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The FASB issued a proposed Accounting Standards Update (ASU) which clarifies the accounting for implementation costs related to a cloud computing arrangement (also known as a hosting arrangement) that is a service contract. If adopted as proposed, the proposed ASU also would enhance disclosures around implementation costs for internal-use software and cloud computing arrangements. Stakeholders are encouraged to review and provide comment on the proposal by April 30, 2018.

The FASB issued ASU No. 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement in April 2015 to assist companies in evaluating the accounting for fees paid by a customer in a hosting arrangement (by providing guidance for determining when the arrangement includes a software license.

During the comment period and after the issuance of the standard, several stakeholders asked the FASB to provide additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. Because existing guidance is not explicit in that area, the FASB decided to issue this proposed ASU to address the resulting diversity in practice.

If adopted as proposed, the amendments in this proposed ASU would align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). It would also require an organization to disclose certain qualitative and quantitative information about implementation costs associated with internal-use software and all hosting arrangements, not just hosting arrangements that are service contracts. The accounting for the service element of a hosting arrangement that is a service contract would not be affected by the proposed amendments.

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