7.12 Cloud Computing Arrangements
In August 2018, the FASB issued ASU 2018-15, which amends ASC 350-40 to address a customer’s accounting for implementation costs incurred in a CCA that is a service contract. ASU 2018-15 aligns the accounting for costs incurred to implement a CCA that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Specifically, the ASU amends ASC 350 to include in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized in a CCA that is considered a service contract.
In accordance with ASC 350-40-45-3, cash flows to implement a CCA that is a
service contract and that meet the capitalization criteria in ASC 350-40 must be
presented in an entity’s statement of cash flows “in the same manner as the cash
flows for the fees for the associated hosting arrangement.” The FASB gives a
rationale for this requirement in paragraph BC12 of ASU 2018-15:
This is because the asset recognized for the implementation
costs is recognized only as a result of enhancing the value of the hosting
service, which itself is not recognized as an asset. Thus, although the
implementation costs are recognized as a standalone asset, the future benefit
derived from that asset is linked to the benefit derived from the hosting
service, which is expensed as incurred.
For additional considerations related to ASU 2018-15, see Deloitte’s September 11, 2018, Heads Up.
Connecting the Dots
Capitalized implementation costs related to a CCA that is a service contract differ from capitalized costs associated with developing or obtaining internal-use software. Internal-use software is, by its nature, a recognizable intangible asset. Accordingly, any incurred and capitalized costs associated with developing or obtaining internal-use software form part of the acquired asset and would generally also be considered an intangible asset. Furthermore, and as discussed in Section 7.7, the cash flow presentation should generally be in line with the balance sheet treatment. That is, cash outflows related to noncurrent productive assets that are capitalized in an entity’s balance sheet should generally be classified as an investing activity in the statement of cash flows.
However, a CCA that is a service contract does not give rise to a recognizable intangible asset because it is an executory service contract. Consequently, any costs incurred to implement a CCA that is a service contract would not be capitalized as an intangible asset (since they do not form part of an intangible asset); rather, such costs would be characterized in a company’s financial statements in the same manner as other service costs and assets related to service contracts (e.g., prepaid expense). That is, these costs would be capitalized as part of the service contract, and financial statement presentation of the cash flows, the resulting asset, and related amortization would be consistent with the ongoing periodic costs of the underlying CCA.