Cloud computing has long been standard in German business. The models are becoming more complex, entire infrastructures and processes are moving to the cloud, and artificial intelligence is driving investment further. For the balance sheet, this raises a question that German GAAP (HGB) does not answer explicitly: is it an asset or an external service?
What cloud computing means for the balance sheet
IDW RS FAIT 5 describes cloud computing as a special form of IT outsourcing: an external provider makes IT resources such as servers, operating systems, networks or software available over the internet. Unlike traditional outsourcing, the company does not rent dedicated systems but uses a resource pool – flexibly scalable, billed by usage and often with very short terms. The more IT layers the provider takes over, the less control remains with the user.
| IT layer | On-premise | IaaS | PaaS | SaaS |
|---|---|---|---|---|
| Data & settings | User | User | User | User |
| Application | User | User | User | Provider |
| Databases & tools | User | User | Provider | Provider |
| Operating system | User | User | Provider | Provider |
| Servers & storage | User | Provider | Provider | Provider |
| Network & security | User | Provider | Provider | Provider |
| Data centre | User | Provider | Provider | Provider |
Decreasing control – capitalisation increasingly doubtful | ||||
User responsibility Provider responsibility
In addition, a cloud contract is usually a bundle of infrastructure rental, software licence, maintenance and support, and implementation. Each of these components must be assessed separately for accounting purposes – and in practice implementation is usually the largest and most difficult item.
The recognition test under German GAAP
There is no specific statutory rule. The general principles apply – completeness and beneficial ownership (Sec. 246 (1) HGB), individual measurement (Sec. 252 (1) no. 3 HGB) – as specified by IDW RS HFA 11 (new version) and GAS 24. This results in the same sequence of tests for each component:
-
1no → not recognised
Is there an asset?
Economic benefit, separate measurability and separate transferability – cumulatively
-
2no → not recognised
Is it attributable to the user?
Beneficial ownership (Sec. 246 (1) sentence 2 HGB): actual control, risks and rewards with the user
-
3
Acquired from third parties or internally generated?
Acquired
Risk borne by the third party (e.g. contract for work)
Must be capitalised · Sec. 246 (1) HGB
Internally generated
Risk borne by the user (e.g. service contract)
Option to capitalise · Sec. 248 (2) HGB
Not recognised: executory contract
Ongoing fees as expense · prepayment as deferred expense (Sec. 250 (1) HGB) · onerous contract as provision (Sec. 249 (1) sentence 1 HGB)
The components in detail
Hardware
As a rule, the user only obtains the right to use a resource pool; the provider may replace components at any time. Without control over separable servers there is no beneficial ownership – capitalisation is ruled out, including as a lease. This would only differ for exclusive use of clearly identifiable hardware for substantially its entire useful life.
Software
Software is always an intangible asset. Whether it belongs on the user's balance sheet depends on the licence model:
Perpetual licence
- Fixed purchase price
- Perpetual licence
- No further performance obligations of the provider
Beneficial ownership with the user
Must be capitalised, scheduled amortisation
Subscription licence Typical SaaS
- Ongoing fee
- No control over the infrastructure
- Maintenance and updates by the provider
Beneficial ownership with the provider
Executory contract: fees as expense, prepayment as deferred expense, onerous contract as provision
Software lease Exception
- Ongoing usage fee
- Fixed, non-cancellable basic lease term
- Assessed by analogy to the German leasing decrees
Beneficial ownership with the user
Capitalised at the present value of the software portion, lease liability of the same amount
Maintenance and operation
Hardware replacement, firewall monitoring, updates, back-ups and support maintain the agreed functionality but do not improve an asset. They are expensed in the period incurred (Sec. 275 (2) no. 8 HGB).
Implementation – the crux
Configuration and customising often cost more than the ongoing fees. If the software belongs to the user, they are incidental acquisition costs. In typical SaaS this ownership is missing – and here the treatment is disputed in the literature:
Is the software attributable to the user as beneficial owner?
Perpetual licence or software lease
Implementation forms part of the software's acquisition cost
Must be capitalised
Prevailing view to date
No acquisition, hence no incidental costs; not separately transferable
Expense
More recent view
Separate asset – what matters is who bears the risk of success:
- In-house / service contractOption to capitalise
- Contract for workMust be capitalised
- By the provider, included in the feeExpense
Conclusion
“Everything in the cloud” does not mean “nothing on the balance sheet”. The key is to break each contract down into its components and test beneficial ownership for each – especially for implementation costs, where contract design and risk allocation decide between expense and capitalisation. Considering this during contract negotiations avoids surprises in the financial statements.
This article is for general information only and does not replace advice on individual cases.