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
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 would like additional counsel on CCAs, we encourage you to contact the experts at SST Accountants & Consultants for personalized recommendations.
