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Technology Alert: FASB finalizes guidance on a customer’s accounting for cloud computing costs

Published on: Feb 26, 2015

At its meeting last 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 significant 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 new guidance would be effective in annual periods (and interim periods therein) beginning after December 15, 2015; for all other entities, the guidance 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 guidance (1) retrospectively or (2) prospectively to arrangements entered into, or materially modified, after the effective date.

Editor’s Note: At the meeting, the Board considered feedback on the proposed ASU and decided not to provide guidance on:

  • The accounting for up-front costs — The Board acknowledged that guidance on implementation fees would be helpful to constituents but decided not to broaden the scope of the project because doing so would require more outreach as well potential re-exposure of the proposal, which could significantly delay the finalization of this simplification project. In addition, the Board noted that the accounting for up-front costs related to service contracts may need to be addressed in a more comprehensive manner (i.e., that the guidance should not be limited to cloud computing arrangements); however, the Board did not indicate that it was considering a project to develop such guidance.
  • The application of the two criteria used to determine whether an arrangement contains a license — The Board acknowledged that it was asked by some constituents to provide additional guidance on how to apply the criteria. However, since the criteria are generally operational from a vendor’s perspective, the Board noted that providing additional guidance on them would potentially affect the vendor’s assessment for revenue recognition purposes, which would require the Board to perform additional outreach and potentially issue a new proposal.

However, the Board agreed that entities should not use the lease classification test for a cloud computing arrangement that includes internal-use software, as currently required under ASC 350-40-25-16. The ASU would therefore supersede this paragraph, 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.


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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