Introduction:
Dexus is a leading Australian real estate investment trust (REIT) that has implemented cloud computing to improve its operational efficiency. Dexus entered into a cloud computing arrangement with a third-party service provider to host its IT infrastructure. The issue arose with regards to the accounting treatment of this arrangement. This case study analyzes the accounting treatment of the cloud computing arrangement as per the International Financial Reporting Standards (IFRS).
Case Issue:
The issue at hand is the accounting treatment of the cloud computing arrangement. The primary concern is whether the cloud computing arrangement is a service contract or an intangible asset. The treatment of the arrangement as a service contract would mean that Dexus would have to expense the fees paid to the third-party service provider as incurred. On the other hand, the treatment of the arrangement as an intangible asset would mean that Dexus would have to capitalize the fees paid and amortize them over the term of the arrangement.
Case Analysis:
The treatment of the cloud computing arrangement depends on whether it is a service contract or an intangible asset. The IFRS 16 requires that lease contracts be treated as right-of-use assets. However, this treatment is only applicable if the lease contract is for a tangible asset. In case of the cloud computing arrangement, it is not a lease contract for a tangible asset, and hence, the IFRS 16 cannot be applied.
The IAS 38 provides guidance on the treatment of intangible assets. An intangible asset is defined as an identifiable non-monetary asset without physical substance. Dexus’s cloud computing arrangement with a third-party service provider meets the criteria of an intangible asset as it is identifiable and does not have physical substance. Therefore, the arrangement should be accounted for as an intangible asset.
Dexus should capitalize the fees paid to the third-party service provider as an intangible asset and amortize it over the term of the arrangement. The amortization period should be the shorter of the useful life of the asset or the term of the arrangement. The useful life of the asset should be estimated based on the expected benefits to be derived from the arrangement.
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Conclusion and Recommendations:
In conclusion, Dexus’s cloud computing arrangement should be treated as an intangible asset, and the fees paid to the third-party service provider should be capitalized and amortized over the term of the arrangement. Dexus should also disclose the accounting treatment of the arrangement in its financial statements to provide clarity to its investors.
It is recommended that Dexus conduct a detailed analysis of all its service contracts to determine if they meet the criteria of intangible assets. This analysis will enable Dexus to ensure that all its contracts are accounted for as per the relevant accounting standards. Dexus should also consider engaging external auditors to review the accounting treatment of all its contracts to ensure compliance with the accounting standards.
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