We’ve received a lot of feedback on our earlier blog on OpEx vs. CapEx treatment for cloud-based technology purchases. And we continue to encounter customers who would prefer to capitalize their cloud technology investments for the reasons mentioned in the blog post (particularly those companies, or executives, who are concerned about EBITDA). So we’ve been looking at this more closely.
One interesting consideration is introduced by some new IFRS (International Financial Reporting Standards) guidelines that took effect at the beginning of 2019. Of particular interest are the changes related to the IFRS 16 standard which say that going forward, virtually all leases must be treated as CapEx. Why this matters has to do with the definition of a “lease.”
According to IFRS 16, a lease is defined as a transaction where an asset is identified (explicitly or implicitly), and the contract “conveys the right to use an asset for a period of time in exchange for consideration.” Clear as mud, right? So the question for cloud technology buyers becomes this: do the terms of my cloud or SaaS allow me to define it as a “lease”? If so, it can and should be treated as CapEx.
There is a lot of active discussion about this, including among the IFRS Interpretations Committee and auditing firms. But what is relatively clear is that the intention of IFRS 16 is to provide transparency by requiring that an obligation to pay for an asset should show up on the buyer’s balance sheet. So if a buyer commits to payment for a multi-year cloud or SaaS contract, should it be treated as a CapEx event? Or should it be treated as a “services agreement,” and thus OpEx?
Stay tuned.…in the next few weeks we will be talking to some colleagues who are expert in financial accounting and all things OpEx vs. CapEx, and we will provide another update here with our findings.