In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-15, 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 . This ASU amends the definition of a hosting arrangement to be “an arrangement in which the customer of the software does not currently have possession of the software; rather, the customer accesses and uses the software on an as-needed basis.” The ASU goes on to clarify the accounting for implementation, setup, and other upfront costs (implementation costs) incurred to implement a hosting arrangement that is a service contract.
A customer in a cloud computing arrangement that is a service contract is now required to follow the internal-use software guidance in Accounting Standards Codification (ASC) 350-40 to determine which implementation costs to capitalize as assets. A customer’s accounting for the hosting component of the arrangement is not affected by the new guidance. Implementation costs will be capitalized or expensed depending on the nature of the costs and the project stage (preliminary project stage, the application development stage, or the post-implementation stage) during which they are incurred. Generally, only costs associated with the application development stage are going to be capitalized. Overhead costs cannot be capitalized.
The capitalized implementation costs will be amortized over the life of the hosting arrangement, plus any reasonably certain renewal periods on a straight-line basis, unless another methodology is justifiable.
The amendments in ASU 2018-15 are effective for annual reporting periods beginning after December 15, 2020 for all nonpublic entities. Early adoption is permitted and should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Overall, entities should review hosting arrangements that are service contracts, determine whether costs are associated with the purchase of a software or are for a service, capitalize implementation costs with the purchase of the software that are incurred during the application development stage, and amortize these costs over the life of the hosting arrangement.
If you have any questions regarding the accounting for fees paid in a cloud computing arrangement, please contact your Hawkins Ash CPAs representative.