The FASB has issued an Exposure Draft of proposed amendments to Subtopic 350-40 titled Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.
Under existing guidance, if a software license is included in a cloud computing agreement, the costs associated with the license may be capitalized as an intangibles asset in accordance with the guidance on internal use software described in Subtopic 350-40. However, if a cloud computing arrangement does not include a software license, the agreement is to be accounted for as a service contract and the associated fees are expensed as incurred. Existing guidance does not specifically address how to account for the implementation costs associated with cloud computing arrangements that are service contracts.
This proposal would align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the existing guidance for capitalizing implementation costs. The service element of a hosting arrangement that is a service contract would continue to be expensed as incurred. Any capitalized implementation costs are to then be amortized over the period of the service contract. This amortization expense is to be presented on the income statement on the same line item as the fees associated with the hosting element of the arrangement.
Additional disclosures regarding qualitative and quantitative information about capitalized implementation costs would also be required.
Comments on this Exposure Draft are due by April 30, 2018. The full text of the Exposure Draft is available here.
Readers should not act upon information presented without individual professional consultation.