Companies now have new guidance on how to account for the costs of implementing certain cloud computing service arrangements.

The Financial Accounting Standards Board issued Accounting Standards Update No. 2018-15 to revise guidance in a narrow area of Generally Accepted Accounting Principles that addresses the accounting for intangible items in financial statements. The board learned that existing rules were not explicit on how to account for fees paid by a customer in a cloud computing or hosting arrangement that includes a software license, which led to companies developing different approaches. FASB’s Emerging Issues Task Force researched the issue and recommended the solution that the board ultimately adopted.

The new guidance aligns the requirements for capitalizing implementation costs that a company would incur in a hosting arrangement that is also a service contract with the requirements for capitalizing implementation costs that would be incurred to develop or obtain software for internal use. FASB says the accounting for the costs associated with the service element of a hosting arrangement that is a service contract is not affected by the new guidance. Service costs are generally expensed as incurred, not capitalized or amortized over time.

FASB Chairman Russ Golden said preparers reported they were running into unnecessary complexity trying to apply historic accounting requirements that did not reflect the nature of emerging transactions as a result of advances in cloud computing technology. The standard aligns the accounting for implementation costs of hosting arrangements regardless of whether they convey a license to the hosted software to assure consistent accounting across entities, he said.

The new accounting takes effect for calendar-year public companies in 2020.