Under an update to the U.S. Generally Accepted Accounting Principles (GAAP), public companies have an opportunity to spread out the costs of setting up higher cost business systems that operate on cloud technology.

FASB Releases ASU No. 2018-15

The Financial Accounting Standards Board (FASB) has been receiving criticisms about the different accounting treatments for cloud-based SaaS solutions versus those operated on physical onsite servers. Practitioners complained to the FASB that the economics of these arrangements are virtually the same.

Now that more businesses have migrated to cloud-based business applications, the FASB is inundated with comment letters. In August 2018, the FASB published Accounting Standards Update (ASU) No. 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40) in response.

Existing GAAP “resulted in unnecessary complexity and needed to be updated to reflect emerging transactions in cloud computing arrangements that are service contracts,” FASB Chairman Russell Golden said 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.”

GAAP Rules for Cloud-Based Services: What’s Changing?

The existing GAAP states that accounting for services managed in the cloud differs depending on the type of contract a business has with a software provider. When a cloud computing (or hosting) arrangement doesn’t include a software license, the arrangement must be accounted for as a service contract. This means the business must expense the costs as incurred.

With the updated guidance, these businesses will be able to treat the expenses of reconfiguring their systems and setting up cloud-managed business services as long-term assets and amortize them over the life of the arrangement.

The update also aligns with the accounting for implementation costs for cloud-managed systems with the accounting for costs associated with developing or obtaining internal-use software. Public companies will have to record the expense related to the capitalized implementation costs in the same line item in the income statement as the expense for the fees for the hosting arrangement.

ASU No. 108-15 - Effective Dates to Know

This update will be effective for public companies for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. (This means 2020 for calendar-year companies.) For all other entities, the update is effective for annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. Early adoption is permitted.

If your company is considering investing in a cloud-based business software, such as an ERP system, our Technology Solutions team can help you evaluate your options and help implement.

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