By CPA Gabin Nyamweya Omanga
Time To Review the Standards?
Accounting as a practice is about painting a near-accurate picture and a consistent view of a business’s financial position. It provides shareholders, regulators, and other stakeholders with an understanding of how the business is performing, what it owns, and what it owes. This is achieved through the application of international accounting standards. However, business processes globally are changing faster than the standards designed to capture them. With the global evolution of businesses into data analytics, cloud computing, and other emerging technologies, it’s becoming increasingly clear that current accounting frameworks are struggling to keep pace.
Take software, for instance, a few years ago, the acquisition of software meant acquiring a term license. In practice, the upfront cost of the total license value was capitalized and amortized over the term’s duration. It was treated as an asset since it fulfilled the requirements of the standards for asset recognition: it was identifiable, controlled by the entity, and provided future benefits.
Today, technology companies often provide software as a service (SaaS) solution rather than software licenses. Businesses don’t typically buy software; instead, they subscribe to it. They pay a relatively small amount upfront for access and integration, and then pay periodic fees, either monthly or annually, to access the necessary tools. These include customer relationship management, creative platforms, office productivity suites, and project management systems.
Currently, the accounting standards expect companies to expense all these costs. SaaS does not fulfil the requirements of capitalization as per IAS 38 on capitalization of intangible assets. Instead, the expectation is that SaaS subscriptions would generally be expensed as incurred. They are treated like operating costs, lumped in with rent and supplies. Therein lies the problem…
SaaS tools are often foundational to the operation of modern businesses. They are just as critical as the on-premises licensed software. Treating them as mere expenses not only has a misleading impact on the business’s Profit and Loss account, but it also fails to capture the economic substance and value provided by these subscriptions. A company that builds its operations around SaaS platforms has made a long-term commitment to an infrastructure that enables revenue and growth. Yet, none of this shows up on the balance sheet.
Picture this: two listed entities run the same business, within the same market. One uses capitalized software licenses, while the other relies on SaaS. Assuming near-similar revenue levels, the two entities might report radically different asset bases and income statements. At this point, the accounting doesn’t reflect reality and may mislead investors and the public.
The disconnect does not stop there. Previously, most businesses procured and owned servers and other networking equipment. These were hardware equipment that could be depreciated over time. However, technology has shifted to cloud computing, and most balance sheets no longer include servers and heavy IT infrastructure. Businesses have opted to rent storage space, processing power, and bandwidth from providers such as Amazon Web Services or Google Cloud.
While cloud computing offers several advantages, such as efficiency and scalability, these values are invisible from an accounting standpoint. Cloud services are typically paid for on a usage or subscription basis, and therefore do not meet the strict criteria for capitalization. They are expensed, despite being central to the company’s ongoing and long-term operations.
Further, cloud services are not just conveniences. For many businesses with a digital-first mindset, cloud platforms are their core infrastructure. All products, services, and data exist on the cloud. Furthermore, with in-house development and customization, as well as development environments, security systems, analytics tools, and customer-facing platforms, all rely on these services. So, for accounting to treat them like incidental operating expenses is to fundamentally misrepresent the nature of the business.
At the very least, there should be clearer guidance on when long-term cloud commitments function more like leases or capital assets than like variable costs. Currently, the standards provide little direction, leaving companies to make inconsistent and often conservative judgments that result in underreporting of core assets.
Perhaps the most significant debate in accounting today is how to accurately represent data. Lately, data is becoming the biggest value driver in business. This is evident in diverse industries, including financial services, retail, and agriculture. Data is no longer a by-product of consumer behaviour. Companies collect, organize, and analyze large amounts of information to gain insights, improve operations, and create new products. This data has become so valuable that some businesses monetize it directly by selling access, offering analytics services, or licensing proprietary models built on data.
This data encompasses user behavior, customer segmentation, risk modelling, credit scores, and predictive maintenance. Despite this, under existing accounting rules, most data is not reflected on the balance sheet. At best, the costs attributed to data analysis are expensed under research and development costs. Data generated internally rarely qualifies for recognition because it often fails to meet the strict criteria regarding identifiability, control, and measurable future economic benefits.
The result is a situation where a company invests heavily in collecting and refining a proprietary dataset that generates millions in revenue, yet still reports no assets related to that dataset. Meanwhile, if it had purchased a similar dataset from a third party, it might be able to capitalize on it. The result is inconsistent treatment and a misleading view of what actually creates value in the business.
What is evident from the examples above is that accounting, due to its conservative nature, is lagging behind the substance of business transactions. While we are faithfully recording the form (a subscription payment, a cloud invoice), we are missing the substance (the creation of a recurring revenue asset, the investment in a scalable operational platform). So, what is to be done?
Firstly, standard-setters like the standards boards must prioritize projects that address the intangible and subscription-based economy. They should anticipate changes and shift from a reactive to a proactive posture. We must further engage with technology leaders, venture capitalists, and analysts to understand which aspects of their businesses are most misrepresented by current standards.
Secondly, we must embrace the concept of “controlled economic resources” more broadly. The definition of an asset needs to be revisited for the digital age. If a company has the practical ability to derive economic benefits from a resource (like a curated dataset or a trained AI model) and can restrict others’ access to it, we must develop principles-based guidance for its recognition, even if it lacks physical substance.
Thirdly, we must get comfortable with estimation and disclosure. We will not achieve perfect valuation for data assets or subscriber relationships on day one. However, we can begin with enhanced disclosures that require companies to quantify key performance indicators (KPIs), such as customer lifetime value, data asset scale, and recurring revenue run rates, alongside the financial statements. This would provide investors with the context needed to bridge the GAAP gap. From there, we can develop graduated frameworks for measurement, starting with cost-based approaches and evolving towards income-based models as markets mature.
Finally, the accounting profession itself must adapt. We must educate ourselves and our teams not just on the latest tax code or auditing standard, but on the fundamentals of how modern technology businesses create and measure value. An auditor must be able to interrogate a data asset valuation with the same rigor they apply to inventory.
The writer is the Principal Internal Auditor, Financial Services Audits, Safaricom, [email protected]
