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The Generally Accepted Accounting Principles (GAAP) has an update that allows companies to capitalize, or spread the costs of, setting up expensive business systems that operate using cloud technology.
Demand for change
In August, the Financial Accounting Standards Board (FASB) published Accounting Standards Update (ASU) No. 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 update was in response to complaints from businesses over the past three years about the different treatment between cloud-based services and physical servers onsite. The complaints stated that the economics between the two methods were insignificant.
FASB Chairman Russell Golden stated that the existing GAAP “resulted in unnecessary complexity and needed to be updated to reflect emerging transaction in cloud computing arrangement that are service contracts,” he continued, “to address this diversity in practice, this standard aligns the accounting for implementation costs of hosting arrangements — regardless of whether they convey a license to the hosted software.”
The existing GAAP cloud-based services have different accounting according to the type of contract a business has with their software provider. Lack of a software license in a cloud computing (or hosting) arrangement requires the arrangement to be accounted for as a service contract; causing to expense the costs as incurred.
The new policy allows businesses to treat reconfiguration of their systems as well as cold-managed business services as long-term assets and amortize them over the period of the contract. The update also similarizes the accounting costs for cloud-managed systems and internal-use software. The expense related to capitalized implementation costs in the same line item in the income statement as the expense for the hosting arrangement fees.
Early adoption of the new policies is permitted. Required updates will be effective for public businesses for fiscal years starting after December 15, 2019, as well as during the interim periods within those fiscal years, meaning 2020 for calendar-year companies. The update will apply for annual reporting periods after December 15, 2020, and interim period within annual reporting periods after December 15, 2021, for all other companies.
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