Observations from the front lines

December 2014
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Observations from the front lines

At a glance

The benefits of cloud computing can be substantial, but companies should consider possible implications to reporting and balance sheet metrics.


Observations from the front lines provides PwC's insight on current economic issues, our perspective regarding the business impacts, and actions we have seen companies taking to effectively address those issues.

IT alternatives – Cloud computing

Cloud computing enables businesses to efficiently and cost-effectively use shared IT infrastructure and applications on an as-needed, pay-as-you-go basis. This technology model, in essence, transfers the responsibility for ownership, management, and maintenance of equipment and IT operations to an external provider. The benefits can be substantial, but companies should consider possible implications to reporting and balance sheet metrics.

Currently, clear guidance is lacking on the issue of whether service agreements include a software license for customers and, if so, whether those licenses can be accounted for separately. The Financial Accounting Standards Board (FASB) recently issued proposed accounting guidance that, when final, will address this issue.

Highlights in this issue:

  • The financial reporting implications of cloud computing should be carefully considered before transitioning to a service-based model.
  • Cloud computing is typically recorded as an operating expenditure, while purchase of software licenses is a capital expenditure.
  • Accordingly, a shift to cloud computing can have significant financial reporting implications for customers.
  • New guidance from the FASB will change how businesses record cloud services that include a software license.

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