Cloud Computing Arrangements

The AcSB has issued new Accounting Guideline AcG-20, Customer’s Accounting for Cloud Computing Arrangements, applicable to private enterprises and not-for-profit organizations. This new Guideline is effective for fiscal years beginning on or after January 1, 2024 with earlier application permitted.

Read our In Brief for an overview of Exposure Draft, Customer’s Accounting for Cloud Computing Arrangements. The proposals aim to simplify the accounting for cloud computing arrangements while ensuring entities can provide relevant information to their users. Share your feedback by attending our virtual roundtable on June 1 or June 7, and by submitting a comment by June 20, 2022.

Share your views on the proposed Accounting Guideline applicable to private enterprises and not-for-profit organizations. The proposals take a pragmatic approach by providing accounting policy choices to address a range of stakeholders’ concerns when accounting for cloud computing arrangements. They also clarify the application of existing Sections. Submit your comments by June 20, 2022. 

The AcSB completed its deliberations on stakeholder comments on the Exposure Draft, “Customer’s Accounting for Cloud Computing Arrangements”, considering feedback from its Private Enterprise Advisory Committee and Not-for-Profit Advisory Committee.

The AcSB discussed how Section 4410, Contributions – Revenue Recognition, would interact with the new Accounting Guideline AcG-20, Customer’s Accounting for Cloud Computing Arrangements, as not-for-profit organizations (NFPOs) may receive contributed materials and services and cash funding in relation to a cloud computing arrangement. The Board noted that for a NFPO to apply Section 4410, it needs to determine the nature of the contributed items received. There are different accounting requirements for contributions of materials and services in paragraph 4410.16, and contributions of capital assets recognized in accordance with Section 4433, Tangible Capital Assets Held by Not-for-Profit Organizations and Section 4434, Intangible Assets Held by Not-for-Profit Organizations. Entities would apply the Guideline to determine the nature of the contributed items received.

The AcSB then considered whether it is appropriate for a NFPO to apply its accounting policy choice for contributed materials and services in paragraph 4410.16 to contributions received in a cloud computing arrangement, that are not intangible assets. The Board recognizes that if a NFPO has a preexisting accounting policy to not recognize contributed materials and services in accordance with paragraph 4410.16, then it would not recognize contributed materials and services in a cloud computing arrangement, unless the NFPO retrospectively changes its accounting policy. The Board noted it currently has a project on accounting for contributions and related topics for NFPOs and decided any consideration of changes to paragraph 4410.16 should be considered more holistically as part of that project.

The AcSB also finalized the transition provisions by including additional transition relief to address stakeholders’ concerns over the cost and efforts required to analyze historical information when applying the Guideline retrospectively.

The AcSB approved the issuance of AcG-20, subject to drafting changes and a written ballot. Two Board members intend to dissent from issuing the Guideline. The Board plans to issue the Guideline in mid-November 2022.

The Not-for-Profit Advisory Committee discussed stakeholder feedback on the Exposure Draft, “Customer’s Accounting for Cloud Computing Arrangements.”

The Committee supported the AcSB’s tentative decisions at its July 20-21, 2022 meeting, specifically discussing the following: 

• The accounting policy choices in the Guideline should be applied consistently to all cloud computing arrangements.
• Adding an example to illustrate the accounting for a software module implemented after access to the software has commenced would be helpful.
• Providing additional transition relief to address concerns raised by stakeholders.
• Deferring the Guideline’s effective date by one year to apply to annual financial statements relating to fiscal years beginning on or after January 1, 2024. 

The Committee also considered feedback on the presentation of cloud computing expenditures on the balance sheet. In a software service situation, the nature of expenditures on implementation activities is like an operating expense because the entity does not control the software. However, given stakeholders’ concerns with the proposed prepaid expenses presentation, the Committee thought the Board’s tentative decision to create a new balance sheet caption to present capitalized expenditures on implementation activities is appropriate.

The Committee also provided input on the issue of how CONTRIBUTIONS – REVENUE RECOGNITION, Section 4410, should interact with the Guideline. Specifically, the Committee considered whether there is an issue that the AcSB needs to address with respect to contributed materials and services that may occur in a cloud computing arrangement. If a NFPO has historically selected an accounting policy to not recognize contributed materials and services in accordance with paragraph 4410.16, then it would not recognize contributed materials and services in a cloud computing arrangement, unless the NFPO retrospectively changes its accounting policy. The Committee expressed mixed views whether this will be an issue in practice. A few members noted that contributed materials and services in a cloud arrangement may be more prevalent in some sectors than others. Furthermore, the significance of contributed materials and services in a cloud computing arrangement may vary. They also observed that some NFPOs may receive funding related to a cloud computing arrangement instead of directly receiving contributed material and services. 

The AcSB will consider the Committee’s comments at its meeting on September 14-15, 2022.

The AcSB assessed the sufficiency of stakeholders’ feedback from its outreach activities and comment letters received on its Exposure Draft, “Customer’s Accounting for Cloud Computing Arrangements.” The Board concluded that it has received sufficient feedback from a wide range of stakeholders, including practitioners, preparers, users, and academics.

The AcSB then deliberated stakeholders’ feedback on its Exposure Draft. The Board tentatively decided to:

• create a new balance sheet caption to present capitalized expenditures on implementation activities when the cloud computing arrangement is a software service;
• provide additional transition relief to address stakeholders’ concerns;
• defer the effective date of the proposed Accounting Guideline 20, Customer’s Accounting for Cloud Computing Arrangements, from January 1, 2023, to January 1, 2024, with early application permitted; and
• include an example to illustrate implementing an additional module to the software after commencement of accessing the software.

The AcSB tentatively decided to finalize the following proposals in the Exposure Draft, subject to certain minor edits:

• scope;
• determining a method for allocating arrangement consideration on a rational and consistent basis;
• optional simplification approach;
• accounting policy choice to capitalize expenditures on implementation activities that are directly attributable to preparing the software service for intended use or expense as incurred;
• applying the accounting policy chosen by the enterprise consistently to expenditures in cloud computing arrangements;
• factors to consider when determining whether a cloud computing arrangement includes a software intangible asset;
• factors to consider in determining the expected period over which the capitalized expenditures on implementation activities should be expensed when a cloud computing arrangement is a software service; and
• disclosure requirements.

The AcSB will seek the advice of its Not-for-Profit Advisory Committee at its July 2022 meeting and continue deliberations in September 2022.