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How FASB Accounting Standard Impacts Cloud Computing Fees

Cloud usage is increasing at a significant pace – clearly the FASB accounting standard impacts cloud computing.

In 2015, it was estimated that the cloud computing market was growing at a rate of 22.8% CAGR (compound annual growth rate) and will reach $125.8 billion in 2018.

Accounting Changes and Cloud

Interestingly, in 2014 the largest amount of revenue spent on cloud computing was on private cloud, or a cloud computing instance implemented within a corporate firewall. This underscores what we hear continually from CIOs that we work with – that there are still limitations to public cloud that prohibit them from shifting a significant portion of their IT infrastructure there.

I had a recent conversation via video on this exact topic – limitations of the cloud – with Ryan Fay, CIO of ACI Specialty Benefits, he pointed to several reasons why migrating to public cloud created issues for him:

Latency

For delivery of their services, Ryan’s team had to minimize latency in order to ensure a quality customer service experience. Concerns over latency impacted their ability to migrate systems to a public cloud instance.

Downtime

Ryan’s team uses the public cloud for processes like Testing/QA. Those processes experience periodic downtime as a result of being in the cloud, something he could not afford on more mission critical processes and applications.

Cost & Control

Ryan informed us that “many people don’t realize that security is still your responsibility in the cloud. You have to install patches, maintain intrusion detection…” For their team, moving to cloud wasn’t a ‘one-stop-shop’ as it still required cost and resources to maintain the security in their public cloud instance. He advised that these software and personnel costs should be factored into a Total Cost of Ownership (TCO) calculation when considering cloud as a solution.

In addition to the concerns that Ryan and many other CIOs currently share with public cloud adoption, recent changes in accounting rules may create an additional barrier to cloud adoption. The Financial Accounting Standards Board (the organization that establishes accounting standards that govern the creation of financial reports) changed a rule in December of 2015 that will make it harder for IT organizations to capitalize the cost of migrating to cloud. Network World described this change as:

The FASB Accounting Standards Update to “Intangibles – Goodwill and Other – Internal-use Software (Subtopic 350-40)” addresses “Customer’s accounting for fees paid in a cloud computing arrangement.” 

And while the update didn’t set out to address how to account for cloud migration costs, the new rules, combined with the FASB’s decision “not to provide additional guidance on the accounting for upfront costs,” will mean enterprise shops can no longer depreciate some fees involved in a cloud migration.

In other words, the new standard makes it harder for companies to capitalize the cost of cloud migration, which impacts how much of that migration cost can be depreciated. If the cost cannot be depreciated as quickly as in the past, it will impact the Return on Investment (ROI) of moving toward cloud computing.

This change was enough to prompt Amie Thuener, Google’s Director of Finance, to submit a letter that said “We believe that the Proposed Standard could result in a disincentive to purchase hosted cloud computing arrangements if companies interpret the wording … to mean that implementation costs should be expensed as incurred (versus capitalized and depreciated).” 

Although the updated standard leaves room for interpretation, it is clear that the change will directly impact the economics of migrating to public cloud. CIOs and IT organizations considering this project in 2016 and beyond will need to involve their financial teams in the process to assess the impact of this accounting standards change on the ROI of their cloud project.