For a cloud computing arrangement, a prepaid asset is recognized for the total amount of costs determined to be capitalizable. Then, to the extent there are payments still attributable to the implementation and other capitalizable costs, a liability is also recognized. The liability is recorded for future payments owed under the agreement and the asset is recorded at total applicable contractual cost, with any difference representing payments made at the inception of the contract.
The intangible asset is amortized over the life of the cloud computing arrangement. Most commonly, straight-line amortization of the intangible asset is used. However, instances could exist where a different method is more appropriate. As long as the basis for amortization is systematic and rational and reflects the usage of the asset, it may be employed.
The journal entry to amortize the prepaid asset is a debit to the cloud computing arrangement expense line item and a credit to the asset.
The liability is relieved as payments are made. In our example below, we specify which costs are capitalized vs. This application will allow certain employees at Company XYZ to view employee contact information in one central online location. The agreement does not include a license to use any software.
The capitalization of costs depends on the nature of the costs and the phase of development in which the costs are incurred. Specific details of the work performed and the costs incurred in each phase of the project is described below.
The explanation of each phase is followed by a determination of whether the fees are capitalizable. Company XYZ hires a consultant to assist with the preliminary selection of a software. Also, the management team at Company XYZ creates a committee to help with determining the list of the requirements and functionality needed for the software solution.
To begin development of the new application, Company XYZ authorizes a team of internal software developers to create a software to convert old data from the existing system to the new system.
Company XYZ also incurs costs to manually purge existing data from the current system i. Company XYZ implements the software and, after transition, incurs costs for additional training of employees. After employees are trained and onboarded with the new application, Company XYZ continues to incur its ongoing software maintenance and customer support costs.
However, after a few months of use the management team decides to allocate resources for the internal software development team to provide an upgraded user interface for the employees at Company XYZ. Please note this upgraded interface will enhance the functionality of the software.
This article provides a summary and example of accounting for cloud computing arrangements under ASC Specifically, the article covered in depth which costs are capitalized vs. The issuance of updates to ASC in provided much needed clarity to entities in regard to the accounting treatment for cloud computing arrangements.
This clarification was necessary, considering the higher rate at which entities are reviewing and entering into cloud computing agreements and also considering the fact many employees are working remotely prompting additional need for cloud computing capabilities.
Your email address will not be published. Customer Center Login. FASB internal-use software standard 2. Effective date of ASC 3. The need for clarity Capitalizable vs. Updates to ASC Capitalizable vs. Initial measurement and subsequent measurement Initial measurement Subsequent measurement 6. Internal-use software under ASC An example Preliminary project phase Application development phase Post-implementation phase Upgrades and enhancements 7. Summary 8. Related articles.
This stage includes development path design, coding, hardware installation, and testing. Common types of costs capitalized during the application development stage include:. Note: Training costs incurred during this stage should not be capitalized, but expensed as incurred. In order to begin capitalizing costs during this stage, management must first authorize and commit to funding the project, and the company must have completed the preliminary project stage.
Additionally, project completion should be reasonably expected. Costs during this stage should be expensed as incurred. This stage is when the software has been rolled out and is being used for its intended purpose. For further discussion regarding long-lived asset impairment triggers, see PPE 5. ASC includes additional triggering event considerations for capitalized software. Excerpt from ASC The guidance is applicable, for example, when one of the following events or changes in circumstances occurs related to computer software being developed or currently in use indicating that the carrying amount may not be recoverable:.
This guidance differs from the model utilized when it remains probable that the software being developed will be completed and placed into service. ASC discusses the accounting when development of the software is no longer probable. ASC When it is no longer probable that computer software being developed will be completed and placed in service, the asset shall be reported at the lower of the carrying amount or fair value, if any, less costs to sell.
Indications that the software may no longer be expected to be completed and placed in service include the following:. As indicated in the guidance, software being developed that is no longer probable of development should be reported at the lower of cost or fair value less cost to sell.
There is a rebuttable presumption that uncompleted software has no value. Similar to the assessment of amortization commencement, the assessment of impairment for uncompleted software is performed at the module or component level. In some circumstances, a reporting entity that previously had no plan to license internal-use software to other parties will make a subsequent decision to license or sell that software. If a reporting entity licenses the internal-use software to another party, the proceeds received from the license of the software, net of direct incremental costs of marketing e.
No profit should be recognized until aggregate proceeds from the licenses and amortization have reduced the carrying amount of the software to zero.
Subsequent proceeds should be recognized as earned. If during the development of internal-use software, a reporting entity decides to market the software to others, the software industry guidance in ASC should be followed on a prospective basis. Example PPE illustrates the accounting for the subsequent license of internal-use software to other parties.
Retail Co is a national retail enterprise that has agreed to sell its stores located in the northeast region to a third-party purchaser. As part of this sale, the purchaser will license a software package that Retail Co had previously developed for its internal use.
What is the appropriate accounting for the licensing of Retail Co's internal-use software? Table of contents 7. Link copied. Related content 1 of. Examples 1 of. Effective date 1 of.
ASU , Customer's accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. Frequently asked questions 1 of.
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