Project Update

Customer’s Accounting for Fees in a Cloud Computing Arrangement

Last updated on March 30, 2015. Please refer to the Current Technical Plan for information about the expected release dates of exposure documents and final standards.

(Updated sections are indicated with an asterisk *)

The staff has prepared this summary of Board decisions for information purposes only. Those Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.

Project Objective
Due Process Documents
*Decisions Reached at Last Meeting
*Tentative Board Decisions Reached to Date
Next Steps
*Board/Other Public Meeting Dates
Background Information
Contact Information

Project Objective

The project objective is to provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer would account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer would account for the arrangement as a service contract. The proposed guidance would not change generally accepted accounting principles (GAAP) for a customer’s accounting for software licenses or service contracts.

Due Process Documents

On August 20, 2014, the FASB issued a proposed Accounting Standards Update, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. The due date for comment letters has been set for November 18, 2014.

Download the August 20, 2014, proposed Accounting Standards Update, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.

*Decisions Reached at Last Meeting (February 18, 2015)

The Board redeliberated changes proposed in the August 2014 Exposure Draft, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, in light of feedback received through comment letters and other outreach.

Changes to the FASB Accounting Standards Codification®

The Board affirmed its proposal that customers in cloud computing arrangements would determine whether a contract is a software license or a service contract by applying the guidance that cloud service providers currently use to make that determination (that is, incorporate paragraphs 985-605-55-121 through 55-123 into Subtopic 350-40 of the Codification).

In addition, the Board decided:
  1. Not to expand the scope of the final Update to include the accounting for upfront costs incurred in cloud computing arrangements
  2. That additional guidance about the application of the criteria included in paragraphs 350-40-15-4A through 15-4B is not necessary
  3. To supersede paragraph 350-40-25-16 of the Codification as part of the final Update, meaning that customers will no longer analogize to the leases guidance in Topic 840 in determining the asset acquired in a software licensing arrangement; rather, customers will account for acquired software licenses in the same manner as the other acquired intangible assets.
Transition, Effective Date, and Early Adoption

The Board affirmed its proposal to allow reporting entities to choose between a retrospective or prospective transition method. By prospective transition, the Board means an entity would apply the guidance in the final Update to all cloud computing arrangements entered into, or materially modified, after the effective date.

The Board also affirmed the proposed effective date of the changes:
  1. Public business entities would initially apply the change in annual periods, including interim periods within those annual periods, beginning after December 15, 2015.
  2. All other entities would initially apply the change in the first annual period beginning after December 15, 2015, and interim periods thereafter.
In addition, the Board affirmed its proposal to allow all entities the option to early adopt the changes.

Transition Disclosures

The Board affirmed its proposal that an entity electing the prospective transition method should disclose, in the period of the change, the nature of and reason for the change in accounting principle, the transition method, and a qualitative description of the financial statement line items affected by the change.

In addition, the Board affirmed its proposal that an entity applying the retrospective transition method should provide quantitative disclosures about the effect of the change, such as those required by Topic 250, Accounting Changes and Error Corrections.

Authorization to Proceed to a Ballot Draft

The Board directed the staff to draft a final Accounting Standards Update for vote by written ballot.

*Tentative Board Decisions Reached to Date (As of February 18, 2015)

The Board voted to add to its technical agenda a project to clarify how a customer should account for its fees paid in a cloud computing arrangement.

The Board directed the staff to draft a proposed Accounting Standards Update for vote by written ballot. In addition, the Board decided on a 90-day comment period for the proposed Update.

See Decisions Reached at Last Meeting.

Next Steps

Please refer to the current technical plan for information about the project timeline.

*Board/Other Public Meeting Dates

The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Boards' deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final standard.

*February 18, 2015 Board Meeting—The Board redeliberated the August 20, 2014 proposed Accounting Standards Update, directing the staff to draft final guidance for a vote by written ballot
June 18, 2014 Board Meeting—Clarifications to the Codification, Transition, Effective Date, Early Adoption, Transition Disclosures, and Permission to Ballot
April 28, 2014 Board Meeting—Agenda prioritization meeting about whether to add a project to the Board’s agenda

Background Information

This project is part of the Board’s Simplification Initiative. The objective of the Simplification Initiative is to identify, evaluate, and improve areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information required to be reported by an entity.

Constituents have generated feedback stating that there is no explicit guidance on how customers should account for the fees in a cloud computing arrangement. GAAP does not include explicit guidance about a customer’s accounting for fees paid in a cloud computing arrangement. Examples of cloud computing arrangements include software as a service, platform as a service, infrastructure as a service, and other similar hosting arrangements. The Board has heard from stakeholders that the absence of explicit guidance results in some diversity in practice as well as unnecessary cost and complexity for some stakeholders that evaluate the accounting for those fees.

This project is intended to improve financial reporting for customers on how to account for the fees in a cloud computing arrangement and reduce the diversity in practice by improving the guidance in the FASB Accounting Standards Codification® about how a customer should account for its fees paid in a cloud computing arrangement.

At its April 28, 2014, meeting, the Board voted to add the project to its agenda.

Contact Information

Scott Muir
Practice Fellow
samuir@fasb.org

Ken Doherty
Postgraduate Technical Assistant
kjdoherty@fasb.org