FASB issues exposure draft intended to simplify the accounting for Cloud Computing customers.
On August 20, the FASB issued an exposure draft, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (the ED), describing how purchasers of hosted computing services should evaluate whether such arrangements contain a software license that should be accounted for separately. With the increased popularity of hosted computing arrangements, and the lack of specific accounting guidance, mixed practice has evolved. Until now, the accounting guidance and related interpretations for these arrangements have been focused on the technology industry, as any issues related to hosted computing arrangements have been considered vendor issues. However, since the exposure draft provides guidance for purchasers, its impact will extend beyond the technology sector. For the purposes of this In Brief, hosted computing arrangements include Cloud, Software-as-a-Service (SaaS) and SaaS-type services.
Currently, many hosted computing arrangements (HCAs) include license language in the contract documents that provide the customer with the right to use the underlying software as part of the service. The ED provides guidance to help purchasers determine when HCAs include a right to use software that should be accounted for separate from the service. The FASB decided to utilize the existing model that vendors apply in making this determination.
Purchasers will need to evaluate whether, as part of the HCA, (a) they have the contractual right to take possession of the underlying software at any time during the service period without significant penalty, and (b) it is feasible for the purchaser to run the software itself (or contract with another party to run the software). Arrangements that do not meet these criteria are considered services contracts, and separate accounting for a license would not be permitted. Arrangements that meet the criteria are considered multiple element arrangements to purchase both the software and the service of hosting or running the software.
The new standard will affect all entities that apply U.S. GAAP and purchase Cloud, SaaS or other hosted computing services irrespective of industry. Although many companies may already be applying a model consistent with the proposed guidance, those that need to adopt a new model might have an impact to their balance sheet, income statement presentation, statement of cash flows presentation and calculation of EBITDA due to potential changes to the accounting for the acquired software component.
The comment period for the ED is 90 days, ending on November 18, 2014, and it is expected that the final standard will be issued shortly thereafter. For public companies it would be effective for annual and interim periods beginning after December 15, 2015. For non-public companies it would be effective for annual periods beginning after December 15, 2015, and interim periods in annual periods beginning after December 15, 2016. Early adoption would be permitted. Entities will have the option of transitioning to the new guidance either prospectively for all new transactions entered into or materially modified after the date of adoption or retrospectively.
PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams who have questions should contact the Revenue team in the National Professional Services Group (1-973-236-7804).