As of today, there are no hard and fast rules regarding how companies need to book costs associated with the setup of cloud services. That leads some to spread the cost over time, similar to a software license. Others treat it as a single expense, having a major impact on their financial statements.
The confusion led the Financial Accounting Standards Board (FASB) to consider whether standardization is necessary. To help you understand what is at stake, here is an overview regarding the source of the discussions.
Which Fees are Being Reviewed?
Accounting rule makers in the United States are specifically examining costs associated with the setup of services through a cloud provider. Typically referred to as implementation fees, these charges cover the work required to connect a particular business to the larger cloud system. These charges are separate from monthly access or hosting fees and are often required as a lump sum.
Why are New Rules Being Considered?
Currently, businesses book the fees in one of two ways: expenses or prepaid assets. The former has the company list the single expense on their income statements while the latter amortizes the payment over the implementation period.
If the fee is expensed, it’s a huge hit on an organization’s income statement. This causes retained earnings to decrease accordingly. While some businesses may see the fee as relatively minor, certain implementations are incredibly costly. For example, a large-scale ERP system can lead to millions of dollars in fees.
The above scenario leads some companies to amortize the expense to lessen spread the impact out over time.
Businesses Want Clarity
Since the current rules are unclear, many companies feel it is time for guidance. Since booking the cost isn’t standardized, it makes comparing financial statements among companies challenging and affects any attempted analysis of their performance.
New rules issued by FASB didn’t speak to the issue. However, it did define how to manage cloud service monthly costs depending on the presence or lack of software licenses. Those that include software are now part of subtopic 350-40-Intangibles, while the rest only count as software contracts.
Companies are looking for a similar decision on classifying implementation costs to define whether it should be considered an intangible asset. If so, the costs can be spread out accordingly. If not, the lump sum expense would be booked.
At this time, neither approach is inherently right or wrong. Until further guidance is provided, companies are somewhat free to proceed in their best interest. In cases where upfront costs are low, the need to capitalize might not apply. However, for larger implementation, the ability to do so could be considered a blessing.
Experts in the field are currently split regarding which method is proper. So, until official rules are created, it is unlikely a consensus will be reached organically.