Capitalized CCA implementation costs should be amortized over the term of the related CCA. 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 will process or how many users will access the hosted software).

The term of the service for amortization purposes should include the initial noncancelable service term and all of the following:

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 250‑10‑45‑17.

When reassessing the term of the hosting arrangement, a reporting entity should consider the effects of the factors described in SW 3.8, which include obsolescence, 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 CCA 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. Judgment may be required to allocate implementation costs to multiple modules or components of a CCA.

Although the guidance refers to the “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 the presentation and disclosure of CCA costs, see FSP 8.7.

Example SW 4-1 illustrates the determination of the amortization period for capitalized CCA implementation costs.

EXAMPLE SW 4-1
Determination of amortization period

On January 1, 20X1, Software Corp enters into a CCA with Cloud Corp for a noncancelable term of three years to access Cloud Corp’s cloud-based product design software. At the end of the three-year term, Software Corp has an option to extend the service contract for two years. Software Corp determines that the cloud-based service is critical to Software Corp’s operations; additionally, Software Corp incurred significant costs to implement the CCA. As a result, Software Corp concludes it is reasonably certain it will exercise its option to extend the CCA with Cloud Corp at the end of the initial noncancelable term.

What amortization period should Software Corp utilize for capitalized implementation costs related to the CCA?

Software Corp should amortize the capitalized implementation costs over five years—the initial three-year noncancelable CCA term plus the optional two-year extension based on the fact that Software Corp is reasonably certain that it will renew the arrangement for another two years. The amortization period should be periodically reassessed to determine if it continues to be reasonable.

Example SW 4-2 illustrates the application of the guidance to a CCA with multiple modules.

EXAMPLE SW 4-2
CCA with multiple modules

During 20X1, Accounting Co enters into a noncancelable two-year SaaS agreement with System Co to implement an enterprise resource planning (ERP) system, which has a general ledger module, an accounts payable module, and an accounts receivable module. The general ledger module must be implemented first and can be utilized without the other two modules.

Through November 30, 20X1, Accounting Co incurred $100,000 in capitalizable implementation costs related to the general ledger module. The general ledger module is expected to be ready in time for the year-end close process in December 20X1. Accounting Co expects to incur $200,000 in additional capitalizable implementation costs during 20X2 related to the remaining two modules of the ERP (accounts payable and accounts receivable).

How should Accounting Co account for the implementation costs related to this arrangement?

Accounting Co should capitalize $100,000 of implementation costs attributable to the general ledger module in 20X1. Accounting Co should commence amortization of those capitalized costs in December 20X1 when the general ledger is ready for its intended use because the functionality of the general ledger component is not dependent on the remaining two modules. In 20X2, Accounting Co should capitalize $200,000 of implementation costs for the remaining two modules. Amortization of capitalized costs related to these modules will commence once they are ready for their intended use and be spread over the then-remaining term (i.e., all modules will have a consistent end date).