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A cloud computing arrangement (CCA) may be referred to as software-as-a-service (SaaS) and may include other SaaS-type services, such as platform-as-a-service, infrastructure-as-a-service, and other hosting arrangements. “Hosting” refers to situations in which the end user does not take possession of the software; instead, the software resides on the vendor’s or a third party’s hardware (servers), and the customer accesses the software remotely. Some CCAs include a traditional license to the software in addition to the remote service. See PPE 7.5.
If the CCA includes a software license in addition to the hosting service, the costs associated with the software license could be in the scope of the guidance for internal-use software or the guidance for software to be sold, leased, or otherwise marketed, depending on the reporting entity’s use of the software. If the CCA is accounted for solely as a service contract, only the implementation costs of the CCA are subject to internal-use software guidance under ASC 350-40. However, it is important to note that while the accounting for CCA implementation costs follows the internal-use software model, the presentation in the balance sheet, income statement, and statement of cash flows of these costs is similar to other services. The guidance requires reporting entities to present implementation costs related to a CCA in the same financial statement line items as the CCA service fees, resulting in key differences from the presentation of costs related to licensed software.
Figure FSP 8-1 illustrates the differences in presentation between internal-use software costs (licensed software) and implementation costs related to a CCA.
Figure FSP 8-1
Financial reporting presentation of cloud computing arrangements

Financial statement

Licensed software

Cloud computing arrangement
Balance sheet
Fixed or intangible asset
Prepaid or other asset
Income statement
Cash operating expense
Statement of cash flows
Investing activities
Operating activities
The presentation requirements could impact key metrics such as EBITDA because the recognition of capitalized implementation costs associated with a CCA over the contract period are considered cash operating expenses, not depreciation or amortization.
Additionally, while the guidance under ASC 350-40 requires a reporting entity to present the capitalized implementation costs of a CCA in the balance sheet in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented, the guidance does not address whether all or a portion of those costs should be classified as current or noncurrent. Reporting entities should apply the guidance in ASC 210-10, Balance Sheet—Overall, related to prepaid expenses to determine the appropriate classification.
Reporting entities are required to disclose the nature of their hosting arrangements that are service contracts. In addition, reporting entities are required to make the disclosures in ASC 360-10 (see FSP 8.6) as if the capitalized implementation costs of a CCA were a separate major class of depreciable asset. These include disclosure of the balance of major classes of depreciable assets, accumulated amortization, amortization expense for all income statement periods presented, and a general description of methods(s) used to compute amortization.
Transition guidance for ASU 2018-15 – CCA implementation costs
ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, was issued in August 2018. This update amended ASC 350-40 to provide accounting guidance for implementation costs of a hosting arrangement that is a service contract, including guidance on presentation of those costs and the related amortization in the financial statements. Refer to PPE 7.5.1 for the transition guidance.

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