The Financial Accounting Standards Board issued a proposed Accounting Standards Update Wednesday intended to simplify the accounting for a customer’s fees paid in a cloud computing arrangement.

Part of FASB’s simplification initiative, the update, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, aims to improve financial reporting of fees paid to public and private companies and not-for-profit organizations that are customers in a cloud computing arrangement.

While current GAAP address the accounting for cloud service providers, they do not include explicit accounting guidance on a customer’s accounting for its fees paid to the cloud service provider, raising stakeholder concerns for this lack of guidance leading to unnecessary cost and complexity when evaluating the accounting, as well as diversity in practice.

The proposed guidance would help customers determine whether a cloud computing arrangement includes a software license, in which case the customer would account for it consistent with other software licenses. If the arrangement does not include a license, the customer would account for it as a service contract. The proposed guidance would not change GAAP for either of those cases.

For public companies, the proposed update would be applied in annual periods and interim periods within those annual periods, beginning after Dec. 15, 2015, and for private companies and not-for-profit organizations, would be applied for annual periods beginning after Dec. 15, 2015, and for interim periods beginning after December 15, 2016.

Organizations would elect to adopt the proposed amendments either prospectively—to all cloud computing arrangements entered into or materially modified after the effective date—or retrospectively, with early adoption permitted.

As part of its simplification initiative to reduce cost and complexity in financial reporting, FASB will add to its agenda a series of narrow-scope projects that stakeholders have identified as opportunities to simplify GAAP in a short time period.

The Exposure Draft, and instructions on how to submit comments by Nov. 18, 2014, is available at Stakeholders can also provide feedback using the electronic feedback form on the FASB website

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