Cloud Computing Arrangements

How customers should account for fees paid

June 2015

With today’s rapidly changing technology, more and more companies are moving many of their accounting and management systems “to the cloud.” Up until now there has been little guidance on how companies should account for fees paid for cloud computing.

As part of its efforts to simplify accounting standards, the FASB has issued ASU No. 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. The most common example of cloud computing is “software as a service” (SaaS); however it also includes: platform as a service, infrastructure as a service, and other similar hosting arrangements.

In order to comply with ASU 2015-15, customers must utilize the new guidance to determine if a cloud computing arrangement includes a software license. If so, then the company must 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 ASU does not change the accounting for a customer’s accounting for service contracts.

If a hosting arrangement provides a customer with the contractual right to take possession of the software at any time during the hosting period without significant penalty and it is feasible for the customer to either run the software on its own hardware or contract with another unrelated vendor to host the software, the arrangement should be considered a license. As defined in the ASU, without significant penalty considers two distinct principles: the ability to take delivery without incurring significant costs, and the ability to use the software separately without significant diminution in utility or value.

To account for cloud computing costs as a license, the customer must capitalize the cost allocated to the software license and amortize it on a straight-line basis unless another systematic and rational basis is more representative of the software’s use. If the contract includes a license to use the software in addition to the provision of services, the customer must allocate the payments between the cost of the license and the service provided. Like all intangible assets, a company must evaluate the asset for impairment whenever events or circumstances indicate the carrying value may not be recoverable.

For public business entities, the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. For all other entities, the amendments will be effective for annual periods beginning after December 15, 2015, and interim periods in annual periods beginning after December 15, 2016. Early adoption is permitted for all entities.

The amendments can be adopted either: (1) prospectively to all arrangements entered into or materially modified after the effective date; or (2) retrospectively. For prospective transition, the only disclosure requirements at transition are the nature of and reason for the change in accounting principle, the transition method, and a qualitative description of the financial statement line items affected by the change. For retrospective transition, the disclosure requirements at transition include the requirements for prospective transition and quantitative information about the effects of the accounting change.

The text of the guidance can be found here.

If you have questions or would like to discuss this further, please contact your BNN advisor at 1.800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.