United States

Customer's accounting for fees paid in a cloud computing arrangement

FINANCIAL REPORTING INSIGHTS  | 

Cloud computing arrangements include software as a service, platform as a service, infrastructure as a service and other similar hosting arrangements. Existing generally accepted accounting principles (GAAP) addressed the accounting for cloud service providers but did not include explicit guidance about a customer’s accounting for its fees paid to the cloud service provider. To address this issue, the Financial Accounting Standards Board recently issued Accounting Standards Update (ASU) 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.

The guidance will help customers determine whether a cloud computing arrangement includes a software license. Per the ASU, if a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance does not change existing GAAP for a customer’s accounting for service contracts.

For public business entities, the ASU should be applied in annual periods, including interim periods within those annual periods, beginning after December 15, 2015. For all other entities, the ASU should be applied for annual periods beginning after December 15, 2015, and for interim periods in annual periods beginning after December 15, 2016. Early adoption is permitted for all entities. Entities may elect to adopt the amendments either (a) prospectively to all arrangements entered into or materially modified after the effective date or (b) retrospectively.