In essence the Update concludes that, if a cloud computing arrangement includes a software license, then the customer should “account for the software license element of the arrangement consistent with the acquisition of other software licenses.” Regarding the latter, a company with, say, a $30 million license for an on-premise Oracle product, may capitalize that as an asset and depreciate $10 million per year over three years, recognizing that as an expense on their income statement.
The Update continues: “If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract.”
One of the perceived advantages of cloud computing is the ability to shift from capital-intensive infrastructure/software investments to a service subscription model paid out of the operating budget, so in and of itself this guidance isn’t too surprising. But the Update goes on to say:
“Some stakeholders wanted the scope of this Update to be expanded to address a customer’s accounting for implementation, set up, and other upfront costs that often are incurred by customers entering into cloud computing arrangements. The activities that entities perform in conjunction with entering into a cloud computing arrangement include training, creating or installing an interface, reconfiguring existing systems, and capturing and reformatting data. The board observed that to the extent a cloud computing arrangement transfers a software license, Subtopic 350-40 provides guidance on how to account for costs such as those resulting from training, data capture, and conversion activities.
“In deciding not to provide additional guidance on the accounting for upfront costs incurred by customers entering into cloud computing arrangements that do not transfer a software license to a customer, the Board noted that initial costs incurred in service arrangements are not unique to cloud computing arrangements. Consequently, the scope of that issue is much broader than the scope of this Update. The Board decided that the scope of this Update should not be expanded to address the range of implementation and setup costs incurred by a customer in a cloud computing arrangement.”
There is, however, disagreement in the comment letters about whether a license is the proper litmus test for cloud service accounting. In HP’s comment letter, Senior Vice President, Controller and Principal Accounting Officer Jeff Ricci writes, “as a vendor, HP generally believes its customer is paying for a hosted service, not the acquisition of software or a software license.”
And if no license is involved, the new rules mean companies can no longer capitalize upfront cloud project costs.
Google urges the FASB to delve deeper on this core issue: “We encourage the FASB to consider issuing explicit guidance with respect to the accounting treatment of implementation costs, as these costs can be significant,” Thuener wrote. “We believe capitalizing the software implementation costs and amortizing the corresponding asset over its useful life better reflects the economics of the transaction as expenses are recorded in a manner that reflects the consumption of the economic benefit from the software implementation costs, and therefore is more helpful to readers of financial statements in the analysis of assets and expenses.”
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