FASB updates accounting for cloud computing costs

The Financial Accounting Standards Board released an accounting standards update Wednesday aimed at decreasing the complexity of accounting for costs of implementing a cloud computing service arrangement.

The update emerged from a consensus of FASB’s Emerging Issues Task Force that was announced in June (see EITF reaches consensus on accounting for cloud computing costs). It harmonizes two types of requirements for capitalizing implementation costs: those incurred in a hosting arrangement that is a service contract, with those incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).

“Stakeholders observed that existing U.S. GAAP resulted in unnecessary complexity and needed to be updated to reflect emerging transactions in cloud computing arrangements that are service contracts,” said FASB Chairman Russell G. Golden in a statement. “To address this diversity in practice, this standard aligns the accounting for implementation costs of hosting arrangements—regardless of whether they convey a license to the hosted software.”

photo from AICPA conference

The accounting for the service element of a hosting arrangement that’s a service contract isn’t affected by the amendments in the update. The amendments require a customer in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. Costs to develop or obtain internal-use software that can’t be capitalized under Subtopic 350-40, such as training costs and certain data conversion costs, also can’t be capitalized for a hosting arrangement that’s a service contract. Thus, a customer in a hosting arrangement that’s a service contract determines which project stage (for example, preliminary project stage, application development stage, or post-implementation stage) an implementation activity relates to. The costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages are expensed as the activities are performed.

The update will take effect in the next few years. For calendar-year public companies, the changes will be effective for annual periods, including interim periods within those annual periods, in 2020. For all other calendar-year companies and organizations, the changes will be effective for annual periods in 2021, and interim periods in 2022.