New Software Accounting Guidance Alert: ASU 2018-15

February 20, 2020

By Fred Kosnac

Beginning on January 1, 2020, many public companies will be required to adopt the recently issued FASB Accounting Standards Update (ASU) 2018-15, Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract.

Here are some key things to know as you assess the impact of adopting this ASU:

  • A hosting arrangement which does not include a license to internal-use software would generally be deemed a service contract. The implementation costs incurred under these arrangements would, upon adoption of the ASU, be accounted for according to the guidance for internal-use software under ASC 350-40.
  • Qualifying implementation costs incurred can only be capitalized in the application development stage of a project. Any implementation costs incurred in the preliminary project or post-implementation stages cannot be capitalized and should be expensed as incurred.
  • Capitalized implementation costs are to be amortized over the term of the hosting arrangement. In determining the term of the arrangement, an entity should consider any options to extend or terminate the arrangement and how likely it is that the option will be exercised.
  • Implementation costs that are capitalized under this ASU should be presented on the same balance sheet line as any prepayments for fees of the related service contract.
  • Amortization expense of capitalized implementation costs for service contracts should be presented in the same income statement line item as fees for the associated hosting agreement.
  • This ASU is effective for non-public entities for annual periods beginning after December 15, 2020. Early adoption is also permitted for all entities.
  • The guidance may be applied retrospectively, which would require a cumulative catch-up adjustment to retained earnings or prospectively to any eligible costs incurred subsequent to the effective date of the ASU.

The updated guidance is intended to make the capitalization of implementation costs for cloud computing arrangements consistent, regardless of whether or not the arrangement is deemed a service contract.

About Fred Kosnac

Mr. Kosnac provides accounting, auditing and business consulting services to businesses in both the public and private sectors. He also contributes to EisnerAmper's technology and life sciences blog.