Clearing Up Cloud Computing Accounting

In today’s business environment, cloud computing arrangements play a key role in the day-to-day operations of companies large and small. The Financial Accounting Standards Board’s (FASB) Accounting Standards Update (ASU) 2015-05 helps fill some of the gaps, though not all, regarding the proper accounting for such arrangements. Following a recent Emerging Issues Task Force (EITF) meeting, the FASB is further considering aligning the accounting for cloud computing arrangements with the accounting for software licenses, so there is more to come in that regard. However, this article provides an overview of cloud computing arrangements, clarification on which types of hosting arrangements are considered under the current accounting principles, and further guidance on which costs to expense or capitalize in hosting arrangements that include a software license.

Cloud computing arrangements include “software as a service” (SaaS), “infrastructure as a service” (IaaS), “platform as a service” (PaaS), and a variety of other hosting arrangements, such as storage, database, application, security, and management. A “hosting arrangement” is defined as an arrangement in which the end user does not take possession of the software. Instead, the software remains on the vendor or third party’s server, allowing the user access to the software over the Internet on an as-needed basis.

Customers of cloud computing arrangements should first evaluate the type of hosting arrangement they have in order to apply proper accounting. If the cloud computing arrangement includes a software license, the customer should account for it as an acquisition of an intangible asset. If the arrangement does not include a software license, and the customer is simply obtaining the right to receive hosting services for a fee, the customer should account for the arrangement as a service contract.

It is important to note that, in order for a hosting arrangement to be accounted for as a purchased intangible asset, the hosting arrangement must be for internal use and meet both of the following criteria:

  1. The customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty. (The term “without significant penalty” means that the customer is able to take delivery of the software without incurring significant cost and to use the software separately without a significant diminution in utility or value.)
  2. It is feasible for the customer to run the software on its own hardware, or contract with another party unrelated to the vendor to host the software.

If these requirements are not met, the cloud computing arrangement does not include a software license, and must be accounted for as a service contract. However, if the requirements are met, customers account for the software license purchase at cost, which is the present value of the license obligation, amortized over its useful life.

ASC 350-40: Accounting for Business Combinations, Goodwill, and Other Intangible Assets provides further guidance on which costs can be expensed as incurred and which costs must be capitalized in the acquisition of a software license. Those that may be expensed include the following:

  • Internal and external costs incurred prior to the application development stage
  • Training costs
  • General and administrative costs
  • Overhead costs
  • Business process re-engineering costs
  • Certain data conversion costs
  • Maintenance and other ongoing operating costs

Internal and external costs incurred during the application development stage are capitalized as part of the cost of the software license. Capitalization of costs ceases when the software project is ready for its intended use after all testing is completed. In other words, when the software is placed in service, no further costs can be capitalized, and the software is then amortized over its intended useful life.

ASU 2015-05 does not contain explicit guidance regarding implementation costs of cloud computing arrangements that are service contracts. While the FASB’s recent task force meeting addressed concerns regarding the absence of guidance regarding this topic, a final decision has not yet been made. Until that such time, customers are expected to refer to existing Generally Accepted Accounting Principles to develop a reasonable accounting method for cloud computing arrangements that do not include a software license.

If you would like more information about accounting for cloud computing arrangements, or would like to request a speaker on this topic for your organization or event, contact one of our PYA executives below at (800) 270-9629.



Mike Shamblin

Mike Shamblin

Managing Principal of Audit & Assurance Services

Catherine Bunch

Catherine Bunch


Related Posts
Medicare cards are getting a much-needed facelift.  The Centers for Medicare & Medicaid Services has announced its intention to remove Social Security numbers from the cards in an effort to...
Read More
Medicare card scam

New Medicare Cards in the Mail—Don’t Fall Prey to Scammers

PYA Consulting Manager Kathryn Culver was recently published in Becker’s Hospital Review. Culver’s article, “Trump’s Tax Act: What It Means for a Physician’s Bottom Line,” examines the impact the Qualified...
Read More

Trump’s Tax Act: What It Means for a Physician’s Bottom Line

The ink on the Tax Cuts and Jobs Act (TCJA), which swept in a tidal wave of changes to federal tax rules, had been dry for only seven weeks before...
Read More

New Budget Agreement Brings Additional Tax Changes

To help you organize and prioritize important 2018 deadlines, we’ve provided this summary of due dates for various tax-related forms, payments, and other actions.  Be aware that some deadlines have...
Read More

No Excuses—New Tax Deadlines You Need to Know

In the wake of passage of the Tax Cuts and Jobs Act (TCJA) late last year, the IRS has taken one of the first critical steps to institute the law’s...
Read More

IRS Issues Updated 2018 Withholding Tables

The Financial Accounting Standards Board (FASB) has set forth amended guidance aimed at simplifying and reclassifying certain features of financial instruments. Accounting Standards Update (ASU) No. 2017-11 – Earnings Per...
Read More

The Update on Down Round—FASB Reclassifies Earnings Per Share

Although the new tax reform was signed into law late 2017, the implications of that reform, now called the Tax Cuts and Jobs Act of 2017, won’t affect your 2017...
Read More

Tax Reform 2018

The new Tax Cuts and Jobs Act is bringing sweeping reform to the United States tax code. While recent tax reform has drawn considerable media attention to domestic corporate tax...
Read More

The Bottom Line: How Will Recent Tax Reform Impact You?

Most Americans are now aware that new tax reform legislation, titled the 2017 Tax Cuts and Jobs Act, was signed into law late last year. There has been significant news...
Read More

Excess Employee Compensation Under the New Tax Reform Law: Will Your Tax-Exempt Organization Be Affected?

Share This Insight

If you received value from this article, please share it with your network (e.g., Facebook, Twitter, LinkedIn). Icons below for your convenience.

Stay Current

* indicates required
Monthly eNewsletters
See more newsletter and alert options.

PYA Population Health Ascend

PYA Healthcare Blog

PYA Thought Leadership Services

The Healthcare Loop