June 2018

Affects: Entities that incur costs for implementation activities (implementation costs) as customers in cloud computing arrangements (CCAs) that are considered service contracts.

Background: In April 2015, the FASB issued ASU 2015-05,1 which clarifies the circumstances under which a customer in a CCA would account for the arrangement as a license of internal-use software under ASC 350-40.2 The ASU provides guidance on whether a CCA contains a software license or whether it is considered a service contract and thus is not within the scope of ASC 350-40. ASC 350-40 only addresses the accounting for the costs of implementation activities related to software licenses used internally. As noted in the Background Information and Basis for Conclusions of ASU 2015-05, at that time the Board decided not to address the accounting for costs for implementation activities related to CCAs that are considered service contracts.

As these arrangements have become more prevalent, stakeholders have raised concerns that the guidance in U.S. GAAP is unclear on the accounting for implementation costs associated with CCAs that are considered service contracts. Stakeholders have indicated that there is currently diversity in practice because entities look to various Codification topics for guidance on accounting for such costs.

Since this Issue was added to the EITF’s agenda, the Task Force has discussed the accounting for a customer’s implementation costs incurred in a CCA that is considered a service contract. On the basis of the FASB staff’s additional research and outreach related to several approaches, the Task Force reached a consensus-for-exposure at its January 2018 meeting 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 March 2018, the FASB issued a proposed ASU3 based on the consensus-for-exposure that the EITF reached at its January 2018 meeting. For more information on the proposed ASU, see Deloitte’s March 2, 2018, Heads Up.

Summary: At its June 7, 2018, meeting, the Task Force discussed the comment letters received on the proposed ASU, reaffirming many issues from the consensus-for-exposure and making minor revisions when applicable. Specifically, the Task Force reaffirmed that:

• An entity would apply the guidance in ASC 350-40 on internal-use software when capitalizing implementation costs related to a hosting arrangement that is a service contract.
• An entity would expense the capitalized implementation costs related to a hosting arrangement that is a service contract over the hosting arrangement’s term, which comprises the arrangement’s noncancelable term and any renewal options whose exercise is reasonably certain. The expense would be presented in the same line item in the statement of income as that in which the fee associated with the hosting arrangement is presented.
• The definition of hosting arrangement in the ASC master glossary would be amended by (1) removing the reference to licensing, (2) eliminating the requirement for the software to reside on the vendor’s or a third party’s hardware, and (3) replacing the phrase “does not take possession” with “does not currently have possession.”
• The guidance will not prohibit analogies.
• The term “implementation costs” does not need to be defined.
• The transition disclosure requirements will differ depending on the transition method elected.

The Task Force also tentatively decided that the final guidance would:

• Clarify that the balance sheet line item in which a customer presents capitalized implementation costs should be the same as that in which it presents (or would present) the prepayment of fees related to the hosting arrangement.
• Clarify that the manner in which a customer classifies the cash flows related to capitalized implementation costs should be the same as that in which it classifies the cash flows for the fees related to the hosting arrangement.
• Require an entity to apply the impairment model in ASC 350-40 to its capitalized implementation costs. The Task Force clarified that when applying this guidance, the customer would consider the asset related to a module or a component of the hosting arrangement as the unit of account for abandonment.
• Require an entity to apply the transition requirements to any eligible costs incurred after the adoption date of the amendments.

Effective Date and Transition: The Task Force reached a final consensus that the effective date of the amendments resulting from this Issue will be as follows:

• Public business entities — Fiscal years beginning after December 15, 2019, and interim periods within those fiscal years beginning after December 15, 2019.
• All other entities — Fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021.

An entity may early adopt the guidance in any annual or interim period for which the entity’s financial statements have not yet been issued or made available for issuance.

The Task Force reaffirmed its consensus-for-exposure that an entity would have the option of applying either a retrospective or prospective transition method when adopting the final guidance.

Next Steps: FASB ratification is expected at the Board’s June 27, 2018, meeting, after which a final ASU will be issued.

Affects: Entities that assume a liability in a revenue recognition contract acquired in a business combination after the acquirer has adopted ASC 606.

Background: ASC 805 requires the recognition of assumed liabilities in a business combination. Views differ on how an entity should apply ASC 805 when the assumed liability in a business combination is a revenue contract and the entity has adopted ASC 606. As a result, at its March 28, 2018, Board meeting, the FASB added to the EITF’s agenda a project to address how an entity recognizes a revenue contract acquired in a business combination after adopting ASC 606. The Board sought feedback from stakeholders on whether an acquirer in a business combination should recognize the assumed liability in a revenue contract as an identifiable liability recognized in the business combination. Some stakeholders believe that the determination should be based on whether the liability represents the acquirer’s legal obligation, while others believe that it should be based on whether the liability represents a performance obligation as described in ASC 606.

Summary: At this meeting, the Task Force discussed how an acquirer applies the recognition guidance in ASC 805 to a revenue contract acquired in a business combination after the acquirer has adopted ASC 606. The Task Force tentatively decided that an entity should recognize the assumed liability resulting from a revenue contract acquired in a business combination on the basis of whether the liability represents a performance obligation under ASC 606.

The Task Force also tentatively decided that it would not be appropriate for an acquirer to use a carry-over basis to measure an assumed liability in a revenue contract acquired in a business combination because doing so would be inconsistent with the fair value measurement guidance in ASC 805. In addition, the Task Force tentatively decided that direct costs used in the acquirer’s measurement of the assumed liability’s fair value would take into account the other assets and liabilities in the acquired set.

Effective Date and Transition: The Task Force decided that an entity would apply a prospective transition method when adopting the final guidance. The effective date will be discussed at a future meeting.

Next Steps: The FASB staff will draft and issue a proposed ASU for public comment on the basis of the decisions made at the EITF meeting.

Affects: Entities that account for episodic television series.

Background: ASC 926-20 provides guidance on accounting for film costs in the media and entertainment industry. The capitalization model for costs related to episodic television series in ASC 926-20 differs from that for film costs. An entity fully capitalizes film costs, while the capitalization of costs related to episodic content is subject to a constraint based on contract revenues. Because there have been changes in how media is produced and distributed over the Internet, the Board added a project to the EITF’s agenda to reconsider whether the cost capitalization guidance for episodic television series in ASC 926-20 is still relevant. The FASB staff established an industry working group to advise the Task Force. In this project, the EITF is addressing whether the cost capitalization model for episodic series should be the same as the model applied to films.

Summary: At its June 7, 2018, meeting, the Task Force tentatively decided the following with respect to cost capitalization for episodic television series:

• The cost capitalization guidance related to episodic content will be aligned with the guidance for films by removing the content distinction.
• The amortization guidance in ASC 926-20 does not need to be amended to provide more prescriptive guidance on viewership and to require the use of amortization curves.

The Task Force also discussed a number of other issues related to the capitalization of costs associated with episodic television series but did not reach any conclusions. As a result, the Task Force requested the FASB staff to obtain feedback from the industry working group on these issues, including the following:

• Different examples of various models for measuring impairment.
• Whether the Task Force should develop — and whether an entity should evaluate — impairment indicators at (1) an individual-film, unit-of-account level or (2) a group level.
• Whether an entity should amortize capitalized episodic costs at an individual-film level.

Effective Date and Transition: The effective date and transition will be discussed at a future meeting.

Next Steps: At its next meeting, the Task Force is expected to redeliberate this Issue on the basis of the FASB staff’s additional research on accounting for episodic television series.

At this meeting, the FASB solicited feedback from the Task Force on the concerns raised in the comment letter. Although the Task Force expressed mixed views at the meeting, it observed that the comment letter did not provide new information that the Task Force did not previously consider during the development of the guidance. The FASB will consider the Task Force’s feedback at a future Board meeting.