Cloud computing offers unprecedented convenience and adaptability, especially now with so many organizations encouraging remote working arrangements for employees. With cloud computing, your team logs into the organization’s systems from any internet-connected computer. Data stored on the cloud offers excellent security and backup protection as well as the convenience of accessibility.
FASB Offers New Cloud Computing Standard
FASB announced another new standard on cloud computing costs associated with a service agreement. This standard is effective for public business entities in fiscal years beginning on or after December 15, 2019, and will take effect for all other entities for reporting periods beginning after December 15, 2020.
Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Service Arrangement That Is a Service Contract has a very long and complex title for a standard intended to reduce complexity.
The standard now aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement. The hosting arrangement must be a service contract. The requirements are for capitalizing the implementation costs incurred to develop, or obtain, software and hosting arrangements that include an internal-use software license. Note, however, that the amendment doesn’t affect accounting for the service element of a hosting arrangement if it is in a service contract.
Before this clarification, there were two different capitalization models. Each model depended on whether the item purchased was a service agreement or an asset. However, cloud computing models weren’t included in the 2015-issued standards. This update clarifies how to account for cloud computing adoption, a popular method of software adoption.
Hybrid Solutions Require Close Accounting Attention
Another challenge that many organizations face is accounting for hybrid cloud models. Hybrid models may include both cloud-based and site-based elements in a software solution. If it’s both, how should it be accounted for?
Companies must assess which portion of the costs are internal-use and which are considered part of a service agreement. The focus should be on identifying costs and properly allocating them to the correct item.
Potential Advantages from the Update
There are some potential advantages from the FASB update, too. One advantage is the deferral aspects of the costs that qualify. EBITDA and some balance sheet metrics may be impacted by the deferral.
The new standard also aligns the balance sheet and income statement in the aggregate for all types of software. It adds consistency and comparability which help accountants provide clear financial reports.
Getting to the Right Answer
Clarity and consistency are both vital to accounting metrics, with management involved in policy decisions regarding IT projects. Deciding whether or not to adopt a hybrid cloud model, pure cloud, or site-based solution is a decision that requires time and care. Each organization must weigh the pros and cons of various products and solutions, including the financial and accounting ramifications, and determine what is best for their needs.
The best method of determining new software for an organization is to include representatives from each department on the decision team. This includes members from finance and accounting who, together with IT, marketing, sales, and management must decide which solution meets the organization’s needs the best. By understanding the financial ramifications of adopting new software, the finance team can provide an informed opinion about the best choice from an accounting and financial perspective.
Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please at 206-605-3113 for more information.