FASB's Simplification Initiative

Published date01 January 2016
Date01 January 2016
© 2016 Wiley Periodicals, Inc.
Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI 10.1002/jcaf.22129
FASB’s Simplification Initiative
Oscar J. Holzmann and Paul Munter
As the Financial Account-
ing Standards Board (FASB)
completes its convergence
agenda with the International
Accounting Standards Board
(IASB), it has added a simplifi-
cation initiative to its agenda as
one of its points of focus going
forward. The simplification
initiative is “a tightly-focused
initiative to make narrow-scope
simplifications and improve-
ments to accounting standards
through a series of short-
term projects.”1 The projects
included in the initiative are
intended to improve or main-
tain the usefulness of the infor-
mation reported to investors
while reducing cost and com-
plexity in financial reporting.
To date, the FASB has
completed five projects from
the simplification initiative:
(1) customer’s accounting for
fees paid in a cloud computing
arrangement, (2) extraordinary
items, (3) measurement date of
defined benefit pension plan
assets, (4) presentation of debt
issue costs, and (5) simplifying
the measurement of inventory.
These projects are discussed
in this column. The FASB
has several other simplifica-
tion projects on its agenda,
including (1) simplifying the
accounting for measurement
period adjustments, (2) bal-
ance sheet classification of
debt, (3)accounting for income
taxes, (4) stock compensa-
tion, and (5) equity method
of accounting. The simplifica-
tion projects currently under
development by the FASB will
be the subject in the next issue
of this column. Finally, the
Board’s current commitment to
accounting standards simplifi-
cation is also apparent in much
of its accounting guidance and
developments not identified as
components of the Simplifica-
tion Initiative including, for
example, its recent standards
on discontinued operations
(Accounting Standards Update
[ASU] 2014-08) and on devel-
opment stage entities (ASU
2014-10)2 and the creation and
operation of the Private Com-
pany Council.3
ASU 2015-05
For many years, there has
been guidance for the cloud
service provider for deter-
mining whether it is selling
a service to its customer or
both licensing software and
providing a service.4 However,
from the customer’s perspec-
tive there was no explicit
guidance, and diversity existed
in practice with some cus-
tomers accounting for the
arrangements as the acquisi-
tion of internal-use software
and others accounting for the
arrangements as the purchase
of services.
ASU 2015-05 addresses
a variety of cloud comput-
ing arrangements including
software as a service (SaaS),
platform as a service, infra-
structure as a service, and other
similar hosting arrangements.5
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 vendor’s or a
third party’s hardware, and the
customer accesses and uses the
software on an as-needed basis
over the Internet or via a dedi-
cated 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 only
if it meets both of the following

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