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Amendment to GAAP Offers Clarity on Accounting for Cloud Computing Fees

The FASB has published a narrow amendment to U.S. GAAP to clarify how to account for the fees paid in a cloud computing arrangement. The update adds guidance to help businesses evaluate the accounting for fees by differentiating between arrangements that include software licenses versus service contracts.

The FASB on April 15, 2015, published Accounting Standards Update (ASU) No. 2015-05, Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement , to clarify the accounting treatment for cloud computing arrangements.

The amendments are intended for cloud computing customers and should be used to determine whether the purchase of cloud services should be accounted for as the purchase of a license to own the software or a service contract. The update adds guidance to Subtopic 350-40, Intangibles—Goodwill and Other—Internal-Use Software , to help make the distinction.

If an arrangement includes a software license, then the software license element should be accounted for consistent with the acquisition of other software licenses. If the arrangement does not include a software license, the arrangement should be accounted for as a service contract.

The update is effective for public companies for fiscal years and interim periods within those years beginning after December 15. For private companies, the effective date also is for annual periods that begin after December 15, but for interim periods, the effective date is a year later.

All companies and organizations may adopt the standard ahead of time, the FASB said.

Companies may adopt the requirements without revising financial results from previous periods, a transition method the FASB calls prospective application. Companies have the option to revise past results, however, through a retrospective application method.

Cloud computing is the delivery of computing as a service rather than a physical product. Resources, software, and information are provided to computers and smart phones as a service over the Internet as opposed to on local servers.

U.S. GAAP does not have explicit guidance to explain how the fees for the services should be accounted for, and companies vary in the way they treat their fees. The absence of guidance also adds cost and complexity for companies accounting for the fees, according to the update.

The amendments are part of the FASB’s “simplification initiative,” which examines narrow problems in U.S. GAAP and offers quick solutions.

The amendments were published in draft form in August 2014 in Proposed ASU No. 2014-230, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement .

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