Accounting for cloud computing fees paid by customers became simpler under an Accounting Standards Update.
The accounting guidance previously provided by the generally accepted accounting principles (GAAP) didn’t provide the clarity customers desire for accounting for their fees to cloud service providers, the update said. For this reason, there were concerns about what may be additional, unnecessary costs, complexity and diversity of practice.
Through a survey, the board heard from stakeholders that the absence of explicit guidance resulted in unnecessary costs and complexity for stakeholders to evaluate accounting for those fees.
The FASB update, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, was issued by the Financial Accounting Standards Board (FASB) as part of its simplification initiative. It’s hoped that the update will help public and private companies and not-for-profit organizations to improve the financial reporting of fees they pay as customers in a cloud computing arrangement.
The update addresses the question of whether a software license is included in the cloud computing arrangement. The answer will determine the accounting method:
- If the software license is included, customers will account for the software license in the same way they account for other software licenses.
- If the license isn’t included, customers will account for the cloud computing arrangement in the same way as they would a service contract.
The guidance already exists in the FASB Accounting Standards Codification in paragraphs 985-605-55-121 through 55-123, but it is included in a subtopic applied by cloud service providers to determine whether an arrangement includes the sale or license of software, the update said.
The update will not affect accounting for software licenses and service contracts under current GAAP. The proposed update will apply to:
- Public companies in annual periods – and interim periods within the annual periods – beginning after Dec. 15, 2015
- Private companies in annual periods beginning after Dec. 15, 2015, and for interim periods beginning after Dec. 15, 2016
- Not-for-profit organizations in annual periods beginning after Dec. 15, 2015, and for interim periods beginning after Dec. 15, 2016
The amendments can be adopted either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively.
If you would like more information about this update, don’t hesitate to contact MKS&H.
McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture and your business goals. This approach enables our clients to achieve their greatest potential.