Authored by Rachel Polson
In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2018-15, 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 (a consensus of the FASB Emerging Issues Task Force) (ASU 2018-15).
This is guidance companies across all industries have been waiting for to assist with relief of having to previously expense cloud software setup costs. Before the popularity of the cloud as a distribution tool for software applications, most software was sold via a license that would be recorded as an asset. Implementation costs usually would qualify for capitalization. The delivery method of the software via cloud prior to ASU 2018-15, required expensing of costs of a hosting arrangement.
Paragraph 350-40-30-4 of ASU 2018-15 notes “Entities may purchase internal-use computer software from a third party or may enter into a hosting arrangement. In some cases, the purchase price includes multiple elements, such as the license or hosting, training for the software, maintenance fees for routine maintenance work to be performed by the third party, data conversion costs, reengineering costs and rights to future upgrades and enhancements. Entities shall allocate the cost among all individual elements. The allocation shall be based on the relative standalone price objective evidence of fair value of the elements in the contract, not necessarily separate prices stated within the contract for each element.”
ASU 2018-05 also requires the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The guidance discusses situations companies should consider if the service contract would qualify as an internal-use computer software project as defined by ASC 350. The implementation costs of a hosting arrangement would need to be assessed for whether or not they are able to be capitalized.
There was also a change in the presentation on the balance sheet, income statement and statement of cash flows. ASU 2018-15 requires companies to present the expense related to the capitalized implementation costs in the same line item as the fees associated with the hosting element (service) of the arrangement. Payments for capitalized implementation costs are required to be classified in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. Companies are also required to present the capitalized implementation costs in the balance sheet in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented.
Amortization shall be over the term of the associated hosting arrangement.
Assessment for any impairment will follow ASC 360-10-35 guidance similar to other long-lived assets.
ASU 2018-15 is effective for public business entities for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for annual reporting periods beginning after December 15, 2020 and interim periods within annual periods beginning after December 15, 2021. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, for all entities.
ASU 2018-15 should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.