Corporates Brace For Cloud Computing Accounting Changes

The Financial Accounting Standards Board (FASB), which establishes accounting standards in the U.S., has released new guidance on computing costs for cloud computing to take effect for public businesses in 2020. It also provides a new standard for companies that struggle with the implementation of the technology, according to a report by Compliance Week.

The new information was released in Accounting Standards Update No. 2018-15, called the “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.”

The purpose of the release is to help find a more common ground for accounting costs, one that is more uniform when service contracts for cloud computing services are implemented.

The previous guidance neglected to address hosting agreements that didn’t have software licenses, but the new guidance takes this information into account, whether the license to the hosting software is conveyed or not.

The new version also creates clearer definitions for arrangements between a business and a provider of services, including a hosting arrangement, which means the customer gets to access and use the software but doesn’t have possession of it.

It also alters the requirements for implementation costs in the hosting agreement to be more in-line with what it takes to develop or get software meant for internal use, which includes capitalized costs.

Before, companies had to put aside money for large investments in cloud computing, which were considered service contracts and not software licenses. This meant that they were also not able to separately download the software on their own equipment.

The new standard will also provide guidance on how to present the implementation costs. The capitalized costs will appear on the balance sheet in the same line as the prepaid costs for the hosting agreement.

ASU 2018-15 goes into effect for public businesses in the fiscal years after Dec. 15, 2019. For other organizations, it goes into effect for annual reporting periods starting after Dec. 15, 2020.

Earlier this year, the FASB, offered corporates more time to adopt some revised standards.

According to reports, the FASB approved a proposal to give businesses more time to adopt new standards related to hedging and leases, after voting in July to delay implementation deadlines by between one and three years.

The extension impacted private businesses and nonprofits, reports noted, by giving them until Dec. 15, 2020, to adopt changes in the way they report on hedging and leases.