Moving to the cloud? Better check the new cost guidance
- New cost guidance for cloud computing service arrangements is effective in 2020 for public business entities.
- Certain implementation costs will be capitalized and recognized over the arrangement term.
- Key metrics such as EBITDA could be impacted.
Fixed or intangible asset
Prepaid or other asset
Depreciation or amortization
Statement of cash flows
The presentation requirements could impact key metrics such as EBITDA because the recognition of CCA costs over time will not be included within depreciation or amortization expense. Companies should also consider the related impact to their budgeting and financial planning processes that may drive earnings guidance.
The new cloud computing guidance is effective for calendar year-end public business entities in 2020, while all other entities have an additional year to adopt. Early adoption is permitted.
Companies can elect to adopt the new cloud computing guidance by retrospectively adjusting all prior periods presented in the financial statements. Alternatively, companies can elect to adopt on a prospective basis, in which case the new guidance will only be applied to eligible costs incurred after adoption. Companies that adopt when they are in the middle of an implementation project will want to balance the potential additional effort associated with retrospective adoption with the impact of adopting on a prospective basis, which could result in different accounting for costs incurred before adoption and costs incurred after adoption.
For more information, see In depth US2018-14, Cloud computing arrangements: Customer accounting for implementation costs and listen to our podcast.
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