The FASB’s Emerging Issues Task Force (EITF) is moving closer to simplifying the accounting for the often expensive costs to set up different types of business services managed in the cloud, but it is not quite there.
The task force on Oct. 12, 2017, agreed that customers of cloud computing arrangements should account for them the same as they would a software license for a large business application with Subtopic 350-40, Intangibles—Goodwill and Other— Internal-Use Software.
The decision puts to rest most of a question that has dogged the EITF and FASB for months. If the decision leads to a final amendment to U.S. GAAP, the accounting change will let businesses capitalize more costs associated with implementing cloud services. The costs include training employees and creating or installing interfaces to other systems. By capitalizing the costs, businesses will be able to recognize them as a long-term asset and amortize them over the life of the software contract instead of booking a large expense at the contract’s outset.
Task force members were not ready to formally recommend the change to the FASB. The task force wants more research on whether the accounting board needs to provide guidance to companies about capitalizing the software setup costs. The group plans to revisit the topic at its next meeting in November.
The EITF typically addresses narrow questions that crop up when businesses and auditors put standards into practice or as financial reporting practices evolve in response to changes in the business world. Typically the task force offers relatively limited solutions for the FASB to formally propose for public comment, and the FASB has the final say about what gets published as an update to U.S. GAAP. The task force often discusses an issue and recommends a path forward on the same day. The cloud computing question has proven to be more complex than other matters the task force addresses, in part because during its debate some questions cropped up about how the accounting for the expenses interacts with the guidance for intangible assets.
Some EITF members urged their colleagues to limit their focus to the topic at hand.
“The impetus for this issue is tying back not only to costs — and large costs — and what to do with large costs, but to the greater point about similar economic arrangements being accounted for very differently,” said Kimber Bascom, a partner with KPMG LLP.
The question has become more pressing in recent years because more companies are opting for cloud computing services for large, company-wide applications, such as enterprise resource planning or customer relationship management, as opposed to installing the software on servers they operate. The implementation costs are often significant for companies, and many would prefer not to recognize such big expenses in a single reporting period. Companies that install software on servers in locations they operate are allowed to capitalize the implementation costs, which lets them recognize the software contract as a long-term asset and amortize it over its life.
When the task force discussed the issue in July, it could not come to a consensus. Members fell into two camps, with one side saying the implementation costs associated with a cloud computing arrangement that is considered a service contract would be recognized as an asset or expense when incurred based on the guidance in Subtopic 350-40, Topic 340, Other Assets and Deferred Costs, and Topic 360, Property, Plant, and Equipment, or Subtopic 720-45, Other Expenses — Business and Technology Reengineering, formerly EITF Issue No. 97-13. Businesses would have to use judgment to determine the appropriate guidance to follow.
The other side said the implementation costs should be accounted for in the same manner as a software license, as outlined in Accounting Standards Update (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.
ASU No. 2015-05 was issued to help distinguish between whether the purchase of cloud services should be accounted for as the purchase of a license to own the software or a service contract. The update added guidance to Subtopic 350-40 to help with the distinction. According to the amendment, if a cloud computing arrangement includes a software license, then the customer should account for the software license consistently with the acquisition of other software licenses in Subtopic 350-40. This generally means that an intangible asset is recognized for the software license, and, to the extent that the payments attributable to the software license are made over time, a liability also is recognized. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract, and the fees to the provider of the cloud services are expensed as they are incurred.
As the FASB finalized the 2015 update, it heard calls to address the accounting for the upfront costs associated with setting up cloud computing arrangements that do not transfer a license to a customer, but the board decided the issue was too broad to address in what was supposed to be a relatively simple amendment to U.S. GAAP.
Businesses continued to ask the FASB for help, and the board’s advisory groups, including the Not-for-Profit Advisory Committee and the Private Company Council, asked the board to come up with consistent guidance.
“We have an emerging issue that deals with a very narrow issue for the implementation costs for cloud computing,” said EITF member Lawrence Dodyk, a partner at PricewaterhouseCoopers LLP. “I think we can develop a model that’s relatively simple to apply.”
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