Fletcher Building, Spark and NZ Herald publisher NZME are among a host of firms likely to be forced to expense millions of dollars worth of software when they report results starting this month.
Fletcher Building reported last year it had up to $75 million of intangible software assets across 599 historic and current cloud computing projects which were now subject to detailed reassessment due to a new accounting interpretation.
"A project team has been appointed and a timeline has been determined," a note in Fletcher Building's 2021 annual report said. "The project is ongoing due to the effort required in obtaining the underlying information from historical records covering multiple projects and assessing the nature of each of the costs."
Fletcher Building, which reports its half-year results next week, said reclassification would result in a reduction of intangible assets and a restatement of retained earnings. However, for many, it could also deliver a one-off increase in expenses in the current year and lower profits, according to Deloitte.
"This conclusion could result in a reduction in profit in a particular year, impacting measures such as earnings before interest and tax, earnings before interest, tax, depreciation and amortisation and profit before tax," the accountancy firm advised.
Vector is one of the few companies to have already completed its review and reported. While it assessed the balance sheet impact for its 2019 and 2020 financial years as not material, Vector recognised $2.3 million of new, up-front cloud computing implementation costs as an expense in 2021 rather than claiming depreciation over coming years.
Like Fletcher Building, Spark has launched a review to quantify the impact on its books.
"In the last three years Spark has capitalised approximately $50 million in relation to cloud computing arrangements of which a subset may relate to customisation and configuration of cloud solutions and may need to be reclassified to operating expense," it reported at half year. "Once the impact has been fully quantified Spark will update the market."
Spark releases results on 23 February.
Media heavyweight NZME was also still reviewing its treatment of capitalised cloud software.
"The initial review of the group's cloud computing arrangements has identified intangible assets requiring re-assessment with a total cost and net book value of approximately $9.5 million and $5.9 million, respectively," the company reported in August.
NZME was still trying to determine whether the costs needed to be expensed or reclassified as prepayments.
"While the final financial impact of the revised accounting policy is still being quantified, it may be material for financial reporting purposes," the company reported.
NZME said it expected to implement the updated accounting policy in the second half of the year with the full impact of the change, including retrospective restatement, reflected in its financial statements for the year ended 31 December 2021. Those results, like Spark's, drop on 23 February.
Most companies will have been capitalising the costs of configuring and customising cloud-based software and claiming depreciation because they thought they would benefit from those investments over a number of years.
However, in March last year a committee of the International Financial Reporting Standards Foundation (IFRS) decided, depending on the circumstances, such costs should often be expensed, a view later ratified by the International Accounting Standards Board.
The IFRS committee concluded that costs incurred in configuring or customising software in a cloud computing arrangement could be recognised as intangible assets only 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 they were incurred unless they met 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 found Freightways, Infratil and The Warehouse Group were also reviewing their intangible software assets.
The Warehouse Group's review identified more than 70 different cloud-based software arrangements with an approximate combined carrying value of between $45 million to $55 million. The company was evaluating and reassessing the nature of the software costs incurred and to understand its contractual rights in relation to the customisations and configurations.
At the time of finalising its 2021 financial statements last year the review was continuing and was expected to take many more months.
Sky TV reported of the $50.4 million net book value of its capitalised software at 30 June 2021, management estimated the value of its cloud-based software-as-a-service (SaaS) component was in the vicinity of $15 million to $20 million.
"We are in the process of reviewing these SaaS related capitalised costs to quantify the extent of any adjustment that may be required due to the revised accounting policy," it reported a half year.
EROAD reported an initial review of its cloud computing landscape identified intangible assets requiring re-assessment with a total cost and net book value of approximately $16 million and $8.8 million respectively.
Kathmandu, meanwhile, had capitalised around $30 million in relation to cloud computing arrangements of which a subset may relate to customisation and configuration that may need to be reclassified to operating expense. The group expected to report the impact in its interim financial statements for the period ended 31 January 2022.
New Zealand's External Reporting Board, which manages the application of accounting standards locally, said the decision was requiring many rganisations to reconsider whether they had appropriately accounted for the costs of configuring and customising software provided by a supplier through a cloud-based, or SaaS, computing arrangement.
"This reconsideration may result in changes to how applicable costs have been accounted for in the current and previous reporting periods, especially when significant configuration or customisation costs have been capitalised as intangible assets," it wrote.
Accountancy firm Grant Thornton wrote that in its view, it would be appropriate to consider any correction arising from the the decision as a change in accounting policy as opposed to being the result of an error.
New Zealand's largest company, dairy cooperative Fonterra, reported its accounting policies were already consistent with the new accounting decision and no adjustment would be required.