Essay Sample on Implementation Costs of Cloud-Based Service Contracts

Introduction

Today technology is a major component in the organization. Internet-based clouds software has become popular software in both large and small entities. The subscription software licensing which is accessible via the internet has resulted in big changes in the business environment. The program provides different business services many businesses can interrelate with each other and it removes the barriers that existed in the traditional business models where the use of computers was limited. Cloud computing is a modern Technology that is helpful to big companies that rely on advanced technology due to its ability to maintain operational costs. Financial Accounting Standard Board ( FASB) proposed an accounting standard Update that would clarify the accounting for the implementation costs that would clarify the implementation costs for the based service contracts. The stakeholders observed that existing U.S the current system, Generally accepted accounting principles (GAAP) was a complex system that required to be updated so that it could align with the current transactions in the in the cloud computing environment. In this paper, I shall address the reasons why my support for the contracts supporting the FADS position on capitalizing implementation costs for cloud-based contracts.

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The changes in this proposed Update would adjust the prerequisites for underwriting usage costs brought about in a facilitating a hosting arrangement which is a service contract with the necessities for capitalizing the execution costs acquired to create or get internal-use software (and facilitating plans that incorporate internal-use computer program license). The accounting for the service contract would not be influenced by the anticipated reviews. The alterations in this proposed Update would require a firm (client) in hosting arrangement in the service contract to seek clarification in Subtopic 350-40 on internal-use software to figure out which expenses involved in the execution of the service indenture would be capitalized as an asset connected to the contract and the expenses also attached to it. Expenses to create or acquire an internal-use program that cannot be capitalized under Subtopic 350-40, for example, costs involved in training and certain information change costs, will not be capitalized for a hosting arrangement is a service charge agreement. In this way, the client in a contractual hosting arrangement would figure out which venture arrange (that is, starter venture stage, application improvement stage, or post-implementation arrange) an execution activity relates to. Expenses for usage exercises in the application improvement stage would be capitalized based on relying upon the idea of the expenses, while costs brought about amid the fundamental task and post-implementation stages would be expensed as the exercises are performed (Tysiac, 2018).

Under current GAAP, the accounting for services done in the cloud is varies depending on the type of contract that an entity has made with the software developer. During such trades, the entity does not own the right to ownership of the software. For this reason, the company has to treat the transaction as an expense. Under the currently proposed review, firms will only treat the expenses within the system while the expenses of the set up of the cloud will be long-term assert which will be amortized periodically. The review in this projected Updates also would require the customers to expense the capitalized execution costs of the contractual hosting arrangement over the term of the hosting arrangement and present that expense in the same line item in the statement of income as the fees associated with the hosting arrangement. The term of the hosting arrangement would include a lengthy period of the arrangement plus time covered by an option to extend the arrangement if the client is sensibly assured to implement that choice, an option to end the arrangement if the client is confident not to exercise the extinction decision, and (3) an option to lengthen the arrangement in which exercise of the selection is in the management of the merchant (Tysiac, 2018).

Despite my suggestion to propose for these arrangements, many people remain in a misunderstanding of the unspecified rules on how to treat those expenses as directed by the FASD and the private company consultative organization. He implementation fee that is higher than the hosting fee paid to the cloud company. When the fees are placed in the category of an expense, definitely the income statement will indicate a reduction in profits. The accountants are seeking advice from FADS on how to treat the costs and absence of the rules thwarts the comparability of the financial statements. Additionally, the implementation costs may result in changes in the taxable income and the companies deferred taxes. To implement this technology that has an effect on the financial position of a company would require consultations between the company management and the investors (Jamil et al, 2018).

Conclusion

To sum it up, the FADS release on the updates on how to treat the costs of setting up business cloud software will enhance the spread of the costs of implementing a cloud computing contract. Additionally, businesses will be able to understand how to treat various costs as either expense or as assets to the firm. A service contract is an expense to the firm. The new proposals will e helpful in the accounting world.

References

Jamil, A., Galligan, H., Snover, M., & Koo, J. (2018). Why Capitalizing Cloud Computing Costs Matters for Tech Companies. Retrieved from https://www.bdo.com/insights/industries/tech-life-sciences/why-capitalizing-cloud-computing-costs-matters-for

Tysiac, K. (2018). FASB simplifies accounting for cloud computing service costs. Retrieved from https://www.journalofaccountancy.com/news/2018/aug/fasb-accounting-for-cloud-computing-service-costs-201819625.html