FASB updates accounting for cloud computing service arrangements

The Financial Accounting Standards Board (FASB) has issued an accounting standards update (ASU) which is designed to reduce the complexity of the accounting for costs of implementing a cloud computing service arrangement

In April 2015, the FASB issued ASU Update No. 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license.

Under these rules, if a cloud computing arrangement includes a license to internal-use software, then the software license is accounted for by the customer in accordance with Subtopic 350-40.

This generally means that an intangible asset is recognised for the software license and, to the extent that the payments attributable to the software license are made over time, a liability also is recognised. If a cloud computing arrangement does not include a software license, the entity should account for the arrangement as a service contract. This generally means that the fees associated with the hosting element (service) of the arrangement are expensed as incurred.

Russell Golden, FASB chairman, said: ‘Stakeholders observed that existing US. GAAP resulted in unnecessary complexity and needed to be updated to reflect emerging transactions in cloud computing arrangements that are service contracts.

‘To address this diversity in practice, this standard aligns the accounting for implementation costs of hosting arrangements—regardless of whether they convey a license to the hosted software.’

The ASU aligns the following requirements for capitalizing implementation costs: those incurred in a hosting arrangement that is a service contract, and those incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).

For calendar-year public companies, the changes will be effective for annual periods, including interim periods within those annual periods, in 2020. For all other calendar-year companies and organizations, the changes will be effective for annual periods in 2021, and interim periods is 2022.

 The ASU customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract is here

Report by Pat Sweet

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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