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FASB Looks to Resolve Accounting Issues with Cloud Computing Costs

A solution is in the works to help frustrated organizations account for their cloud computing software costs. At the Financial Accounting Standards Board’s (“FASB”) Not-for-Profit Advisory Committee meeting on September 8, Project Manager Jamie Dordik stated that the FASB’s research staff is currently reviewing opportunities to improve transparency of the accounting guidance for expenses associated with implementing cloud computing arrangements.

Research staff members are looking at accounting options the FASB’s Emerging Issues Task Force (“EITF”) had considered at its July meeting. In that meeting, the EITF failed to reach a consensus on providing clear cloud computing guidance to businesses. One side argued that the costs related to a cloud computing arrangement labeled as a service contract should be classified as an asset or expense when incurred. This view is based on the guidance under Topic 340, Other Assets and Deferred Costs, Subtopic 350-40, Intangibles—Goodwill and Other— Internal-Use Software, Topic 360, Property, Plant, and Equipment, or Subtopic 720-45, Other Expenses — Business and Technology Reengineering. Members acknowledged that organizations would need to use judgment when deciding the best guidance to follow. Another option presented at the July meeting was accounting implementation costs similar to a software license, as stated under Accounting Standards Update No. 2015-05, Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.

The FASB and EITF want to determine whether cloud computing setup costs should be recognized as assets amortized during the life of the contract or disclosed as an expense during the period when incurred. Organizations with software installed on servers in their operating locations can capitalize the implementation costs, which allow the expense to be spread out by classifying it as a long-term asset and amortizing it over the span of the software contract.

FASB research staff members are also considering an additional accounting option to present at the EITF’s next meeting, which is scheduled for October 12. Dordik said the new option would permit more capitalization of the costs for establishing a cloud computing arrangement while staying in line with the FASB’s Conceptual Framework.

 

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