New Accounting Standards for Software as a Service Contracts

When software programs were installed from a floppy disc or CD-ROM it was easier to identify and account for implementation costs. But the move to cloud computing and SaaS (Software as a Service) muddied the accounting waters. Last year the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU-2018-15) to address the issue. The new standards are about to go into effect (for public companies for fiscal years beginning after December 15, 2019, and for all other entities for fiscal years beginning after December 15, 2020).
Here’s a brief summary of what you need to know if you are implementing new software through a SaaS provider, or if you are a SaaS provider.

• The new standard brings the accounting for the costs of implementing a cloud computing arrangement or SaaS arrangement in line with the current guidance on capitalizing costs for acquiring or developing internal-use software.
• A company implementing software through a cloud-based or SaaS provider will be able to capitalize certain costs incurred during the application-development stage. Previously an entity was required to expense these costs as part of a service contract.
• Costs incurred during the preliminary planning stage and post-implementation stage must still be expensed. However, an entity may be able to capitalize certain costs during the post-implementation stage that result in enhanced functionality to the hosted solution.
• The updated guidance may be adopted early in any annual or interim period for which financial statements have not yet been issued.

This new guidance could make the use of a cloud computing arrangement or SaaS contract more appealing for many businesses and other entities.
This remains a complex accounting process. It is important to receive guidance and direction from a qualified advisor before making any decisions for your business. If you have additional questions about the new accounting standards for cloud-based software implementation please contact Jim Donellon of our SaaS practice group at (781) 407-0300.