Skip to the content

Menu

What impact will FASB ruling have on cloud adoption

Cloud adoption

​The advantages of cloud adoption have become widely acknowledged by businesses of all sizes and sectors, and yet those working in accountancy may find themselves put off by the idea due to new rules introduced in December by the Financial Accounting Standards Board (FASB).

The new rules, which come under the FASB's Update to “Intangibles – Goodwill and Other – Internal-use Software (Subtopic 350-40)”,  mean the regulatory body will no longer provide "additional guidance on the accounting for upfront costs,” meaning many enterprises looking to depreciate some fees involved in migrating to the cloud will no longer be able to do so.

The main conclusion of the update is that if wishing to implement a cloud computing solution that includes a software license, companies should be prepared to account for that element of the move, which brings it in line with rules regarding the acquisition of other software licences.

It continues: “If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract.”

There is currently no explicit guidance under GAAP in implementing cloud systems, resulting in a myriad of approaches, as well as a number of unnecessary costs and complexities for many stakeholders.

The latest update aims to both simplify and add greater clarity to the current rules.

However, there is a growing sense of unease that the change will make it harder for companies to capitalise the cost of setting up and implementing a cloud system.

One example was given by Hugo Vasquez, Deputy chief information officer and vice president of Technology and Services for AES, a Fortune 200 global power company.

He told Network World that before the changes, the company could capitalise the cost of cloud migration projects and subsequently write off the investment over the last three years.

“We were able to capitalise around $4.46 million to implement the project, which went live at the beginning of this month. Our integrator was Deloitte, and we capitalised those costs and the labour of our own people, so we had an incentive to move forward with a cloud solution.  But today I couldn’t capitalise that $4.46 million.  And that change is resulting in a reduction in projects in our company to move to a cloud computing model," he said.

Missing out on benefits

As a result of the new rules, there are growing concerns that many companies will be pushed more towards the use of on-premise solutions.

Google is just one company to have voiced its concerns about the new measures. In a comment letter sent to the FASB, the company's director of finance Amie Thuener warned: “We believe that the Proposed Standard could result in a disincentive to purchase hosted cloud computing arrangements if companies interpret the wording … to mean that implementation costs should be expensed as incurred”.

Reports suggest Google is not the only company to have raised concerns, with Visa, Salesforce and Groupon all apparently suggesting that more work needs to be done on solving this issue.

However, giving an answer to the question of how best to account for cloud services still seems to elude even the most stringent of critics to the FASB's measures, with Ms Thuener even adding that it was up to the regulatory body to find its own solution.

She added: “We encourage the FASB to consider issuing explicit guidance with respect to the accounting treatment of implementation costs, as these costs can be significant."

“We believe capitalising the software implementation costs and amortising the corresponding asset over its useful life better reflects the economics of the transaction as expenses are recorded in a manner that reflects the consumption of the economic benefit from the software implementation costs, and therefore is more helpful to readers of financial statements in the analysis of assets and expenses.”

Consequences

Whatever the circumstances, if the FASB's update has dampened enthusiasm for cloud computing services, the consequences could leave businesses, particularly those looking to grow and expand, may fund themselves missing out on the benefits that come the adoption of a cloud computing service.

To see Google voicing concerns is unsurprising given that it was behind a 2014 report that found small or medium-sized businesses were 21 per cent more profitable when they adopted the cloud and also grew 26 per cent faster.

The added level of flexibility, combined with the increased accessibility means it is easier for companies to keep a track of costs in real time and on a daily basis, offering firms a more in-depth view of their finances. If the adoption of such technology is hindered even slightly, it could have a knock-on effect for the economy, not just in the US, but around the world.