Increasingly, companies are investing in cloud-based solutions for common business applications. These arrangements can improve security, lower costs and improve data analysis — and these benefits represent an intangible asset that will provide value for years to come.

So, rather than report the implementation costs all at once, in the period they’re incurred, many businesses wonder: Can we capitalize these costs and then amortize them over the contract’s life? Here are the details of a recent proposal by the Financial Accounting Standards Board (FASB) that addresses this question.

Work in Progress

In 2015, the FASB published guidance to help businesses evaluate whether a hosting arrangement includes an internal-use software license. If a company’s cloud computing arrangement includes a software license, then accounting for the license should be consistent with accounting for the acquisition of other software licenses. This generally means that an asset is recognized for the software license itself, and, if payments for the software license are made over time, a liability also is recognized.

However, if a company’s cloud computing arrangement doesn’t include a software license, the arrangement must be accounted for as a service contract. In this case, hosting fees are expensed as they’re incurred.

After the 2015 guidance was issued, businesses continued to have questions as they moved toward the cloud-based solutions. Many companies couldn’t see an economic difference between a contract that includes a license to run the software locally versus a contract to have the application run on the cloud. So, they wanted to be allowed to use similar accounting treatment for both arrangements.

After months of debate, the FASB agreed to release a proposal to let companies capitalize certain expenses related to setting up business processes managed with a cloud computing service. The proposal won’t define the term “implementation costs.” But examples of capitalizable set-up costs may include such items as:

• Employee training,
• Customization and reconfiguration of systems,
• Installation, and
• Coding and data conversion costs.

The expense related to the capitalized implementation costs would be presented in the same line item in the income statement as the fees associated with the hosting arrangement. In addition, amortization would occur over the term of the hosting arrangement, which would include the noncancelable period and certain periods covered by options to renew (or not terminate) the arrangement.

Stay Tuned

The FASB published its cloud computing proposal on March 1, 2018, and provided a 60-day comment period. Contact us if you’re considering moving to the cloud. Our accounting and assurance team is atop the latest developments and can help you comply with the latest rules for these arrangements under U.S. Generally Accepted Accounting Principles (GAAP).