The accounting standard addresses the treatment of agreements granting the right to use computer programs. This includes situations where an organization obtains access to software hosted on a vendor’s infrastructure, often referred to as Software as a Service (SaaS), and also traditional on-premise software licenses. The critical element is whether the organization controls the use of the software, determining how and when it is used, rather than merely receiving an output or service from it.
Proper accounting for these agreements is vital because it impacts the financial statements, specifically the balance sheet and income statement. Previously, many arrangements meeting the definition of a service contract were treated as operating expenses. The revised accounting treatment mandates capitalization of the underlying asset (the right to use the software) and recognition of a corresponding liability, thereby increasing transparency and comparability across organizations. This provides a more accurate representation of an entity’s financial obligations and asset base.
