Cloud computing SaaS Business and Software Tax Accounting Treatment
Disruptive innovation and Crossing the Chasm
Author Geoffrey Moore of ‘Crossing the Chasm’ argues that early adopters whom the people frothing at the mouth for the disruptive innovation are buy technology; while the majority buy products. A product is the technology plus everything else they need to actually make use of it, such as reasonable pricing and good support. The technology adoption lifecycle in ‘Crossing the Chasm’ of Geoffrey Moore explains that there is almost always a customer for the new technology, but making money means appealing to the mainstream. Crossing the Chasm is built around a model that every tech company needs to understand: the bell-shaped technology adoption life-cycle as illustrated below. The tech company should have itself to jump the chasm successfully and could achieve a Google, or Facebook size return on investment on the horizon.
Source: Crossing the Chasm, Author Geoffrey Moore
Crossing the Chasm and Cloud Computing
In terms of Crossing the Chasm of Cloud computing, Geoffrey Moore was saying “I am thinking specifically of enterprise IT here, and there is no question in this context that cloud itself has had to cross the chasm. But now that it has, and brought along with it SaaS applications and more recently mobile clients, the barrier to entry for next-generation B2B software companies is much lower. The chasm is still there, but it is nowhere near as daunting as it was a decade or more ago.” A great deal of tech experts argue that the essence of the fourth industrial revolution be Cloud computing and advise that a tech company should focus on the business to business (B2B) market based upon it.
Cloud Computing Software as a Service (SaaS)
Simply put, cloud computing is the delivery of computing services—servers, storage, databases, networking, software, analytics, diverse services, and more—over the Internet (“the cloud”). There are a lot of types of cloud services: Software as a Service (SaaS), Infrastructure as a Service (IaaS), Platform as a Service (PaaS), Big Data as a Service (DBaaS),Blockchain as a Service (BaaS), and maybe et cetera. Let’s more focus on Software as a Service (SaaS) over traditional software licensing as the following table at this time.
Software as a Service (SaaS) VS Traditional software licensing
Category
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Software as a Service (SaaS)
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Traditional software licensing
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Software cost
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Lower upfront cost
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Up to three times the SaaS
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Fee
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Subscription
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One time pay
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Upgrade
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All inclusive and managed by the SaaS provider
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Additional pay and managed by the client
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Maintenance cost
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Zero and incurred by the SaaS provider
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Variable between 25%~50% of the software cost and incurred by the client
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Hosting cost
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Zero and incurred by the SaaS provider
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Server and maintenance costs and incurred by the client
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Implementation cost
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Low implementation costs
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Costs typically 50% more of the software cost
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Data back up
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Managed by SaaS provider
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Managed by the client
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Personnel cost & requirement
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Managed by SaaS provider
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Managed by the client
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Security
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Managed by SaaS provider on behalf of clients with robust security requirements
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Client manage data security, access, backup’s etc.
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Infrastructure
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A SaaS provider manages the servers and networks, and provides scalability and access, performance tuning and application management.
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A client manages the infrastructure servers, networks, performance tuning, etc.
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Software Accounting Treatment
Category
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US-GAAP
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IFRS
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Software revenue recognition
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Unlike IFRS, US GAAP provides specific guidance on revenue recognition for software and software-related deliverables in an arrangement. It applies to all agreement and contracts that are accounting for under “Ship and Bill”: contracts for sale of hardware, software, and services.
Step 1: Persuasive evidence of an arrangement exists
Step 2: Delivery of the software has occurred
Step 3: The fee (contract fee) is fixed or determinable
Step 4: Collection of the contract price is probable
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IFRS does not provide specific guidance on revenue recognition for software-related transactions. The general revenue recognition requirements are applied to each component of the transaction.
Step 1: Identify the contract
Step 2: Identify performance obligations
Step 3: Determine transaction price
Step 4: Allocation transaction price
Step 5: Recognize revenue
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Multiple Element Arrangements
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Must allocate the contract price to each element based on Vendor-Specific Objective Evidence (VSOE) of fair value and then recognize the allocated revenue when all revenue recognition criteria have been met on an element-by-element basis. Two approaches can be used to account for VSOE: Bell-shape curve approach and substantive renewal approach.
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The concept of VSOE of fair value does not exist under IFRS. Although the price that is regularly charged by an entity when an item is sold separately is the best evidence of the item’s fair value, IFRS acknowledges that reasonable estimates of fair value (such as cost plus a reasonable margin)
may, in certain circumstances, be acceptable alternatives.
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Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed
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1. Research & Development (R&D) costs are expensed as incurred until the point of technological feasibility.
2. Software development costs must be capitalized at the point reaching the technological feasibility established when planning, designing, coding, and testing activities all have been completed until the point of the general availability. There are two methods of software capitalization: detailed program design and working model method.
3. Direct costs to reproduce and package the product, training materials and documentation manuals are capitalized as inventory at the point reaching general availability where product is ready to be released to customers.
4. Amortization begins once product is generally available.
5. [LCM] The unamortized capitalized costs of software must be compared to the Net Realizable Value(NRV) of the product to determine whether the product should be written off.
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Under IFRS, Research costs are expensed, like US GAAP. However, unlike US GAAP, IFRS has broad-based guidance that requires companies to capitalize development expenditures when certain criteria are met:
* Technological feasibility of completing the asset for use or sale has been achieved.
* The entity intends to complete and use or sell the asset
* The entity has the ability to use or sell the asset
* The entity understands how the asset will generate probable future economic benefits.
* Technical, financial, and other resources are available to complete development of the asset
* The entity has the ability to reliably measure the expenditures.
Under IFRS, there are no special requirements for software. The costs of such software are accounted for under the general principles for internally generated intangible assets or, in the case of purchased software following the general requirements for intangible assets.
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Accounting for Costs of Computer Software Developed or Obtained for Internal Use
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1. Preliminary project stage: expense
2. Application development stage: capitalize
3. Post-implementation / operation stage: expense
4. Amortization
5. Impairment test
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Impairment test
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Two steps test (recovery not allowed)
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One step test (recovery allowed)
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License fees and royalties
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Like IFRS, to determine the appropriate pattern of revenue recognition for a license or royalty arrangement, the substance of the agreement is considered.
Unlike IFRS, specific revenue recognition criteria may apply depending on intellectual property that is being licensed. The appropriate model depends on whether the license software requires significant production, modification or customization:
1. If none is required, then completed-performance model is used.
2. if it is required, the contract accounting is used, which generally requires application of the percentage of completion model.
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To determine the appropriate pattern of revenue recognition for a license or royalty arrangement, the substance of the agreement is considered.
The analysis of the substance of the transaction is based on the general principles for the recognition of revenue in the following circumstances:
1. The rights to the asset are assigned to licensee in return for fixed fee or non-refundable guarantee;
2. The contract is non-cancellable;
3. The licensee is able to exploit its rights to the asset freely; and
4. The licensor has no remining obligations to perform.
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Cloud computing
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Unlike IFRS, under US-GAAP, there are specific criteria for determining whether a cloud computing arrangement includes both a license of software and services or just service:
1. To the extent that the arrangement includes a license of software, the customer capitalizes the fee attributable to the license when the criteria for the capitalization of internal-use software are met.
2. To the extent that arrangement does not include a license of software, the customer accounts for the arrangement as a service contract and expenses the cost as the services are received.
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Under IFRS, there is no specific guidance for cloud computing arrangements and the general principle for intangible assets apply
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Comparison between USA and Korean Tax laws about Software Amortization
Category
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USA (IRS)
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Korea (NTS)
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Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed
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1. Separately stated costs: The cost of software bought by itself, rather than being bundled into hardware costs, is treated as the cost of acquiring an intangible asset and must be capitalized. The capitalized software cost may be amortized over 36 months, beginning with the month the software is placed in service.
2. Bundled software costs: The cost of software included or bundled, without being separately stated, in the cost of the hardware is capitalized and depreciated as a part of the cost of the hardware.
Under MACRS, computers are depreciable over 60 months using 200% declining balance depreciation method.
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If externally purchased,
1. Direct revenue generation in usage: classified as an asset (tangible asset) by the type of the business on which the useful life in the table 6 of corporation income tax enforcement rules depends.
2. Others: classified as equipments and fixtures (tangible asset) on which the useful life in the table 5 of corporation income tax enforcement rules depends.
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Accounting for Costs of Computer Software Developed or Obtained for Internal Use
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A taxpayer may use any of the following three methods for costs paid or incurred in developing software for a particular project, either for the taxpayer’s own use, or to be held by the taxpayer for sale or lease to others:
1. The costs may be consistently treated as current expenses and deducted in full.
2. The costs may be consistently treated as capital expenses that are amortized ratably over 60 months from the date of completion of the software development.
3. The costs may be consistently treated as capital expenses and amortized ratably over 36 months from the date the software is placed in service.
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If internally developed,
1. Direct revenue generation in usage: classified as a development cost (intangible asset) which is amortized over 20 years rately.
2. Others: classified as equipments and fixtures (tangible asset) on which the useful life in the table 5 of corporation income tax enforcement rules depends.
3. Not meet asset criteria: expenses immediately
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50 Leading global SaaS companies for 2017
※ You can find your software at Capterra which is a free Web service that aims to help businesses find the right software solutions; https://www.capterra.com
Source: Geoffrey Moore’s ‘Crossing the Chasm’, IASB, FASB, PWC, KPMG, EY, Deloitte, McGraw-Hill Accounting Analysis, AICPA, KICPA, IRS, NTS, Becker, Datamation, Capterra
The tax information above is for your reference, and is not legally binding.
[테크비즈니스와 세무회계] 클라우드컴퓨팅(Cloud computing) SaaS 비즈니스와 소프트웨어 세무회계 처리
파괴적 혁신(Disruptive innovation)과 캐즘마케팅(Crossing the Chasm)
캐즘마케팅(Crossing the Chasm)의 저자 제프리무어(Geoffrey Moore)는 대다수의 사람들은 제품(products)을 구매하는 반면 파괴적 혁신(Disruptive innovation)에 대해서 입이 닳도록 말하는 사람들, 얼리어탭터들(early adopters)은 기술(technology)를 구매한다고 합니다. 제품은 기술에 합리적인 가격과 양질의 고객지원과 같이 구매자가 실질적으로 사용에 필요한 모든것을 포함한다고 합니다. 제프리무어의 캐즘마케팅에서 기술수용주기(technology adoption lifecycle)는 다음과 같이 설명하고 있습니다. 신기술 나왔을 때 거의 항상 그 신기술에 대한 고객이 생기지만 실질적으로 기업이 수익을 창출하는지는 어떻게 주류계층 고객에게 호소할지에 달려있다고 합니다. 아래와 같이 묘사된 종모양 기술수용주기의 케즘마케팅은 모든 테크기업이 알 필요가 있는 모델입니다. 테크기업은 성공적으로 이 케즘을 뛰어넘어야만 장기적으로 구글과 페이스북 규모의 투자수익(ROI)을 창출할 수 있는 기회를 얻을 것입니다.
출처: Crossing the Chasm, Author Geoffrey Moore
케즘마케팅(Crossing the Chasm)과 클라우드컴퓨팅(Cloud Computing)
클라우드컴퓨팅의 캐즘마케팅에서 대해서 제프리무어는 이렇게 말합니다. “저는 여기서 구체적으로 기업IT에 대해서 말하고 싶습니다. 현재상황에서 클라우드가 케즘을 뛰어넘어다는 것은 의심할 여지가 없습니다. 하지만 클라우드가 SaaS 어플리케이션과 근래에는 다수의 모바일고객과 함께 성장해 왔기 때문에 차세대 B2B 소프트웨어 기업의 진입장벽은 상당히 낮아졌습니다. 케즘은 여전히 존재하지만 10년 전처럼 더이상 두려운 존재는 아닙니다.” 대다수의 테크 전문가들은 4차산업혁명의 본질은 클라우드컴퓨팅이라고 입이 닳도록 말하고 있으며 테크기업은 클라우드컴퓨팅에 기초한 B2B(Business to Business) 시장에 집중해야 한다고 조언합니다.
클라우드컴퓨팅 서비스형 소프트웨어(Software as a Service, SaaS)
클라우드컴퓨팅은 간단하게 말해서 서버(servers), 스토리지(storage), 데이타베이스(databases), 네트워킹(networking), 소프트웨어(software), 분석서비스(analytics) 등의 다양한 서비스를 클라우드라는 인터넷공간에서 제공하는 컴퓨팅 서비스를 말합니다. 다양한 종류의 클라우드 서비스가 가능한데 예를들어 Software as a Service (SaaS), Infrastructure as a Service (IaaS), Platform as a Service (PaaS), Big Data as a Service (DBaaS), Blockchain as a Service (BaaS) 등 더욱 다양한 서비스가 제공될 수 있습니다. 이번 시간에는 아래 표와 같이 서비스형 소프트웨어(SaaS)와 전통적인 소프트웨어 라이선스에 대해서 집중해서 비교해 보도록 하겠습니다.
서비스형 소프트웨어 (SaaS) VS 전통적인 소프트웨어 라이선스
소프트웨어 회계처리
소프트웨어 감가상각에 대한 미국과 한국 세법 비교
2017년도 50 Leading global SaaS 기업들
※ 최대 소프트웨어솔루션 검색사이트인 무료웹서비스 Capterra는 적합한 소프트웨어를 찾게 도와주어 벤더가 판매하고 고객이 구매할 수 있도록 해줍니다. (https://www.capterra.com)
출처: Geoffrey Moore’s ‘Crossing the Chasm’, IASB, FASB, PWC, KPMG, EY, Deloitte, McGraw-Hill Accounting Analysis, AICPA, KICPA, IRS, NTS, Becker, Datamation, Capterra
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