The use of service providers to host and support computing needs is abundant (and growing) in today’s business environment. Many companies have grown accustomed to the ease of on-demand availability of resources and the limited user data management requirements.

Whenever I start thinking about this topic, I can’t help but put a spin on the refrain of that classic Rolling Stones hit, “Get (on to) my cloud!” and set this phrase on replay in my head!

So, with the current trend favoring the use of cloud computing arrangements when compared with in-house solutions, is there anything noteworthy from an accounting perspective?

How about some background?

Prior to the issuance of ASU 2018-15, there was no explicit guidance related to accounting for certain costs incurred in connection with cloud computing arrangements in the codification. While the FASB did initially provide guidance in ASU 2015-05 regarding the treatment of fees paid in connection with a cloud computing arrangement, the guidance was silent as to the treatment of expenses incurred by the customer to convert data from its existing software into the cloud-based computing environment. Jenny Lukac wrote a great blog discussing ASU 2018-15 shortly after its initial issuance.

What’s changing?

Mick and Keith were right; two really is a crowd! Instead of treating implementation costs in a different manner if a company chose to use an outside service provider, the FASB updated the guidance to align the requirements for capitalizing certain implementation costs in a cloud computing arrangement that is a service contract with the requirements for capitalizing certain implementation costs incurred to develop or obtain internal-use software.

So, what does that mean?

Normally, when developing internal-use software, the project consists of three stages:

1. Preliminary project
2. Application development
3. Post implementation

ASC 350-40 requires companies to expense costs as incurrent in both the preliminary project stage and the post-implementation stage. However, there are costs incurred during the application development stage that, when certain criteria are met, may be capitalized! Jenny’s blog includes a case study example to illustrate some costs and the appropriate treatment!

The capitalizable costs incurred during the application development stage that relate to implementation efforts (e.g. integration costs, testing costs) are amortized on a straight-line basis over the term of the service arrangement. The term includes both the non-cancellable period plus certain additional periods that meet specific criteria. Check out Jenny’s blog for details!

The issuance of ASU 2018-15 aligns the spirit of the software arrangement under both circumstances to better reflect certain costs incurred by a company over the period of benefit.

The capitalized costs are evaluated for impairment in accordance with long-lived asset guidance (ASC 360-10-35).

While much of the guidance on how to account for implementation costs for cloud-computing arrangements mirrors that of internal-use software, there are differences as to presentation and disclosure requirements:

• Balance sheet: Instead of being classified as an intangible asset, capitalizable implementation costs associated with cloud computing arrangements are presented on the balance sheet in other assets.
• Income statement: Amortization of capitalizable implementation costs is classified in the same financial statement line as the fee for the cloud computing arrangement.
• Statement of cash flows: Cash outflows for implementation costs in cloud computing arrangements are reflected as a component of operations (as opposed to an investing activity for internal-use software).

When is it effective?

Companies may early adopt these provisions, and the updates may either be applied prospectively or retrospectively. The amendments are effective in fiscal years beginning after December 15, 2019 for public business entities, including interim periods within those years. For other entities, the amendments are effective in fiscal years beginning after December 15, 2020 and interim periods within annual periods after December 15, 2021.

Where can I learn more about ASUs effective in 2020?

Sometimes it seems like the FASB never wants to go to bed with all of these updates! ASU 2018-15 is just one of several updates impacting companies in 2020. Would you like to learn more and earn some CPE? We have some great courses for you!

- ASUs Effective in 2020 (2.0 CPE)

- ASUs Effective in 2021 and Beyond (2.0 CPE)

These courses are also available as part of our U.S. GAAP Update (2020), A&A Update (2020), OR our Ultimate U.S. Update (2020) – You pick what works for you!

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