The FASB agreed to finalize an update to U.S. GAAP that will let businesses capitalize the implementation costs for setting up cloud computing systems. The FASB endorsed a decision from its Emerging Issues Task Force (EITF) that will align the accounting for cloud computing costs with the accounting for the costs from developing or obtaining internal-use software.
Companies will be able to capitalize the costs of setting up cloud computing systems, the FASB agreed by a 4-2 vote on June 27, 2018.
The board said it would publish a final update to U.S. GAAP by late summer or early fall based largely on Proposed Accounting Standards Update (ASU) No. 2018-230, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract; Disclosures for Implementation Costs Incurred for Internal-Use Software and Cloud Computing Arrangements — a Consensus of the FASB Emerging Issues Task Force.
The update developed by the FASB’s Emerging Issues Task Force (EITF) is a response to requests from businesses that complained to the FASB about the different accounting treatment for the setup costs for cloud-based services compared to software installed on a company’s servers. The differences have persisted in U.S. GAAP despite the similar economics of each type of purchase. The requests became more numerous as more businesses moved to cloud computing.
The final update is expected to tell businesses to look at the guidance in FASB ASC 350-40, Intangibles — Goodwill and Other — Internal-Use Software, to determine which implementation costs in a cloud computing arrangement that is considered a service contract can be capitalized as an asset. The EITF agreed that costs for employee training, reconfiguring systems, and entering software code for the cloud service should be capitalized as long-term assets and amortized over the contract’s life. Businesses now record the costs at the time they set up a cloud contract.
The final update is also expected to align the accounting for the implementation costs of a cloud arrangement with the costs for developing or purchasing internal-use software. Businesses will have to record the expense related to the capitalized implementation costs in the same income statement line item as the expense for the fees for the hosting arrangement, the FASB said.
U.S. GAAP has required different accounting for services managed in the cloud based on the type of contract a business has with a software provider. When a hosting arrangement does not include a software license, the arrangement must be accounted for as a service contract, which means businesses must expense the costs as incurred.
Businesses have long complained that there no difference between on-site software applications versus those managed in the cloud, so the accounting treatment for both applications should be the same.
Two of the FASB’s six members — Marc Siegel and Christine Botosan — dissented from the final vote because they believe the implementation costs do not represent assets. In their view the planned amendment could provide an incentive for businesses to structure more service deals to treat the costs as capital assets and amortize them over a service contract’s life.
“Costs that are incurred in customizing and configuring a vendor’s software, in my opinion, are not an asset of the vendor’s customer,” Botosan said. “When we recognize those as assets on the customer’s books, my concern is that we not going to be providing relevant information to the users of financial statements about the customer’s own assets.”
Siegel said he believed the update would “open the door to changing all of service contract accounting.”
