The Financial Accounting Standards Board’s Emerging Issues Task Force has reached a consensus on how to account for implementation costs in a cloud computing arrangement that’s considered a service contract.
In March, FASB issued a proposed accounting standards update to clarify the accounting for such implementation costs (see FASB proposes changes in accounting for cloud computing costs). It asked for feedback to be submitted by the end of April. At a meeting of FASB’s Emerging Issues Task Force last week, the EITF reached a consensus that a customer in a cloud computing arrangement that is a service contract should apply guidance on internal-use software to determine which implementation costs to recognize as an asset. The EITF also reached some decisions on other items, including scope, subsequent measurement, presentation and disclosure, and effective date.
Entities should expense those implementation costs over the term of the hosting arrangement, which includes periods covered under renewal options that are reasonably certain to be exercised, according to the EITF decisions. They should apply the impairment guidance in Subtopic 350-40 (which references the impairment model in Subtopic 360-10) to the capitalized implementation costs of a hosting arrangement that is a service contract.
The EITF decided to require entities to record the expense related to implementation costs in the same line item in the statement of income as the expense for fees for the hosting arrangement, to present the capitalized implementation costs in the same line item in the statement of financial position that a prepayment of the fees for the associated hosting arrangement would be presented, and to classify the cash flows from capitalized implementation costs in the same manner as the cash flows for the fees for the associated hosting arrangement. Another decision is to require entities to make the existing disclosures in paragraph 350-40-50-1 to provide information to users about implementation costs of a hosting arrangement that is a service contract, supplemented by a description of the nature of an entity’s hosting arrangements that are service contracts.
The EITF decided not to propose guidance related to scope or the ability to analogize to the proposed guidance. In terms of the transition, the EITF reached a consensus that provides entities with an option to apply the guidance either retrospectively or prospectively to implementation costs incurred after the date of adoption. The transition disclosures depend on the transition approach an entity selects.
The EITF also decided on the following effective dates: annual periods, including interim periods within those annual periods, beginning after Dec. 15, 2019 for public business entities; and annual periods beginning after Dec. 15, 2020, and interim periods beginning after Dec. 15, 2021, for entities other-than-public business entities.
Also at last week’s meeting, the EITF discussed different alternatives for the recognition and measurement of an assumed liability from a revenue contract in a business combination. The task force reached a consensus-for-exposure that the performance obligation concept in Topic 606 would be used to determine whether a liability assumed from a revenue contract with a customer is recognized by the acquirer in a business combination. The EITF also reached decisions on other items, including measurement and transition.
For the measurement of the liability, the EITF reached a consensus-for-exposure that carry-over basis would not be an acceptable measurement approach, and an entity would need to consider the assets and liabilities in an acquired set when it measures the fair value of an assumed liability in a revenue contract. In terms of the transition, the EITF reached a consensus-for-exposure that would require a prospective transition method, but no transition disclosures would be required.
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