Capitalization of Cloud Computing Costs

In recent years, there has been a distinct and significant shift to cloud computing arrangements (CCA), for companies across a variety of industries. These CCAs include:

  • Software as a service (SaaS) – arrangements that provide web-based delivery of applications managed by a third-party vendor
  • Platform as a service (PaaS) – third parties provide a framework for a team of software developers to create and manage customized applications
  • Infrastructure as a service (IaaS) – third parties provide access to scalable and automated computing resources, such as networking, monitoring and storage

Historically, companies have expensed these cloud-computing costs as the costs were incurred. However, numerous businesses complained to the Financial Accounting Standards Board (FASB), arguing that cloud-based platforms and physical onsite servers are virtually the same, and they therefore should be reported the same. In response, FASB issued Accounting Standards Update (ASU) 2018 – 15 Intangibles – Goodwill and Other – Internal Use Software to address how costs incurred during the development phase of CCAs can qualify for capitalization.

Capitalization costs are recorded as assets on the balance sheet and amortized over the estimated useful life of the asset. However, when it comes to cloud computing, it can be difficult to determine which portion of fees are considered capitalizable costs. Below is a list of CAA costs that may be capitalizable:

  • External direct costs of materials
  • Third-party service fees to develop the software
  • Costs to obtain software from third-parties
  • Coding and testing fees directly related to software products

Costs for data conversion activities, training activities and software maintenance costs are generally not eligible for capitalization.

ASU 2018-15 is effective for private companies, including non-profit organizations, for fiscal years beginning after December 15, 2020, and can be adopted either prospectively or retrospectively.

If your organization is interested in taking advantage of ASU 2018-15 or would like additional counsel on CCAs, we encourage you to contact the experts at SST Accountants & Consultants for personalized recommendations.