NZX Companies Forced to Cancel Millions of Cloud Investments
Fletcher Building, Spark and New Zealand Herald Publisher NZME is among a host of companies likely to be forced to spend millions of dollars on software when they report results from this month.
Fletcher Building announced last year that it had up to $75 million in intangible software assets across 599 historical and current cloud computing projects that were now undergoing detailed reassessment due to a new accounting interpretation.
“A project team has been appointed and a schedule has been determined,” reads a note in Fletcher Building’s 2021 annual report. “The project is ongoing due to the effort required to obtain the underlying information from historical documents spanning multiple projects and assess the nature of each of the costs.”
Fletcher Building, which will report its half-year results next week, said the reclassification would lead to a reduction in intangible assets and a restatement of retained earnings. However, for many, it could also result in a one-time increase in current-year expenses and a drop in profits, according to Deloitte.
“This finding could result in reduced earnings in any given year, impacting measures such as earnings before interest and taxes, earnings before interest, taxes, depreciation and amortization, and earnings before taxes,” the firm said. accounting. informed.
Vector is one of the few companies that has already completed its review and report. Although it rated the impact on its fiscal 2019 and 2020 balance sheet as not material, Vector recognized $2.3 million in new upfront cloud computing implementation costs as an expense in 2021 instead. than to claim depreciation in future years.
Like Fletcher Building, Spark launched a review to quantify the impact on its books.
“Over the past three years, Spark has capitalized approximately $50 million in relation to cloud computing agreements, a subset of which may relate to customization and configuration of cloud solutions and may need to be reclassified as operating expenses,” he told the semester. “Once the impact is fully quantified, Spark will update the market.”
Spark publishes its results on February 23.
Media heavyweight NZME was also overhauling its treatment of capitalized cloud software.
“The initial review of the group’s cloud computing arrangements identified intangible assets requiring revaluation with a total cost and net book value of approximately $9.5 million and $5.9 million, respectively,” it said. the company reported in August.
The NZME was still trying to determine whether the costs should be expensed or reclassified as advance payments.
“While the final financial impact of the revised accounting policy is yet to be quantified, it may be material for financial reporting purposes,” the company said.
NZME said it expects to implement the updated accounting policy in the second half of the year with the full impact of the change, including the retrospective restatement, reflected in its financial statements for the year ended December 31, 2021. These results, like Spark’s, drop to February 23.
Most companies will have capitalized the costs of setting up and customizing cloud-based software and claimed amortization because they believed they would benefit from these investments over several years.
However, in March last year, a committee of the International Financial Reporting Standards Foundation (IFRS) decided that, depending on the circumstances, these costs should often be expensed, a view later endorsed by the International Accounting Standards Board.
The IFRS Committee concluded that costs incurred to configure or customize software in a cloud computing arrangement could only be recognized as an intangible asset if the company controlled that asset and the asset met other recognition criteria.
Costs that did not result in intangible assets should be expensed as incurred, unless they meet other criteria where they could be treated as a prepayment which would then be expensed over the term of a cloud computing contract.
Reseller news Freightways, Infratil and The Warehouse Group were also reviewing their intangible software assets.
The Warehouse Group review identified more than 70 different cloud-based software agreements with an approximate combined book value of between $45 million and $55 million. The company was evaluating and re-evaluating the nature of software costs incurred and seeking to understand its contractual rights regarding customizations and configurations.
As it finalized its 2021 financials last year, the review was ongoing and expected to take many more months.
Sky TV reported a net book value of $50.4 million of its capitalized software as of June 30, 2021, management estimated the value of its cloud-based software-as-a-service (SaaS) component to be d ‘about 15 to 20 million dollars.
“We are in the process of reviewing these capitalized SaaS costs to quantify the extent of any adjustments that may be required due to the revised accounting policy,” he said six months ago.
EROAD reported that an initial review of its cloud computing landscape identified intangible assets requiring revaluation with a total cost and net book value of approximately $16 million and $8.8 million respectively.
Kathmandu, on the other hand, had capitalized about $30 million in relation to cloud computing deals of which a subset may relate to customization and configuration that may need to be reclassified to operating expenses. The group planned to report the impact in its interim financial statements for the period ended January 31, 2022.
The External Reporting Board of New Zealand, which manages the application of accounting standards locally, noted the decision forced many organizations to reconsider whether they had correctly accounted for the costs of configuring and customizing software delivered by a vendor through a cloud-based or SaaS computing arrangement.
“This review may result in changes to how applicable costs were accounted for in current and prior reporting periods, particularly where significant setup or customization costs have been capitalized as intangible assets,” writes- he.
Chartered accounting firm Grant Thornton wrote that in his opinion, it would be appropriate to consider any correction arising from the decision as a change in accounting policy rather than as the result of an error.
New Zealand’s largest company, Fonterra Dairy Cooperative, said its accounting policies were already in line with the new accounting ruling and no adjustments would be needed.
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Tags cloud computingaccountingSoftware as a serviceNZMESaaS