The shift from perpetual licenses to subscriptions has also shifted software from capital expenditure toward operating expenditure. That changes how costs appear in financial statements, which budgets pay for them, and how software decisions are evaluated. IT leaders do not need to be accountants, but understanding the basics avoids surprises. This article is general information, not accounting advice.
Spending on an asset that benefits several years. It is capitalized on the balance sheet and amortized over its useful life.
Spending consumed in the period, such as subscription fees. It is expensed as it is incurred.
How the cost profile differs
Over five years in this example, the perpetual license costs $880K in cash and the subscription $900K: almost the same. But the profile is very different, and so is where the cost lands: a large capitalized amount in year one with amortization afterwards, versus an even operating expense every year.
Cloud implementation costs
Under ASU 2018-15, issued by the US Financial Accounting Standards Board in 2018, a customer in a cloud computing arrangement that is a service contract applies the internal-use software guidance to decide which implementation costs to capitalize. Capitalized costs are amortized over the term of the arrangement and presented in the same line items as the service fees.
Why it matters for SAM
OpEx and CapEx often sit with different owners and approval processes.
A perpetual license and a subscription should be compared over the full period, in cash and in accounting terms.
Subscription renewals affect operating results every year, so price uplifts show up directly in the P&L.
How MI One helps
Frequently asked questions
Are SaaS subscriptions always OpEx?
Subscription fees are generally operating expenses. Some implementation costs may be capitalized. Check with your finance team.
Does IFRS treat this differently?
Treatment under IFRS differs in some respects; consult your accountants.
Does it change the business case for SaaS?
It changes how costs appear, not necessarily the total. Compare options over the full period, in cash, and then look at the accounting effects.
Sources
- Moss Adams, "FASB issues guidance on accounting treatment for cloud computing arrangement implementation costs," October 2018. https://mossadams.com/articles/2018/october/guidance-on-accounting-for-cloud-computing
- Deloitte DART, "FASB amends guidance on cloud computing arrangements." https://dart.deloitte.com/USDART/home/publications/archive/deloitte-publications/heads-up/2018/fasb-amends-guidance-cloud-computing-arrangements