Increasingly, software solutions are available only through the cloud, and because business operations continue to automate, cloud-based solutions can represent a fairly significant investment. Organizations received recently updated accounting guidance in ASU 2018-15 Cloud Computing Arrangements, which was issued in as a consensus of the Financial Accounting Standards Board’s Emerging Issues Task Force.
Public companies adopted the changes in 2020, and for private companies with calendar year-ends, the accounting update is in effect for 2021. Below is a quick recap of what private entities should know about the standard for their reporting.
What ASU 2018-15 Tries to Accomplish
The impact of the ASU is to align the accounting for implementation costs incurred in a hosting arrangement that does not include a license to internal-use-software (i.e., a cloud computing arrangement) with one that does. Both will follow the steps in ASC Subtopic 350-40 to account for implementation costs incurred.
A hosting arrangement is one that allows the customer to access and use the software on an “as needed basis” without having possession of the software. Under the guidance provided by ASU 2018-15, companies will now capitalize costs that were typically expensed under previous guidance. The capitalized costs are amortized to expense over the term of the hosting arrangement. In addition to the noncancellable term of the hosting arrangement, renewal options that are reasonably certain to be exercised by the customer or which are in the control of the vendor are included in determining the term of the hosting arrangement.
The chart below depicts the accounting for implementation costs incurred in a cloud computing for both hosting arrangements that include internal-use software and those arrangements that do not subsequent to the adoption of ASU 2018-15:
| Project Stage || Accounting for Costs Incurred |
| Preliminary || Expense |
| Application Development || Capitalize |
| Post-Implementation || Expense |
How are costs in a cloud computing arrangement evaluated?
Each individual cost in a cloud computing arrangement is evaluated to determine whether it is required to be capitalized or expensed. Therefore the “unit of account” is the individual expense itself. However, once it is determined that the individual cost is capitalized, the cost is typically assigned to the module or component to which it relates. It is not unusual to have multiple modules or components. Capitalized implementation costs are amortized from the point in time that the related module or component is substantially complete and ready for its intended use. From a practical standpoint, if capitalized implementation costs that relate to different modules or components become ready for their intended use concurrently and have the same expected life, a single unit of account may be utilized.
How do you determine the term of the hosting arrangement and consideration of renewals?
Often the vendor and customer may expect to renew the hosting arrangement beyond its original non-cancellable term. The question arises as to whether the hosting arrangement term can include the expected renewal in the absence of a stated contractual renewal option. The amortization period for capitalized implementation costs is expressly limited to the non-cancellable term of the hosting arrangement plus periods for which the customer or vendor have option to extend. An expectation of renewal is not permitted in the determination of the hosting arrangement term.
When would you perform a reassessment of the hosting arrangement term?
ASC 350-340 requires a periodic reassessment of the estimated hosting arrangement term over which the capitalized implementation costs are amortized. Your organization should consider the factors present in the original determination; unfortunately, the guidance as written is not clear how often the reassessment should occur. Generally speaking, if the cloud computing arrangement is modified or an exercise of a renewal or termination option occurs, you should perform a reassessment. Otherwise, your organization should develop appropriate internal controls and processes to identify substantive changes in the factors found in ASC 350-40 that are considered in determining or reassessing the hosting arrangement’s term. Then, if substantive changes are identified using those internal controls, a reassessment should be performed.
Your Biggest Takeaway
Working with an accounting provider who understands the complexity of accounting for cloud computing arrangements is vital in making sure that your company is accounting for its costs appropriately. For more information, please contact us.