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our roots run deep TM MAYER HOFFMAN MCCANN P.C. – AN INDEPENDENT CPA FIRM A publication of the Professional Standards Group MHMMessenger © 2014 MAYER HOFFMAN MCCANN P.C. 877-887-1090 • www.mhmcpa.com • All rights reserved. TM Last week, the Financial Accounting Standards Board (FASB) issued another proposal under its Simplification Initiative to address how an entity should account for payments when it purchases the use of software hosted by a vendor (i.e. cloud computing arrangements). These arrangements are known as a “hosting arrangement,” an example of which is the use of web-based Customer Relationship Management (CRM) software or any other web-based software. Internal-Use Software Accounting guidance requires an entity to capitalize the cost of software acquired as an intangible asset and amortize the asset over its estimated useful life. If there are multiple elements purchased at the same time as the software, such as training, an entity is also required to allocate the purchase price to the multiple elements based on their relative fair value. However, under US Generally Accepted Accounting Principles (US GAAP) there is no current guidance on whether the customer in a hosting arrangement should account for the fees paid to the vendor of the arrangement under the guidance on internal-use software. The lack of guidance in US GAAP lead some entities to evaluate their hosting arrangements to determine if they should be accounting under the internal-use software guidance and the effect of that accounting. August 2014 Do you use Software Provided from the Cloud? In addition to being inconsistently applied, this evaluation was difficult and costly to perform. Scoping Under the proposed accounting standard, a hosting arrangement would only be accounted for as intangible internal-use software when these two conditions are met: 1. The customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty, and 2. It is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software. These conditions are the same criteria that are applied by the vendor providing the hosting service to determine if it is providing a software license or a service. Hosting Arrangement Within the proposed guidance, a hosting arrangement is defined as “an arrangement in which an end user of the software does not take possession of the software; rather, the software application resides on the vendor’s or a third party’s hardware, and the customer accesses and uses the software on an as-needed basis over the Internet or via a dedicated line.”
