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Although the reporting entity does not acquire software in a CCA that is solely a service contract, costs to implement the CCA are accounted for following the same model as the guidance for internal-use software in ASC 350-40, which is described in SW 3. Accordingly, whether implementation costs are capitalized or expensed depends on the nature of the costs and the project stage during which they are incurred. Because the guidance in ASC 350-40 generally addresses the development of software, applying the guidance to implementation activities for a CCA may require judgment.
As discussed in SW 3, ASC 350-40 describes three project stages:
  • Preliminary project stage: For a CCA, this stage generally consists of planning activities; during this stage, costs are expensed as incurred.
  • Application development stage: For a CCA, this stage generally consists of configuration and customization activities; during this stage, certain costs are capitalized (see further discussion below).
  • Postimplementation-operation stage: For a CCA, this stage generally consists of maintenance activities; during this stage, costs are expensed as incurred.

Consistent with the internal-use software guidance, in general:
  • costs related to coding and testing activities during the application development stage are capitalized (e.g., costs for configuration and customization),
  • costs related to training activities are expensed as incurred, and
  • costs related to data conversion activities are expensed as incurred.

4.2.1 Capitalizable CCA implementation costs

Both internal and external costs incurred during the application development stage are eligible for capitalization. Examples include the following:
  • Payroll and payroll-related costs (e.g., costs of employee benefits or stock-based compensation) for employees who are directly associated with and who devote time to implementation
  • Fees paid to the CCA service provider or other third-party vendors providing implementation services. These may also include travel expenses directly associated with providing implementation services.

4.2.2 Accounting for CCA service fees

The accounting for the costs for the CCA service itself is not specifically addressed in ASC 350‑40. The reporting entity should account for these costs similar to costs for other service contracts, which are generally expensed as incurred or as the services are received. Payments made in advance of the CCA service being received should generally be recorded as a prepaid expense.
Often, the reporting entity will begin incurring CCA service fees prior to completion of implementation activities (e.g., in order to migrate data from the existing system to new cloud-based solution). The CCA service fees incurred during this period should generally not be capitalized as an implementation activity, even if they are incurred prior to completion of implementation.
CCAs with third-party service providers often include multiple elements (e.g., hosting service, implementation costs); therefore, total consideration paid to the CCA service provider may need to be allocated to the different elements as discussed in SW 3.6.
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