United States

Proposed guidance: Certain cloud computing implementation activities

FINANCIAL REPORTING INSIGHTS  | 

In 2015, the Financial Accounting Standards Board (FASB) 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, to address a customer’s accounting for its fees paid to a cloud service provider by providing guidance to determine whether a cloud computing arrangement includes a software license. Recently, in response to requests for additional guidance, the FASB issued a proposed ASU to clarify the accounting for costs of implementation activities related to a cloud computing arrangement that is a service contract.

If finalized, the proposed ASU would align the requirements for capitalizing implementation costs (implementation, setup and other upfront costs) incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the proposed ASU would require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in FASB Accounting Standard Codification Subtopic 350-40 on internal-use software to determine which costs to implement the service contract would be capitalized as an asset related to the service contract and which costs would be expensed.

Per the proposed ASU, the capitalized implementation costs of a hosting arrangement that is a service contract would be required to be expensed over the term of the hosting arrangement and presented in the same line item in the income statement as the fees associated with the hosting element (service) of the arrangement. The accounting for the service element of a hosting arrangement that is a service contract would not be affected by the proposed amendments.

The proposed ASU also would require an organization to disclose certain qualitative and quantitative information about implementation costs associated with internal-use software and all hosting arrangements, not just hosting arrangements that are service contracts.

The proposed ASU, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract; Disclosure for Implementation Costs Incurred for Internal-Use Software and Cloud Computing Arrangements (a consensus of the FASB Emerging Issues Task Force), is available for comment until April 30, 2018.