Therefore, in a service contract hosting agreement, customers follow the instructions of the 350-40 subsite when estimating the implementation costs to be capitalized and the costs to be costed. the client must determine to which stage of the project an implementation effort relates. Implementation costs incurred in the pre-project and post-implementation phases are recorded as expenses depending on the nature of the costs and costs incurred in the application development phase are capitalized: A cloud service contract specifies the legal basis on which a customer accesses and uses these services for cloud-based services. Customers in cloud computing agreements often incur upfront costs for software implementation. Billing for these implementation costs depends on whether the customer has a software asset or service contract. The new cloud computing guidelines offer an opportunity to improve tax processes and increase tax positions surrounding these costs. Given that the nature of the CCA costs incurred will dictate treatment for both tax and accounting purposes, the new standard could also be an opportunity to create synergies related to data collection around these items. The main areas of tax analysis are: One of the fundamental principles of cloud services is service standardization. Legal terms should also be standardized in most cases. As a result, most cloud service contracts are created at the request of the service provider. They therefore tend to highlight the rights of the service provider and the obligations/responsibilities of the customer. Capitalized implementation costs are amortized on a straight-line basis, unless another basis is more representative of the trend that the customer expects to benefit from using the hosted software.
Implementation costs are amortized over the life of the hosting agreement and depreciation costs are reported in the same income statement as hosting service charges. The return on investment for each module of a hosting contract begins when it is ready for the intended use (once all essential testing is completed), whether or not the hosting agreement is provisioned in planned phases that may extend beyond a reporting period. On the balance sheet, the capitalized implementation costs are presented in the same line as any initial payment of the accommodation costs. The amortization period includes the non-refundable period of the hosting agreement and must take into account the periods covered by the following options: In addition, capitalized implementation costs are subject to existing impairment policies in sub-theme 350-40 (i.e., capitalized implementation costs are treated as long-lived assets). If the contract for hosting software for internal use includes several elements (. B for example, hosting, software training, third-party maintenance fees, data conversion costs, re-engineering costs, and rights to future upgrades and improvements), customers must allocate implementation costs to each item based on the relative standalone price of each item that does not necessarily match the price specified in the vendor`s contract. Moving data, applications, and platforms to the cloud can bring significant business benefits, as organizations may be able to reduce capital costs while maintaining a more flexible IT environment. However, companies should consider the impact on financial reporting as well as broader tax and IT considerations due to the new accounting guidelines.
Publicly traded companies must begin the implementation process now to ensure regulatory compliance for annual reporting periods beginning on or after December 15, 2019. Private companies and nonprofits have an extra year to comply with the regulations – or they can choose to adopt the changes early to spread more installation costs over the life of their contracts. If you`re not sure how to consider cloud computing arrangements, contact us. For more information on customer billing for cloud service contract implementation costs, contact one of our PYA leaders below at (800) 270-9629. Identify cloud computing arrangements. Each business unit, as well as the supply chain and accountability management services, should be responsible for informing the accounting department of new cloud computing agreements. See also PwCâs “In depth” guidance at Cloud Computing arrangements: Customer accounting for implementation costs. “Because the standard requires a new perspective to look at the costs associated with a service contract, existing policies may need to be adjusted or new processes introduced to ensure costs are properly identified and recorded,” he said.
“I think it would be important to have a roadmap for the company`s future plans for cloud computing,” Torr said. “It is essential to understand the impact on key performance indicators or the impact on the company`s financial commitments, as well as the change management of cost tracking solutions. There are obviously a whole series of technical nuances here, in addition to management judgment. So have a clearly defined policy on this and make sure it is properly discussed with stakeholders and especially auditors. “The cost of setting up cloud services can be significant, and many companies would prefer not to spend these installation costs immediately. The updated guidelines on accounting for cloud computing costs are intended to reduce differences in the accounting treatment of these agreements. In short, the changes will spread more of the cost of implementing a cloud computing contract over the duration of the contract than under existing guidelines. If a cloud computing contract under ASU 2015-05 does not include a software license, the contract should be accounted for as a service agreement.
This means that companies have to charge for the costs incurred. The ability to deduct or amortize current software development, research and experimentation costs (before fiscal year 2022) related to the implementation of cloud-related systems, solutions, applications and middleware should be assessed. From 2022, all expenses in accordance with § 174 will be capitalized, regardless of the type of costs incurred. ASU 2018-15, Intangible Assets – Goodwill and Others – Software for Internal Use (Sub-Theme 350-40): Customer`s accounting for implementation costs incurred in a cloud computing contract, which is a service contract, requires companies to take the same approach to capitalize on the implementation costs associated with accepting a cloud computing contract and an on-premises software license apply. In a cloud computing contract, a customer typically pays a fee to a provider in exchange for access to software over the Internet. .