In our last blog exploring the benefits of the cloud, we discussed the differences between initial and ongoing costs, and how the cloud not only saves you money on the initial costs, it provides you a much more business friendly way of accounting.
This structure, while immensely beneficial for businesses, left one gap within the generally accepted accounting principles (GAAP): Even if the initial costs were lower than an on-premises operation, there was a bit of ambiguity in accounting for these costs. Today, we would like to look at how to clear the GAAP clouds for things like implementation, training, and data conversion.
New GAAP Allows You to Capitalize Setup
Cloud hosting has removed the costs associated with buying a server, purchasing perpetual licenses, and provisioning the server to handle the software. However, there was still one cost that existed in “accounting purgatory” in cloud hosting arrangements: Set-up and implementation fees.
While these fees were much lower than the initial fees that existed in on-premises implementations, they were not insignificant—training and data conversion fees are part of any software agreement regardless of deployment and presented a dilemma for companies using services in the cloud.
Luckily, a recent change (Accounting Standards Update (ASU) No. 2018-15) announced by the Financial Accounting Standards Board (FASB) addressed this one last hurdle for companies, clarifying an aspect of ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.
ASU 2015-05 Sets Stage for Capitalizing Implementation Costs
Initially, the April 2015 announcement of ASU 2015-05 presented more questions than answers, with many accusing this standard of making it harder to move to the cloud.
Purpose of ASU 2015-05
Part of the FASB “simplification initiative,” ASU 2015-05 addressed the accounting concerns present in the accounting standards for internal use software (ASC 350-40), which led to diversity in practice, unnecessary costs, and more complexity.
“ASU 2015-05align[s] the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).””
The Wall Street Journal investigates the release of ASU 2015-05 in greater detail, but there was a notable element that needed additional clarification, as the ASU does not affect the accounting for the service element of a hosting arrangement that is a service contract.
ASU 2018-15 Establishes Section for Implementation Costs of Hosting Arrangements
After three years and a wide range of commentary, this all changed, as discussed in a blog on the changes made by ASU 2018-15. This blog, “Good News – Now You Can Capitalize a Cloud!” looks at the elements of the update and explores how it changes the way companies account for cloud computing arrangements:
“ASU 2018-15 does establish a subsection of ASC 350-40 specifically for implementation costs of a hosting arrangement that is a service contract. The subsection of ASC 350-40 includes certain requirements specific to hosting arrangements that are service contracts, such as requirements for determining the term of the contract as well as presentation requirements.”
There are certain accounting discussions and terms that pertain to this accounting regarding the term of the contract and associated amortization, but essentially, this will allow businesses who enter cloud agreements to capitalize certain costs over a fixed period. Read the entire blog to learn more.
- Amortization of capitalized implementation costs should be reported in the statement of income in the same line item as the expense for fees for the hosting arrangement.
- Capitalized implementation costs should be presented in the balance sheet in the same line item that a prepayment of the fees for the hosting arrangement would be presented.
- Cash flows from capitalized implementation costs should be reported in the same manner as cash flows for the fees for the hosting arrangement.
Early adoption of this is permitted, but the amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019 and December 15, 2020 for all other entities.
The Best of Both Worlds: Reduced Initial Fees Spread Out Over the Life of a Hosting Contract
Many businesses have found that cloud hosting does lower the initial costs of implementation but were still looking for a way to control the initial costs that go into making the move. With the announcement of ASC 2018-15 and approval of early adoption, 2019 is as good a time as any to make the move to host your applications in the cloud, remaining compliant and positioning yourself for more tax-advantaged accounting in 2020 and beyond.
At Flywire Technology, we understand the many challenges that firms like yours face when moving to the cloud, and have helped many companies like yours to understand the benefits, forge ahead, and reap the rewards. Accounting advantage are just one benefit; if you want to learn more, subscribe to our blog and contact us for more information.