According to a Goldman Sachs study, cloud computing will grow at a rate of 30 percent through 2018, a trend that started back in 2013. With the penetration of cloud computing, questions of how to properly recognize revenues from cloud computing arrangements have been raised.

The Financial Accounting Standards Board on April 15 decided to add guidance to Subtopic 350-40, Intangibles—Goodwill and Other—Internal-Use Software, to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement.

New accounting rule for cloud computing arrangements

 Under the new standard, customers would apply the same criteria as vendors to determine whether a cloud computing arrangement is a sale of software license or is solely a service contract.

If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses.

If a cloud computing arrangement doesn’t include a software license, the customer should account for the arrangement as a service contract.

In addition, the guidance also supersedes ASC 350-40-25-16, Internal-Use Software, 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 licenses in the same manner as the other acquired intangible assets. The elimination would result in more intangible assets showing on the balance sheet.

Companies Concerns  

 On the original proposal issued by FASB August 2014, companies–including Google, Time Warner Cable, Visa, and Salesforce–said even though they support most of the provisions in the guidance, they believe, the upfront implementation costs of cloud arrangements should be capitalized and amortized over an appropriate useful life.

The board decided not to provide additional guidance on the accounting for upfront costs, as it noted that initial costs incurred in service arrangements are not unique to cloud computing arrangements. Therefore, in accounting for upfront costs, customers should follow guidance provided in Subtopic 350-40, which allows them to capitalize the implementation and setup costs.

Possible impact on the cloud market?

With a 30 percent growth rate every year, the cloud computing market is certainly growing very fast. Even though the market is big, will the new standard have an impact on the cloud market as a whole?

As cloud computing consumers, they will have to show one more item on their balance sheets if they are inclined to own the cloud licenses and use them in their own data centers. However, for those companies that are attached to off-balance-sheet transactions, would the new rule be a disincentive for them to even go into the cloud computing market? That question won’t be answered until implementation approaches and these companies more directly confront all its challenges and hurdles.

Source: Bloomberg BNA – By Xing Gao