When (and When Not) to Capitalize Cloud Computing Fees

by Erik Bradbury

For customers entering into hosted cloud computing arrangements, an important question to consider: which costs can be capitalized and which costs should be expensed?

The use of hosted cloud computing arrangements has become more and more common as companies find benefits in moving away from capital-intensive infrastructure and internal software investments. Companies often incur substantial fees in connection with the setup and implementation of these cloud computing arrangements, and are required to determine whether to expense or capitalize those fees.

In addition to the cost of a software license, for instance, there could be fees for services, software upgrades and renewals, support and maintenance, internal and external consulting services, website development, infrastructure, training, and systems reconfiguration. The incurred fees may be bundled together or paid individually to a provider up-front or over time. In some cases, fees are paid to third parties. The costs can be substantial and material to a preparer’s financial reporting.

New Guidance Effective for Q1 2016: ASU 2015-05

Historically, U.S. GAAP did not explicitly address a customer’s accounting for fees incurred in a cloud computing arrangement, which may have led to complexity and diversity in practice as some cloud migration costs were capitalized while others were expensed1.

The issuance of ASU 2015-05 simplifies the analysis required from preparers when determining how to account for those fees by providing the following:

  • Aligning the criteria for customer accounting in a cloud computing arrangement to the existing guidance for cloud service providers2
  • Providing explicit criteria to customers to evaluate whether a cloud computing arrangement includes a software license
  • Eliminating the need for customers to analogize to the guidance on leases in ASC 840 to determine the asset acquired in a software licensing arrangement
  • Clarifying that when a cloud computing arrangement does not include a license of software, the customer should account for the arrangement as a service contract.
While preparers were allowed to early adopt, companies are required to begin applying the provision of the new guidance in the first quarter of 2016 with an option to adopt on a prospective (for all arrangements entered into or materially modified after the effective date) or retrospective basis.

FEI Answers Your Questions

One of the most common questions for customers entering into hosted cloud computing arrangements deals with the question of which costs can be capitalized and which costs should be expensed. Answering those questions is not always clear, even with the FASB’s updated guidance.  In an effort to bring additional clarity around this and other issues and questions, FEI has put together a members-only article which takes a deeper dive into this important topic. Please click on the banner below to gain access to the entire article through FEIconnect.



1U.S. GAAP did, however, provide explicit guidance for cloud computing providers in ASC 985-605, Software – Revenue Recognition

2 Refer to ASC 985-605-55-121 to 55-125