The first half of this column that ran last week outlined some of the new standards released by the Financial Accounting Standards Board for reporting cloud-computing expenses. Following are some of the other key reporting requirements you need to know.
New FASB standards add to reporting complexity by requiring costs to be tracked by software by module or component. The capitalized costs are written off when each module or component of the software is abandoned (ceases to be used). The costs will be subject to amortization on a straight-line method unless there is a more representative systematic and rational model that reflects the benefits of being able to access the software. The amortization period for the costs is the term of the cloud-computing service arrangement, which includes the noncancelable period of the arrangement, plus any period covered by an option to renew that the customer is reasonably certain to exercise. The term of the arrangement also includes periods covered by an option to terminate the arrangement if the customer is reasonably expected not to exercise the termination option, and the option to extend the arrangement in which exercise of the option is in control of the vendor. Considerations when evaluating which optional periods to include:
Technological obsolescence and the pace of development
Economic value of significant implementation costs
Amortization of implementation costs begins when each module or component of the cloud software becomes available for use. If a module is functionally dependent on another module that is not available for use, amortization would begin when the latter module is available for use.
Customers in service-contract arrangements will apply the impairment and abandonment guidance under ASC Topic 360, Property, Plant, and Equipment.
Customers in service-contract arrangements must present the expense related to the capitalized implementation cost in the same line item as fees associated with the service of the arrangement in their statement of income. Payments for classified implementation costs must be classified in the statement of cash flows in the same manner as payments made for fees associated with the hosting element, generally as an operating activity instead of an investing activity. Customers will be required to present the capitalized implementation costs in the same line item as prepayments for fees associated with hosting arrangements in the statement of financial position.
In a change from the original proposal, the only disclosures that will be required related to the cloud-computing arrangements is a description of the nature of the arrangement and the disclosures required under ASC Topic 360, which include the amortization expense in the period, balance of the capitalized costs, accumulated amortization and the method of amortization.
ASU 2018-15 takes effect for public businesses for fiscal years and interim periods beginning after Dec. 15, 2019 (generally the 2020 calendar year). All other entities will adopt for annual periods beginning after Dec. 15, 2020 (2021 calendar year) and interim periods beginning after Dec. 15, 2021 (2022 calendar year). Early adoption is permitted.
The adoption method could be applied either retrospectively or prospectively to all implementation costs incurred after the adoption date.
Paul Languirand is a managing director in the New England office of CBIZ & MHM in Providence.