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Cloud Computing Proposal Addresses Customers’ Reporting of Fees

The FASB issued a proposal to clarify how cloud computing clients report fees they pay to suppliers. Cloud computing customers are expected to use the amended guidance to determine whether they have a license to use the software or a service contract.

The FASB issued Proposed Accounting Standards Update (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, on August 20, 2014.

Comments are due by November 18, the FASB said. The accounting board agreed in June to publish the proposal for a three-month comment period.

The proposed amendment to U.S. GAAP is intended to clarify how cloud computing clients report fees they pay to suppliers.

U.S. GAAP doesn’t explicitly address how customers should report cloud-computing fees, the FASB said. Some financial professionals have told the accounting board that the lack of a clear standard makes reporting the fees unnecessarily complicated and costly, and it leads to inconsistencies in reporting the fees. Some companies treat their purchases of cloud computing services as software licenses, although more typically the agreements are treated as service contracts.

The proposal is intended to help customers determine whether a cloud computing contract is a software license, which was one of the chief concerns FASB members had when they debated the issue. The more stringent criteria are expected to establish more consistency in financial reporting by cloud computing clients, who are being asked to apply the revenue recognition accounting service providers use when reporting their results.

Board members agreed to adapt the application of the guidance for service providers in FASB ASC 985-605-55-121, through FASB ASC 985-605-55-123, Software — Revenue Recognition — Implementation Guidance and Illustrations, formerly Emerging Issues Task Force (EITF) Issue No. 00-3, to cloud customers. In Proposed ASU No. 2014-230, the FASB is proposing to add the guidance to FASB ASC 350-40-15-4, Intangibles—Goodwill and Other—Internal Use Software, formerly AICPA Statement of Position (SOP) No. 98-1. Cloud computing customers will use the amended guidance to determine whether they have a license to use the software or a service contract.

A customer would need both the contractual right and the data center capacity to load the software in order to be considered licensing it. If either the right or the computing power is missing, then the customer would have a service contract.

If the proposed amendments are finalized, public companies will begin applying them for fiscal years starting after December 15, 2015, and the first quarterly reports in 2016. Privately held companies and not-for-profit organizations would also apply the change to the fiscal years that start after December 15, 2015, but won’t have to apply them to quarterly or semiannual reports until 2017.

The FASB said the changes can be adopted ahead of the effective date.

When adopting the change, the FASB said companies can revise their results from earlier periods, in what the board calls retrospective transition. Companies that opt for retrospective transition will follow the disclosure requirements in Subtopic 250-10, Accounting Changes and Error Corrections—Overall, formerly SFAS No. 154.

Companies will also be permitted to adopt the change without the revisions to the earlier results, using what the FASB calls prospective transition. If a company opts for prospective transition, it should add a disclosure to its financial statement footnotes that explains the change and describes the line items it affects.

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