CAPEX and OPEX Options in Azure

Overview

One of the early value propositions of cloud computing was the ability to transition from a capital to operating expense model. Cloud costs are incurred on a pay-as-you-go basis, allowing organizations to scale their usage up or down, as needed, and pay for only the resources that they consume. This is different than traditional IT infrastructure costing, where capital expenditures are made upfront to purchase hardware, software, and other resources that will be used over a longer period of time. While treating Azure usage as an operational expense is desirable for a vast majority of customers, recent economic conditions and internal budget allocations have moved discussions back to finding opportunities to classify Azure costs as a capital expenditure.

Azure Reservations

In Azure, the primary vehicle supporting the shift from an operational to capital expense is the "reservation". In recent years, the catalog of services available for reservations has expanded considerably. Reservations are available in 1-Year and 3-Year increments and include virtual machines, storage, databases, and other software services (see Figure 1). During the purchase process, you have the option to pay upfront or monthly and these resources can then be evaluated by the finance team for categorization as intangible assets and amortized as such.

The variety of services available allow for a range of solution architectures to be developed to support applications in Azure that have the potential to be accounted for as a capital expense. It is important to work closely with your finance team when planning a deployment to Azure. Every organization has specific accounting requirements for capital expense categorization, and final determination will require their sign-off and approval. Further, the solution architecture may need to be adjusted to leverage reservation-eligible services wherever possible. These factors will necessitate alignment among business, finance, and IT during the planning process. To support detailed tracking and reporting, a robust tagging strategy should accompany the workload/project. The use of tags will enable more granular reporting of costs in the Cost Management area of the Azure portal. Within Cost Management, there are specific views supporting amortization of Azure reservations and tagging will help allocate costs for specific workloads that can be tracked in the appropriate financial systems.

Summary

There are significant cost benefits associated with reservations outside of the financial accounting perspective. Reservations provide discounts in the 30% range for a single year commitment and can approach 50% for the three-year option. If any workload has an anticipated lifespan of 1 year or longer, reservations should be used, regardless of the how the expense will be accounted for. Again, the classification of capital or operating expense will ultimately be determined by your accounting team. For more accounting related information on this topic, the Financial Accounting Standards Board (FASB) has provided guidance for cloud computing arrangements in ASU 2018-15, Intangibles - Goodwill and Other.

Reference: New Cloud Computing Accounting Guidance

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