FASB Issues Standard for Cloud Computing Fees

The Financial Accounting Standards Board released two accounting standards updates last week, one of which covers the fees paid for cloud computing while the other applies to defined benefit obligations and plan assets.

Both updates are part of FASB's simplification initiative aimed at eliminating unnecessary complexity in accounting standards. In the first update, “Accounting Standards Update No. 2015-05—Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” FASB noted that existing GAAP does not include explicit guidance about a customer’s accounting for fees paid in a cloud computing arrangement. These can include software as a service, platform as a service, infrastructure as a service, and other similar hosting arrangements. FASB said it heard from stakeholders that the absence of explicit guidance resulted in some diversity in practice, along with unnecessary costs and complexity, in evaluating the accounting for those fees.

The guidance already exists in the FASB Accounting Standards Codification, but it's included in a subtopic applied by cloud service providers to determine whether an arrangement includes the sale or license of software. The amendments in the latest update provide guidance to customers about whether a cloud computing arrangement includes a software license.

If a cloud computing arrangement includes a software license, then FASB said the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP for a customer’s accounting for service contracts.

In the other update issued last week, Accounting Standards Update No. 2015-04—Compensation—Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets, FASB said a reporting entity with a fiscal year-end that does not coincide with a month-end may incur more costs than other entities when measuring the fair value of plan assets of a defined benefit pension or other post-retirement benefit plan. That's because information about the fair value of plan assets obtained from a third-party service provider typically is reported as of the month-end. That information then is adjusted to reflect the fair value of plan assets as of the fiscal year-end.

For an entity with a fiscal year-end that does not coincide with a month-end, the amendments in the latest update provide a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. The practical expedient should be applied consistently to all plans if an entity has more than one plan, FASB noted.

If a contribution or significant event (such as a plan amendment, settlement, or curtailment that calls for a remeasurement in accordance with existing requirements) occurs between the month-end date used to measure defined benefit plan assets and obligations and an entity’s fiscal year-end, the entity should adjust the measurement of defined benefit plan assets and obligations to reflect the effects of those contributions or significant events. However, an entity should not adjust the measurement of defined benefit plan assets and obligations for other events that occur between the month-end measurement and the entity’s fiscal year-end that are not caused by the entity (for example, changes in market prices or interest rates).