New Accounting Rules For Cloud Computing Arrangements: A Deeper Review

Back in August, 2018, FASB amended the accounting standards that affect virtually every public company and the way they account for implementation costs incurred in the deployment of cloud computing solutions. This is important if you're running on-premises software today and looking at migrating to cloud HCM, ERP, CRM, Marketing Automation tools.

Typically, there's going to be two main costs associated with a cloud project. You'll have:

1) cloud licensing costs (cloud computing arrangement, or CCA)

2) implementation costs to deploy the solution.

The FASB amendment provides guidance for when costs associated with an implementation should be capitalized vs treated as an operating expense. 

Previous Guidance

Previously, FASB guidelines treated most cloud solution deployment and implementation costs as operating expenses. Implementation costs for cloud solutions were being treated differently than other on-premises technology implementation costs.

How have the accounting standards changed?

It could be welcome news for many organizations. The new FASB Guidelines now allow companies to capitalize a portion of cloud implementation services just as they would other forms of technology implementations. This new guidance points you to the existing standard for Internal use software (SC 350-40; existing guidance on internal use software).

·      Configuring and customizing the solution will be capitalized on the balance sheet

·      Data conversion and training will be expensed

·      Once you have a capitalized cost, you will recognize that expense over the contractual term of the arrangement and any options to extend the term (recognition will generally be on a straight line basis).

Example: Let's say you're evaluating a project to move from your On Premises HCM to Oracle HCM Cloud. Within the implementation projection, it's been estimated at $5M to customize the cloud software. You're looking at a 3 year contract with Oracle, with a 2 year option to renew early. Under old guidance, this $5M expense would hit your operating expense in year 1. Now, you can potentially capitalize the $5M over 5 years, since the contract term is 3 years with a 2 year option.

Who does it affect?

This new guidance affects IT, Tax, Accounting, Planning and Budgeting, and Financial Statement users. IT and even Lines of Business should be aware as they bring forth technology transformation business cases to Executive Leadership Boards, Controllers, and CFOs. You may consider reviewing open business cases to determine feasibility as cloud system configuration and setup costs will hit your books differently.

·      You need to determine which implementation activity costs can be capitalized vs. expensed. This will require estimation/allocation of project activities to determine which amounts to capitalize/expense. This means project plans should estimate total hours for each deployment activity (Blueprinting, Customizations/Development, Integrations, Unit Testing, UAT, Training, etc.).

This may even change the way you request details on invoices from software vendors to detail project activities/amounts and phases.

Adoption

·      There are two ways to adopt the standard: Retrospectively or Prospectively. You have to adopt one or the other.

·       If your organization selects the Retrospective adoption, you will revise previous project allocations and prior period financial statements.

·      Prospective adoption will be applied to costs incurred Jan. 1, 2020 onward.

Summary

When trying to get projects approved there is always a battle over CapEx and OpEx dollars. Some companies are further along in their cloud accounting practices while others are nascent in their efforts to migrate to cloud software. Talk to your controllers and procurement contacts and see how this affects your budgets and potential to move a cloud transformation forward.

Here are some resources:

Deloitte: https://www2.deloitte.com/us/en/pages/audit/articles/hu-fasb-amends-cloud-computing-arrangements.html

Pwc: https://www.pwc.com/us/en/services/audit-assurance/accounting-advisory/cloud-computing.html

This is not Tax or Accounting advice, just my opinion. The views expressed in this article are my own and do not necessarily reflect the views of Oracle.