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Accounting for Cloud Computing Implementation Costs: What Customers Need to Know

Overview

Accounting for implementation costs for cloud computing service arrangements has historically been complicated. ASU 2018-15 was designed to reduce the complexity by aligning requirements for capitalizing implementation costs for hosting arrangements (services) with costs for internal-use software (assets).

Defining Cloud Computing Arrangements

Cloud computing arrangements (CCAs) are hosting arrangements in which the user of software accesses and uses it over the Internet (via the cloud) rather than purchasing the software and installing it locally on a computer — therefore, there is no physical possession of the software. This type of arrangement has become increasingly popular as companies move their data, applications, and platforms to the cloud so they can be connected from anywhere and any device. Functionally, the user’s interaction with the software is the same however, the accounting treatment is different.

Accounting for Costs

In moving to a cloud computing arrangement (CCA), a company may incur substantial implementation costs. These costs can include software licenses for setup/implementation, enhancement/customization, training, constructing the interface, and reconfiguring existing data and systems. These costs will be capitalized or expensed depending on their nature and the project stage in which they are incurred, consistent with internal-use software.

  • Costs to develop or obtain internal-use software that cannot be capitalized under ASC 350-40, such as training costs and certain data conversion costs, also cannot be capitalized for a CCA. Therefore, an entity should expense these costs when incurred in the preliminary project and post-implementation stages.
  • Setup fees are accounted for in accordance with the guidance in ASC 340 on prepaid assets or other relevant guidance.
  • Integration costs for existing software, coding, and configuration or customization are capitalized as intangible assets.
  • Data conversion and training costs are expensed as incurred.
  • Any costs for changes to business processes are accounted for in accordance with ASC 720-45.
Hosting Fees
Accounting for hosting fees remains unchanged — the fees are expensed as the service is performed. If a CCA includes a software license, the hosting fees for that software license should be capitalized as an intangible asset with a corresponding liability to the extent the fees are paid overtime. If a CCA does not include a software license, the hosting fees are expensed as incurred.

Presenting Costs

Implementation costs related to a CCA should be presented in the same financial line items as the CCA service fees.

Balance Sheet Present deferred implementation costs in the same line item as the prepayment of fees for a CCA.
Income Statement Present the expense for deferred implementation costs in the same line item as CCA fees paid.
Cash Flow Statement Classify cash payments for CCA implementation consistent with how the fees for the CCA are classified.

These requirements can impact key metrics including EBITDA because the recognition of CCA costs over time will not be included with depreciation or amortization expense. Additionally, customers should consider the impact on their budgeting and financial planning processes.

Effective Date and Transition

These changes are effective for public entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, the changes are effective for annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. However, early adoption is permitted, including adoption in any interim period, for all entities.

These changes should be applied prospectively to all implementation costs incurred after the date of adoption or retrospectively in accordance with ASC 250-10-45-5 through ASC 250-10-45-10.

How MFA Can Help

Prior to adoption, entities should consider the effects of prospective versus retrospective adoption, as well as whether they need to change their processes or internal controls in order to fully compile. MFA is here to help you understand how different adoption strategies could affect your business processes and financial reporting. To connect with a dedicated advisor, please contact us.

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