Even companies that agree with using the license model to figure out how to account for cloud services want the FASB to clarify its position on upfront costs given that the “costs can be substantial.” James Hoffmesiter, Corporate Controller for Visa, writes: “While we are supportive of the FASB’s proposal for how to evaluate the arrangement to determine if it is a software license or a service contract, we respectfully request that the FASB consider expanding the proposed standard to include guidance on the accounting for one-time set-up fees incurred by a customer under a cloud computing arrangement.”
Visa goes on to add another wrinkle to the upfront cost discussion. Instead of capitalizing those costs, Visa argues that the “set-up/integration costs should be considered part of the total service cost and recognized over the term of the service agreement,” because the set-up costs “provide a future benefit to the customer in the form of continuous connectivity to the service provider.”
Bigger question going forward
The FASB more or less admitted there is more work to be done when it determined the “scope of this Update should not be expanded to address the range of implementation and setup costs incurred by a customer,” but some of the companies that commented on the update are pushing for a more fundamental review of cloud computing accounting, and more specifically, the role of licenses in that accounting.
Joseph Allanson, Chief Accounting Officer at Salesforce.com, wrote: “We do not agree with the Board’s proposal that a cloud computing arrangement should be accounted for as a service contract if the arrangement does not include a software license. We believe that the delivery mechanism, or the customer’s ability to take possession of the software, should not determine whether a software element is present in a cloud computing arrangement as the functionality of the underlying software is the same regardless of whether the software is delivered via the cloud or on-premise software license. We encourage the board to develop an accounting framework that is based on the economics rather than the form of the software arrangements.”
Groupon’s Chief Accounting Officer Brian Stevens also called for a broader review: “We believe that accounting guidance resulting in a more consistent presentation of software costs, regardless of whether the purchaser elects to maintain the underlying software on its own servers in an on-premise arrangement or contracts to have it maintained on a third party’s servers in a cloud computing arrangement, would reduce complexity for users of financial statements by increasing comparability between economically similar transactions.”
And in a comment letter filed with the FASB, Jay Buth, Vice President, Controller and Chief Accounting Officer with Northeast Utilities System, argues that “both [software] licenses and cloud rights represent intangible assets, and we believe that … these two economically similar types of arrangements should be given similar accounting treatment. We do not believe an entity’s lack of ownership, title or license to software should preclude capitalization.”
Vasquez of AES hopes the FASB reviews the decision soon because it is “affecting our costs and our projects, which is affecting our people, our morale.”
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