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Private Enterprise Advisory Committee Notes – November 18, 2021

The Private Enterprise Advisory Committee assists the Accounting Standards Board (AcSB) with maintaining and improving accounting standards for private enterprises (ASPE) in Part II of the CPA Canada Handbook – Accounting and with identifying the need for non-authoritative guidance about the standards. The Committee makes recommendations to the AcSB but is not authorized to interpret or provide authoritative guidance on ASPE.

The AcSB staff has prepared this document based on discussions held during the Committee’s meeting. The meeting notes do not necessarily represent the AcSB’s views, and nothing in them constitutes authoritative guidance on acceptable or unacceptable application of ASPE. Only the AcSB can make such a determination.

Cloud Computing Arrangements

The Private Enterprise Advisory Committee received an update on the AcSB’s recent discussions regarding the development of proposals to address the customer’s accounting for fees paid in a cloud computing arrangement and the related implementation costs. The proposals involve:

  • clarifying the application of existing guidance;
  • permitting entities to apply a simplified approach to account for cloud computing arrangements; and
  • capitalizing directly attributable implementation costs when the arrangement is a software service.

The Committee provided additional feedback for the AcSB to consider.

Some Committee members noted it would be helpful to clarify the accounting for subsequent changes to the software in a cloud computing arrangement. For example, the guidance should clarify whether the assessment of entity’s control of the software element needs to be performed again when there are upgrades or version changes.

The Committee considered options in developing the simplified approach.

Some Committee members observed that it is rare in practice for an enterprise to control the software in a cloud computing arrangement. Therefore, they thought performing the control analysis is often not difficult. These Committee members prefer an option that provides a choice to either capitalize or expense only implementation costs when the cloud computing arrangement is a service contract.

Other Committee members noted that performing the control analysis could be difficult and costly for smaller enterprises. Therefore, they supported an option that permits enterprises to expense as incurred the amounts in a cloud computing arrangement without having to perform the control analysis.

The Committee discussed the presentation of capitalized implementation costs when the arrangement is a software service. A few Committee members thought such costs should be presented as an intangible asset so that the expensing of such costs would not affect earnings before interest, taxes, depreciation and amortization. However, as long as there are sufficient disclosures to identify the balance sheet and income statement impact, users can make the necessary adjustments. Committee members supported the proposed disclosure requirements.

The Committee also provided feedback on the transition provisions, and comments on the draft of the accounting guideline.

The AcSB will consider the Committee’s feedback, as well as feedback from its Not-for-Profit Advisory Committee, in December 2021.

Other Topics

The Private Enterprise Advisory Committee discussed an application issue relating to the related party amendments to Section 3856, Financial Instruments. The scenario discussed involved a related party transaction where a bond investment and an investment in equity instruments (not quoted in an active market) is exchanged for cash. Paragraph 3856.A8C provides guidance in measuring a related party transaction involving the exchange of multiple assets and liabilities and requires measurement of an instrument without repayment terms at the residual of the total consideration transferred in the transaction less the amounts attributed to the other assets or liabilities recognized in the transaction. In applying this guidance to the scenario provided, the investment in equity instruments is measured at the residual, resulting in an amount greater than its fair value.

Committee members agreed with the application of paragraph 3856.A8C in this scenario and noted that if the investment in equity instruments is not recoverable, then they should recognize an impairment. Committee members observed that as these amendments became effective only as of January 1, 2021, they are not seeing scenarios like this in practice yet. Therefore, the Committee recommended that the AcSB continue to monitor implementation of the amendments.