FASB Floats Cloud Computing Proposal


by Edith Orenstein

The $131 billion cloud computing market is facing uncertainty after new guidance is floated by the U.S. accounting rulemaker.

The proposal issued by Financial Accounting Standards Board (FASB) calls for customers to determine whether payments they make to cloud computing service providers should be treated as a software licenses or service contracts.

FASB provides guidance for making this determination in Proposed Accounting Standards Update Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, [an amendment of] Intangibles-Goodwill and Other- Internal-Use Software (Subtopic 350-40).

Upon release of its wide-ranging revenue recognition standard in May, guidance was provided in FASB’s Accounting Standards Codification regarding how providers of cloud computing services should account for revenue received. Questions were raised as to whether parallel treatment -- including a ‘bifurcation’ of sorts for that portion of fees paid to cloud computing providers constituting or akin to a ‘software license,’ -- should be accounting for substantively as a software license rather than a service contract.

This proposed ASU has been issued to resolve the question.

Follow-on to Rev Rec

As further explained in the Proposed ASU (reformatted to bullets):

  • Examples of cloud computing arrangements include software as a service, platform as a service, infrastructure as a service, and other similar hosting arrangements.
  • The guidance in this proposed Update would provide a basis for evaluating whether a cloud computing arrangement includes a software license.
  • If a cloud computing arrangement includes a license to internal-use software, then the software license would be accounted for by the customer in accordance with Subtopic 350-40.
  • A license to software other than internal-use software would be accounted for under other applicable GAAP (for example, software to be used in research and development would be accounted for in accordance with Subtopic 730-10, Research and Development—Overall).
  •  If a cloud computing arrangement does not include a software license, then the arrangement would be accounted for as a service contract.
  • Some arrangements may include one or more licenses to software as well as a promise to provide services, in which case the customer should allocate the contract consideration between the license(s) and the service element(s).
  • The proposed guidance does not change GAAP for a customer’s or a vendor’s accounting for software licenses or service contracts.
Will this Impact Business?

Cloud computing  is now a major player in the U.S. economy, with the Gartner Group estimating the current market at $131 billion that could possibly grow to $677 billion.

Will this impact customer’s desire to do business with cloud computing companies  if the fees are recharacterized from service contracts to software licenses?

Over the long haul, based on the business case and the value these customers obtain from their cloud computing services, my initial gut reaction is I doubt it.

However, if the proposal did have an impact, it may mean that contracts could be written differently to avoid a characterization as either a service contract or a software license. Stranger things have been seen, but again, in this day and age I have a feeling the auditors and regulators would be “on that” and there may be some concern about “substance over form.” 

Effective Date and Transition

The proposed effective date for all entities (public and private) would be for annual periods beginning after December 15, 2015. Public companies would also have to apply this proposal to interim periods within those years beginning after that same date. Private companies would have until years beginning after December 15, 2016 to apply the standard to its interim reports (while being required to apply the standard to its annual reports beginning under the same time frame as public companies).

Under the proposal, companies could choose whether to apply retroactive or prospective adoption of the standard.

The comment deadline on this proposed ASU is November 18, 2014. Read more about FASB’s proposal in this PwC InBrief: FASB Proposal to Shed Some Light on Accounting for the Cloud.