CPA FAR Exam Changes-January 2020. Accounting for Cloud Computing

In the 1980’s up to about 2013, companies ran their software on their own in office hardware. Today, software is often “hosted” in the cloud and fees are paid to a provider to “host” the software. Microsoft Office used to be a product that you could buy, install on your hardware and you owned it. Fees paid in a cloud computing arrangement that are an outright purchase of a software license should be capitalized as an intangible asset and amortized over the life of the software license. On the other hand, the fees being paid for a cloud arrangement could be a “service contract”, and these costs would be expensed. In order to account for cloud computing costs as a software license, two criteria must be met A) The customer has the contractual right to take possession of the software at any time during the hosting period without significant reduction of functionality.  AND B)  Feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software. Only if both criteria are met, are the fees associated with cloud computing considered to be a software license giving you an intangible asset and if both are met, capitalize the costs and amortize over useful life. Note that if it meets neither or just one of the criteria, account for the fees as a “service contract” and all costs are expensed. There are always implementation costs associated with set up of the hosting arrangement. Implementation costs are the costs of customizing and configuring the cloud computing service to the needs of a particular business. If we are considering the arrangement a license, then capitalize the implementation costs to the same intangible asset and then amortize that intangible asset over the useful life of the license. If we previously considered the arrangement, “service contract”, we do not yet have an intangible asset, because we are going to expense all costs of the service contract. We must nevertheless capitalize implementation costs as a prepaid asset even for this “service contract” and expense those implementation costs over the life of the service contract. Once the software is in use, costs can no longer be capitalized, implementation period is over, and costs must be expensed in the period incurred.

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