Task Force to Issue Final Consensus on Cloud Computing Arrangements
The Emerging Issues Task Force (“EITF”) has agreed to issue a final consensus on its project to clarify the accounting for implementation expenses for a cloud computing arrangement that is a service contract. Voted on at a recent EITF meeting, Issue No. 17-A, “Customer’s Accounting for Implementation, Setup, and Other Upfront Costs (Implementation Costs) Incurred in a Cloud Computing Arrangement That Is Considered a Service Contract,” will include the following decisions in the final consensus:
- Businesses will be required to capitalize the implementation costs of a hosting arrangement that is a service contract using the guidance under 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; Disclosures for Implementation Costs Incurred for Internal-Use Software and Cloud Computing Arrangements.
- The capitalized implementation costs of a hosting arrangement that is a service contract must be expensed over the hosting arrangement’s term (e.g., renewal options) and disclose them on the same line item in the income statement as the fee linked to the hosting arrangement.
- Capitalized implementation costs must be disclosed in the same line item on the balance sheet as prepaid fees associated with the hosting arrangement.
- The cash flows related to capitalized implementation costs must be categorized just like the cash flows for charges associated with the hosting arrangement.
- No guidance will be given regarding the application of the project stages under Subtopic 350-40 to hosting arrangements.
- Businesses must use the impairment model under Subtopic 350-40 and clarify that the accounting unit for abandonment is the asset linked to a module or component of the hosting arrangement.
- The definition of “Hosting Arrangement” in the Master Glossary no longer includes the reference to licensing.
- Businesses can choose either the prospective transition or retrospective transition when adopting the guidance in any amendments caused by Issue 17-A.
For public businesses, Issue 17-A will be effective for fiscal years, and interim periods within, starting after December 15, 2019. All other businesses must apply Issue 17-A to fiscal years starting after December 15, 2020, and to interim periods within fiscal years starting after December 15, 2021. Early adoption is permitted for all businesses in any yearly or interim period for which their financial statements have yet to be issued.