FASB Updates Cloud Computing Accounting Standards, Which Impacts Oracle Cloud

As of August 29, 2018, the Financial Accounting Standards Board (FASB) has approved amendments to the accounting guidelines that relate to cloud computing. These changes affect Software as a Service (SaaS), Platform as a Service (PaaS), and Infrastructure as a Service (IaaS) contracts, as well as similar types of hosting arrangements. Oracle Cloud products will be affected.

The amendments should simplify accounting procedures for companies that have already migrated to cloud solutions, but the changes may create an obstacle for companies that haven’t yet taken advantage of emerging cloud conveniences.

 

Questions About FASB Updates?

 

Let’s dive into the details – or, rather, let’s “dive up” to the details, since we’re talking about the cloud.

What Are the New FASB Requirements for Cloud Computing?

Previously, the U.S. Generally Accepted Accounting Principles (GAAP) created unnecessary complexity for companies using “as a Service” solutions. This also led to variability in how the rules were applied from one company to the next.

According to the FASB press release about these changes, the recently approved amendments will align two types of requirements for capitalizing implementation costs:

  • Those incurred in a hosting arrangement that is a service contract
  • Those incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license)

The changes outline which costs can be capitalized and which costs must be expensed, but considering how the rules are written, your CFO may still have quite a few questions.

Under the new amendment there are two main areas of impact:

  • Hardware
    • Hardware leases can no longer be expensed. Companies must report lease obligations on their balance sheets. This eradicates the benefit of leasing hardware and bloats the balance sheet with both assets and liabilities.
  • Services
    • Implementation and migration costs for cloud deployment must be treated as a one-time expense.
    • Most implementation costs cannot be capitalized, unless they’re for certain types of software, specifically tied to R&D.
    • Although post-implementation costs cannot be capitalized, post-implementation costs that result in enhanced functionality can be capitalized.

In general, this means that implementation must soon be counted as a one-time expense, data migration must soon be counted as a one-time expense, and training costs must soon be counted as a one-time expense. Added together, that means companies planning their cloud transformation after 2019 may face a lot of upfront expenses.

For many organizations, the implementation costs associated with these new guidelines may make it unrealistic to consider a move to the cloud after next year.

The amendments take effect on fiscal years beginning after December 15, 2019, for public business entities and on fiscal years beginning after December 15, 2020, for all other entities. Companies that are unable to move to the cloud before then may miss out on the long-term cost savings, flexibility, and agility that their cloud-focused competitors are experiencing.

Fortunately, you have options.

It’s Important to Carefully Consider Your Options

If your company has not yet started planning your roadmap to the cloud, now is the time to take action. Your first step should be to make sure you fully understand the FASB requirements, so you can develop your strategy.

In order to appropriately navigate and apply the new accounting rules, you’ll find that it’s also important to have a baseline understanding of the variety and scope of your options for cloud services and deployment models.

Not sure how to get your IT department to clearly communicate the ins and outs of cloud computing to your accounting department? Not sure if your IT department has the necessary skillsets to weigh and consider the virtually unlimited range of cloud strategies? Don’t want to miss out on cloud advantages? Better call in the cloud experts.

Since 1997, Centroid has been helping clients identify and implement Oracle business management solutions that streamline and speed up daily operations. Early on, Centroid understood the cloud’s potential for business applications and focused a large part of their attention on the emerging technology.

Years later, Centroid is now universally viewed as one of the leaders in the Oracle Cloud, with wide-ranging expertise in SaaS, PaaS, and IaaS applications. They were one of the first companies to certify as a Managed Services Provider (MSP) for Oracle Cloud products and they also implemented the largest Oracle Cloud IaaS/PaaS environment on the globe.

In short: if you’re looking for Oracle Cloud expertise, you’re looking for Centroid.

Contact Centroid, so you can get answers to your questions about how to leverage the new FASB cloud guidelines.