Customer's Accounting for Cost Incurred in Software and Cloud Computing Arrangements

DOIhttp://doi.org/10.1002/jcaf.22362
Date01 October 2018
Published date01 October 2018
Customers Accounting for Cost
Incurred in Software and Cloud
Computing Arrangements
Paul Munter
For many years, there has
been guidance for the cloud
service provider for determin-
ing whether it is selling a ser-
vice to its customer (typically
referred to as software as a
serviceor SaaS) or both
licensing software and provid-
ing a service.
1
However, from
the customers perspective there
was no explicit guidance until
much more recently on whether
the customer acquired software
and a related service or had
just entered into a service con-
tract. Not surprisingly, diver-
sity existed in practice with
some customers accounting for
all of these arrangements as the
acquisition of internal-use soft-
ware and others accounting for
the arrangements as the pur-
chase of services.
Additionally, customers
often incur a signicant cost
related to implementation and
integration services when mov-
ing onto a new software or
SaaS platform. So, not surpris-
ingly, there have been further
questions around the account-
ing for these costs and, in
particular, whether the
accounting for these costs
would be different if they are
related to an arrangement that
includes a software element
from one that does not. To
address the rst question, the
Financial Accounting Stan-
dards Board (FASB) issued
Accounting Standards Update
(ASU) 2015-05.
2
The second
question was addressed more
recently by the Emerging Issues
Task Force (EITF) in
Issue 17-A.
3
ASU 2015-05
ASU 2015-05 speaks to a
variety of cloud computing
arrangements including SaaS,
platform as a service, infra-
structure as a service, and other
similar hosting arrangements.
A hosting arrangement is an
arrangement in which an end
user of the software does not
take possession of the software.
Instead, the software applica-
tion resides on the vendorsor
a third-partys hardware, and
the customer accesses and uses
the software on an as-needed
basis over the Internet or via a
dedicated line.
The FASB concluded that
to determine whether it had
acquired internal-use software
versus services, the customer
should use the same criteria as
are used by the vendor. There-
fore, a hosting arrangement
includes a software license
4
only if it meets both of the fol-
lowing criteria:
Customer has the contractual
right to take possession of
the software at any time dur-
ing the arrangement without
either incurring a signicant
cost or penalty or a diminu-
tion in the functionality of
the software.
It is feasible for the customer
to run the software on its
own IT infrastructure or to
contract with an unrelated
third party to run the soft-
ware on the customers
behalf.
The rst criterion requires
the customer to have the right
to take possession of the
FASB
© 2019 Wiley Periodicals, Inc.
Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI 10.1002/jcaf.22362 63

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