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
, 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
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.