No. 2015-25
20 April 2015
To the Point
FASB — final guidance
FASB clarifies a customer’s
accounting for payments made in
a cloud computing arrangement
The FASB continues
to make progress
on its simplification
initiative.
What you need to know
• The FASB amended its guidance on internal use software to clarify how customers in
cloud computing arrangements should determine whether the arrangement includes a
software license.
• The amendment also eliminates today’s requirement that customers analogize to the
leases standard when determining the asset acquired in a software licensing arrangement.
• For calendar year-end entities, the guidance is effective 1 January 2016. Early adoption
is permitted. Entities have the option of applying the guidance prospectively or
retrospectively.
Overview
The Financial Accounting Standards Board (FASB or Board) issued final guidance clarifying
that customers should determine whether a cloud computing arrangement includes the
license of software by applying the same guidance cloud service providers use to make this
determination. 1 The Accounting Standards Update (ASU) 2 also eliminates the existing
requirement for customers to account for software licenses they acquire by analogizing to the
guidance on leases.
The FASB developed the new guidance as part of its simplification initiative to reduce the cost
and complexity of financial reporting while improving or maintaining the usefulness of the
information reported. In this initiative, the FASB is tackling narrow topics it can address more
quickly than usual.
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Key considerations
ASU 2015-05 amends Accounting Standards Codification (ASC) 350-40 3 on internal use
software to provide guidance to customers about whether a cloud computing arrangement
includes a software license. Examples of cloud computing arrangements include software as a
service, platform as a service, infrastructure as a service and other hosting arrangements.
If a hosting arrangement includes a software license for internal use software, the software
license should be accounted for by the customer under ASC 350-40. A license of software
other than internal use software would be accounted for by the customer under other
US GAAP (e.g., a research and development cost and software to be sold, leased or otherwise
marketed). If a hosting arrangement includes a software license, then that would be in
addition to any service contract in the arrangement. Hosting arrangements that do not
include software licenses should be accounted for as service contracts.
The ASU also eliminates the existing requirement that customers analogize to the guidance
on leases in ASC 840 to determine the asset acquired in a software licensing arrangement. 4
Instead, customers will account for software licenses that are in the scope of ASC 350-40 in
the same manner as licenses of other intangible assets.
The ASU changes
the accounting
model for all
customers that
license internal
use software.
Some respondents suggested that the FASB expand the scope of the ASU to include guidance on
accounting for implementation and other up-front costs in cloud computing arrangements. The
FASB decided not to expand the scope of the ASU because if a cloud computing arrangement
transfers a software license, ASC 350-40 provides guidance on how to account for costs such
as training, data capture and conversion activities. The FASB noted that costs incurred when
entering into a service contract are not unique to cloud computing arrangements, and the scope
of that issue is much broader than the ASU. We believe the nature of any implementation and
up-front costs a customer incurs when it enters into a cloud computing arrangement that
does not transfer a software license should be evaluated, and the costs should be accounted
for in accordance with applicable US GAAP (e.g., ASC 720-45 5 or ASC 720-15 6).
How we see it
A cloud computing customer that determines it is acquiring a software license will no longer
consider the lease guidance to determine the accounting for the software license and would
instead account for it in the same manner as other licenses of intangible assets. This would
be a change in practice for entities that today analogize to the guidance on leases.
Effective date and transition
Entities have the option of applying the guidance (1) prospectively to all arrangements
entered into or materially modified after the effective date or (2) retrospectively. Entities that
elect prospective application are required to disclose the reason for the change in accounting
principle, the transition method, and a description of the financial statement line items affected
by the change. Entities that elect retrospective application must disclose the information
required by ASC 250. 7
For public business entities, the guidance is effective for annual periods, including interim
periods within those annual periods, beginning after 15 December 2015. For all other
entities, the guidance is effective for annual periods beginning after 15 December 2015 and
interim periods in annual periods beginning after 15 December 2016. Early adoption is
permitted for all entities.
2 | To the Point FASB clarifies a customer’s accounting for payments made in a cloud computing arrangement 20 April 2015
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Endnotes:
1
2
3
4
5
6
7
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ASC 985-605-55-121 through 55-123.
ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.
ASC 350-40, Internal-Use Software.
ASC 350-40-25-16 says: “Entities often license internal-use software from third parties. Though Subtopic 840-10
excludes licensing agreements from its scope, entities shall analogize to that Subtopic when determining the asset
acquired in a software licensing arrangement.”
ASC 720-45, Business and Technology Reengineering.
ASC 720-15, Start-Up Costs.
ASC 250, Accounting Changes and Error Corrections.
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3 | To the Point FASB clarifies a customer’s accounting for payments made in a cloud computing arrangement 20 April 2015