How Do I Account for Cloud Computing?

October 25, 2016

On April 15, 2015, the FASB issued ASU 2015-05 focusing on customer’s accounting for internal-use software especially fees paid in a Cloud Computing Arrangement (CCA). From time to time, lack of explicit guidance about fees paid in a CCA has caused unnecessary costs to organizations in extra accounting fees.

The major changes in the update include eliminating the analogy to leasing guidance, adding a few more subtopics in defining software license and service contract, and some other amendments. If an organization obtains a software license for cloud computing service, it should account for that license consistently with the acquisition of any other license of an intangible asset. A software license will be accounted for differently based on its type and payment method. If it is a perpetual software license which the organization pays a one-time license fee then the costs should be capitalized. If the organization pays the software license as a subscription then the cost should be expensed.  Otherwise, the organization should account for the cloud computing fees for service contract as either prepaid expenses or operating expenses. The new glossary added definitions for “hosting arrangement” and “without significant penalty”.

In summary, when dealing with accounting issues of cloud services, the organization should disclose them in a way similar to other licenses, under the scope of intangible asset instead of leases.

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