Lease GAAP unusual questions- software licences can they be classified as leases

Various companies very often source software licenses from third parties for their operating systems and more often than not these are bundled together with AMC & software support contracts.

Contracts for core accounting and operating software typically run over a period of time say 3-5 years and many a times accountants take the annual cost  on the contract straight into SG&A.

Well for those companies who wish to improve their EBITDA or LBITDA (coined only for the recession "L"= losses), they can take recourse to lease accounting.

Wait a minute doesnt, lease accounting straight away exclude licenses from its scope under its very definition, co-incidentally all GAAP's (US/IASB/ICAI) have this written in their very first page, so where's the scope.

Well i scratched my head and could find all about two reasons

a) the exclusions cover licences on copyrights, trade licenses, oil exploration rights.... most of these licenses, typically have no shelf life and appreciate over a period of time or rather are intangibles with no finite life, these can be construed that lease GAAP excludes from its scope only those licenses, which dont have a shelf life and their values appreciate over a period of time.

b) SOP 98-1 (Accounting for cost of software- AICPA pronouncement) provides that companies must analogize to FAS 13 (Accounting for leases), whenever  an asset is acquired as a result of a software arrangement and must test for the 4 criteria to classify them as an operating or a financial lease.

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Point (a) may or may not be that convincing but if you can analogize SOP 98-1 to your GAAP, then its worth a try.

Now that we have figured out that software licenses can be classified as leases, all you have to do is break down your value of the contract into cost of software licenses, cost of support and AMC (based on the fair value approach) or rather apply the rules on embedded leases (read my blog on embedded leases).

Its strange but when you sit down and compare GAAP'S across the world, most of the substance remains the same, though may vary in form.