hi Sylvia, if the annual maintenance period is over 2 financial years, i.e. 6 months in current year, (Year 1) and 6 months in the next year (Year 2). Should I expense the total invoice value once-off in year 1, or recognize a prepaid expense asset and recognize the maintenance expense equally over the relevant 12 months ?
Hi Geriant, yes, this is a prepaid expense, recognized in profit or loss when the service is received.
Hi Silvia
Apologies for hijacking this post. If the license is for adobe and states subscription fees over a term of 4 years, will this prepaid and then expense per month?
Hi Silvia, if the fees are payable in any other period, for example, monthly, as most of the software licenses for my business are priced monthly, I guess I will also need to include them in profit and loss on a monthly basis. I hope I am correct. I would appreciate your say, thanks.
Yes, since they relate to the specific period.
Thank you, Silvia.