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Journal entry — FASB affirms proposed guidance on a customer’s accounting for cloud computing costs

Published on: Feb 20, 2015

At its meeting this week, the FASB redeliberated its proposed ASU1 that would add guidance to ASC 350-402 on a customer’s accounting for fees paid in a cloud computing arrangement. The proposed ASU would require a customer to determine whether a cloud computing arrangement contains a software license. If so, the customer would account for the fees related to the software element as an internal-use software intangible under ASC 350-40; if not, the customer would account for the arrangement as a service contract.

During the meeting, the Board affirmed the proposal without modification. Thus, in determining whether an arrangement contains a software license element, the customer would perform the same assessment that vendors currently perform under ASC 985-605. Specifically, an arrangement would contain a software license element if both of the following criteria are met:

  • “The customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty.”
  • “It is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software.”

Note that the guidance would only apply to the determination of whether a cloud computing arrangement contains a software license element within the scope of ASC 350-40. It would not prescribe how to account for arrangements deemed to be service contracts.

For public business entities, the ASU would be effective in annual periods (and interim periods therein) beginning after December 15, 2015; for all other entities, the ASU would be effective in annual periods beginning after December 15, 2015, and interim periods in the annual period thereafter.

Early adoption would be permitted, and entities could adopt the ASU (1) retrospectively or (2) prospectively to arrangements entered into, or materially modified, after the effective date.

Editor’s Note: In response to feedback received on the proposed ASU, the Board considered but ultimately decided not to provide (1) guidance on the accounting for up-front costs incurred in cloud computing arrangements and (2) additional guidance on the application of the two criteria used to determine whether an arrangement contains a license. However, the Board agreed that for a cloud computing arrangement that includes internal-use software, entities should not determine the accounting by applying the lease classification test, as currently required under ASC 350-40-25-16. Therefore, this paragraph would be superseded by the ASU, and entities with software licenses within the scope of ASC 350-40 would account for them the way they account for other acquired intangible assets.

 

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1 FASB Proposed Accounting Standards Update, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.

2 For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”

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