Most configuration and customisation costs in a software as a service arrangement cannot be capitalised, because the customer does not control the software being configured. They are expensed when the work is performed, or spread over the subscription term if the supplier’s set up work cannot be separated from access to the software. Only work that creates something the customer controls, such as separate code it owns, can be tested for recognition as an intangible asset.

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Why does FRS 102 not give a direct answer?

FRS 102 has no paragraph on cloud computing. Section 18 deals with intangible assets in general, and paragraph 18.3B deals with software that is part of hardware, but neither addresses a subscription to software that runs on the supplier’s servers. Paragraph 10.4 therefore requires management to develop a policy that gives relevant and reliable information. Paragraph 10.5 directs it first to FRS requirements on similar issues and to the concepts in Section 2, and paragraph 10.6 allows it also to consider adopted IFRS.

The most detailed analysis available is the IFRS Interpretations Committee agenda decision of April 2021, Configuration or Customisation Costs in a Cloud Computing Arrangement. It applies IAS 38, whose expense and prepayment rules are closely matched by FRS 102 paragraphs 18.4, 18.8C and 18.8D, so it is a natural reference point for a UK business looking for a supportable policy. The wider question of when software and websites are assets is covered in accounting for website and software development costs; this page looks only at the implementation spend around a subscription.

What is the difference between configuration and customisation?

The agenda decision used two working definitions. Configuration means setting flags or switches within the application, or defining values or parameters, so that the existing code works in a specified way. Customisation means modifying the code or writing additional code, which generally changes or adds functionality.

The distinction helps with the facts, but the accounting does not turn on the label. The question in both cases is whether the work gives the customer a resource it controls.

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Can any of the cost be capitalised?

An intangible asset must be a resource the business controls, and paragraph 18.4 requires it to be probable that future economic benefits will flow and that cost can be measured reliably. In the fact pattern considered, the contract gave the customer only a right to receive access to the supplier’s software over the term. That access is a service, not a software asset. The Committee observed that the customer often would not recognise an intangible asset, because it does not control the software being configured or customised and the work does not create a separate resource it controls.

The exception is where the work produces something the customer does control, the Committee’s example being additional code from which the customer can obtain the benefits and restrict others’ access. That code is then assessed against the normal recognition criteria. Under FRS 102, code written for the business by its own staff or contractors is an internally generated intangible, so it must meet all six development conditions in paragraph 18.8H, and capitalising is a policy choice that paragraph 18.8K requires to be applied consistently. See capitalising development costs.

A contract that gives the business its own software asset, for example a licence to run software on its own hardware, is different. That is a separately acquired intangible within Section 18, and paragraph 18.10 includes directly attributable costs of preparing it for use in its cost.

When is the expense recognised?

If no asset is recognised, the costs are expensed when the services are received. IAS 38 paragraph 69A says services are received when they are performed by a supplier under a contract to deliver them, not when the business later uses them. The agenda decision then split the analysis by who performs the work.

  • Work by the software supplier, including work it subcontracts. If the configuration or customisation service is distinct, the cost is expensed when the supplier performs it. If it is not distinct, because it cannot be separated from the right to access the software, it is expensed as the supplier provides access over the contract term.
  • Work by a third party, such as an implementation partner engaged directly. The cost is expensed when that third party performs the work.
  • Payments in advance of the work are a prepayment. FRS 102 paragraph 18.8D allows a prepayment where payment is made before services are rendered.

To decide whether a supplier’s service is distinct, the Committee pointed to the revenue standard’s tests for identifying promised goods or services. In FRS 102 those are in paragraphs 23.21 to 23.24: the customer must be able to benefit from the service on its own or with readily available resources, and the promise must be separate from the other promises in the contract. Paragraph 23.24(b) gives, as an indicator that items are not distinct, a software contract where customisation significantly modifies the software. In practice, set up that only the supplier can do and that is needed simply to switch the service on is more likely to be part of the access; work that other firms could do, or that the business could buy separately, is more likely to be distinct. The tests are explained from the seller’s side in the five step revenue model.

What does this look like on a real implementation?

Illustration only. A company signs a three year subscription for a cloud finance system at £24,000 a year, paid annually in advance, and spends the following on implementation.

Cost £ Treatment
Supplier’s onboarding fee to set up the company’s tenant, only available with the subscription 6,000 Not distinct: prepayment, expensed over the three years at £2,000 a year
Implementation partner configuring workflows, approval rules and reports 15,000 Expensed as the partner performs the work
Integration code written by a contractor, owned by the company and run on its own server 20,000 Possible intangible if all 18.8H conditions are met and the company capitalises development
Data migration and cleansing 4,000 Expensed when performed
Staff training 3,000 Expensed: paragraph 18.8C(c)
First year subscription 24,000 Prepayment, expensed over the year

If the integration code is capitalised, its useful life should reflect how long it will be used. Code that only works with this subscription is unlikely to be useful beyond the subscription and any renewal the company expects, and paragraph 18.22 requires straight line amortisation if the pattern of use cannot be determined reliably.

What should be disclosed?

Because the policy rests on judgement, paragraph 8.6 of FRS 102 requires disclosure of the judgements management has made in applying its accounting policies that have the most significant effect on the amounts recognised. A business with significant implementation spend should explain how it decides between expensing, spreading and capitalising. The agenda decision likewise noted that the accounting policy for these costs should be disclosed where relevant to understanding the accounts.

How are these costs treated for tax?

Trading profits follow generally accepted accounting practice under section 46 of the Corporation Tax Act 2009, subject to any adjustment required by law. HMRC’s Business Income Manual at BIM35810 says periodic licence payments are deductible unless shown to be instalments of a capital sum, and that the timing of relief follows accounting practice. It also tells officers not to contend that software with an expected useful life of less than two years is capital, and that where expenditure has been capitalised under GAAP the deduction should follow the amortisation in the accounts.

For a company, BIM35801 explains that software rights acquired or created on or after 1 April 2002 usually fall within the corporate intangibles regime, which brings expenditure into account in line with the accounts. Any integration code capitalised as an intangible would therefore normally be relieved as it is amortised. See software and website costs for tax and the intangible fixed assets regime.

What mistakes come up most often?

  • Capitalising the whole implementation budget as an intangible asset when the business owns nothing that results from it.
  • Expensing a supplier’s non distinct set up fee on day one rather than over the access period.
  • Expensing payments made in advance of work that has not yet been performed, instead of carrying a prepayment.
  • Capitalising training and data cleansing, which paragraph 18.8C and the general expense rule keep in profit or loss.
  • Amortising capitalised integration code over a longer period than the subscription it depends on.
  • Applying the policy inconsistently from one project to the next.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.