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As described in PPE 7.2.3, some cloud computing arrangements include a software license. If the CCA includes a software license, the software license costs incurred by the customer could be in the scope of the internal-use software (refer to PPE 7.4) or software to be sold, leased, or otherwise marketed (refer to PPE 7.3) guidance, depending on the customer’s use of the software. If the CCA does not include a software license, it is only a service contract; however, implementation costs incurred by the customer related to a CCA that is a service contract are accounted for under ASC 350-40. PPE 7.5 discusses the customer’s accounting for implementation costs when the CCA is only a service contract.
It is important to note that while the accounting for CCA implementation costs follows the internal-use software model (e.g., the determination of whether costs should be capitalized), the presentation of costs is similar to other services. For example, the amortization of capitalized implementation costs is presented in the same line item as the CCA service. See FSP 8.8 for further discussion of presentation and disclosure requirements for CCA costs.
Figure PPE 7-2 illustrates the considerations when determining whether a CCA includes only a service or includes a software license in addition to the service component.
Figure PPE 7-2
Cloud computing arrangements decision tree

7.5.1 Implementation costs of a CCA post adoption of ASU 2018-15

The accounting for costs to implement a cloud computing arrangement that is a service contract follows the guidance in ASC 350-40, which is described in PPE 7.4. Implementation costs are capitalized or expensed depending on the nature of the costs and the project stage during which they are incurred. Determining which costs in the implementation process should be capitalized may require judgment.
Costs in preliminary project stage (generally consisting of planning activities) and the post implementation stage (generally consisting of maintenance activities) are expensed as incurred. Costs during the application development stage (generally consisting of configuration and customization activities) are eligible for capitalization.
Both internal and external implementation costs (incurred by the CCA service provider or other third parties) are eligible for capitalization. The general guidelines included within the internal-use software guidance should be considered, and include:
  • Costs related to coding and testing activities during the application development stage are capitalized–for a CCA these costs include configuration and customization
  • Costs related to training activities are expensed as incurred
  • Costs related to data conversion activities are expensed as incurred
CCAs with third-party service providers often include multiple elements; therefore, total consideration paid to the CCA service provider may need to be allocated to the different activities as discussed in PPE 7.4.4. ASC 350-40 does not provide guidance on how to account for the costs of the ongoing CCA service (i.e., the payment(s) to the service provider for the ongoing CCA service). The customer should account for these costs similarly to costs for other service contracts, which are generally expensed as incurred. Payments made in advance should generally be recorded as a prepaid expense.
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 by FASB. This update amended ASC 350-40 to provide accounting guidance for implementation costs of a hosting arrangement that is a service contract. Refer to PPE 7.5.1.
ASU 2018-15 was effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted, including adoption in any interim period for which financial statements have not been issued. Reporting entities can choose to adopt the new guidance prospectively to eligible costs incurred on or after the date the guidance is first applied or retrospectively.
Reporting entities electing prospective adoption are required to disclose, in the interim and annual periods of adoption, the nature of and reason for the change in accounting principle, the transition method elected, and a qualitative description of the financial statement line items affected by the change.
Reporting entities electing retrospective adoption are required to disclose, in the first annual period after the reporting entity’s adoption date and in the interim periods within the first annual period, the nature of and reason for the change in accounting principle, the transition method, a qualitative description of the financial statement line items affected by the change, and quantitative information about the effects of the change.

7.5.2  Amortization of capitalized CCA implementation costs

Capitalized implementation costs from a cloud-based service should be amortized over the term of the related cloud-based service arrangement. Amortization expense should be recognized on a straight-line basis, unless another systematic and rational basis is more representative of the pattern in which the reporting entity expects to benefit from its right to access to the hosted software. The pattern of amortization should not be based on expectations about the reporting entity’s usage of the hosted software (e.g., how many transactions the reporting entity processes or how many users access the hosted software).
The term of the service for amortization purposes should include the initial noncancelable service term and all of following:
  • Periods covered by an option to extend if the reporting entity is reasonably certain to exercise that option
  • Periods covered by an option to terminate if the reporting entity is reasonably certain not to exercise that option
  • Periods covered by an option to extend (or not to terminate) the service in which exercise of the option is controlled by the vendor
The amortization period should be periodically reassessed to determine if it continues to be reasonable. If the estimated amortization period changes (based on new or more recent information), that change should be accounted for prospectively in accordance with ASC 250, Accounting Changes and Error Corrections.
When reassessing the term of the hosting arrangement, a reporting entity should consider the effects of the factors described in PPE 7.4.5, which include obsolescence, technology, competition, other economic factors, and any rapid changes that may be occurring in the development of the arrangement. Additionally, a reporting entity should also consider the effect of any significant implementation costs that are expected to have significant economic value to the reporting entity when the option to extend or terminate the cloud computing arrangement becomes exercisable.
The commencement date for amortization of capitalized CCA implementation costs is determined separately for each module or component; therefore, amortization will begin when a module or component of the CCA is ready for its intended use. This might not be concurrent with the commencement of the CCA service, unless the functionality of a module or component is entirely dependent on the completion of other components.
Although the guidance refers to “amortization” of capitalized implementation costs, the expense should not be included with other long-lived asset amortization and depreciation. Instead, this expense should be presented in the same line item as the CCA service. For more information on presentation and disclosure of CCA costs, see FSP 8.8.

7.5.3 Impairment of capitalized CCA implementation costs

Capitalized implementation costs should be assessed for impairment in accordance with the guidance in ASC 360-10-35 on impairment of long-lived assets. That is, reporting entities should group capitalized implementation costs with other assets and liabilities at the lowest level for which identifiable cash flows exist independent of the cash flows of other assets and liabilities. Impairment is assessed when events or circumstances occur that indicate the carrying amount of the asset (asset group) may not be recoverable. ASC 350-40-35-11 includes some examples of events or circumstances when reporting entities should assess impairment of the capitalized implementation costs:
  • The hosted cloud computing arrangement service is not expected to provide substantive service potential
  • A significant change occurs in the extent or manner in which the hosting arrangement is used or expected to be used
  • A significant change is made or will be made to the hosting arrangement, including early termination
When a CCA is terminated early, the capitalized implementation costs should be treated like an asset being disposed of by abandonment. That is, the implementation costs should be expensed when the related cloud-based service ceases to be used. 
As described in ASC 350-40-35-12, “implementation costs related to each module or component of a hosting arrangement that is a service contract shall be evaluated separately as to when it ceases to be used.” Therefore, in the case of a partial termination of the arrangement, the reporting entity should impair the capitalized implementation costs related to the component(s) for which the reporting entity’s right to access the hosted software was terminated.
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