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Cloud Computing Accounting FAQs

May 7, 2020

Cloud computing arrangements – or hosting arrangements – are increasing in prevalence. While the potential benefits are numerous, there is a level of uncertainty in the actual accounting for the development or acquisition of internal-use software. Here, we tackle some common questions companies might find themselves asking when entering into such an arrangement.

Q: Okay, so what exactly is a hosting arrangement? Do I have one?

A: The Center for Plain English Accounting defines a hosting arrangement as when “the customer does not currently have possession of the software; rather, the customer accesses and uses the software on an as-needed basis.” In other words, are you taking physical possession of the software in question, either by media device or download/installation? If the answer is no, you likely have a hosting arrangement.

Q: Does it matter whether or not I have a license to the software in question?

A: Yes it does. A hosting arrangement that does not contain a software license would be treated as a service contract and the related costs would generally be expensed as incurred. An example of this would be using a third-party payroll provider’s online portal to manage payroll. The arrangement would likely be considered a service contract if you were never acquiring a license for the actual software.

A hosting arrangement that does contain a software license (think Microsoft Office, for example) is typically treated as internal-use software.  You would capitalize the cost of the license and implementation costs and amortize over the estimated useful life in accordance with FASB ASC 350-40. For additional information, see The 3 Stages of Capitalizing Internally Developed Software.

Q: Are there any changes in accounting guidance I need to consider?

A: Yes there are. Accounting Standards Update (ASU) 2018-15 is effective for most public entities in 2020 and for private companies in 2021. Upon adoption of this update, certain implementation costs related to hosting arrangements that are service contracts may now be capitalized. Prior to this update there was not clear guidance on the accounting for implementation costs for these service-type hosting arrangements.

Q: What types of implementation costs would typically be covered under ASU 2018-15?

A: You should assess implementation costs to determine whether they should be capitalized or expensed in accordance with internal-use software guidance, as referenced above. Implementation costs could include setup, training, interfacing, configuration, and other similar costs incurred.

Q: Does ASU 2018-15 apply to all types of hosting arrangements?

A: No. ASU 2018-15 only affects implementation costs of hosting arrangements that are considered service contracts. There is no change to the treatment of the underlying hosting arrangements or to implementation costs for arrangements that are not deemed service contracts – they are still accounted for under internal-use software guidance in ASC 350-40.

Q: I did the assessment and capitalized some implementation costs for my hosting arrangement. How do I report the amortization?

A: An important distinction when it comes to hosting arrangements that are service contracts is that the amortization of any capitalized implementation costs are to be presented in the same line of the income statement as the service contract fees – not within depreciation/amortization expense.

For more information on ASU 2018-15, see New Software Accounting Guidance Alert: ASU 2018-15.

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