Private Companies Need Accounting Clarity for Cloud Setup Fees

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By Denise Lugo

Private company reliance on cloud systems to store data, rather than buying internal software systems themselves, will continue to grow, which will probably require greater accounting clarity on how to record upfront cloud service implementation costs.

Rapid technological changes are the forces driving more companies—including small community banks—toward cloud systems despite substantial set-up fees, July 11 discussions among the Financial Accounting Standards Board and its Private Company Council revealed.

“I’ve been through this process and think of what computing offers versus building your own system, it might be expensive but it’s not as expensive as building your own,” Steven Brown, credit manager and senior vice president of Portland, Ore.-based US Bank, said. “It allows the flexibility as technology changes, it’s going to allow a company to evolve. If I buy hardware, I’ve got it and if technology moves, I’ve got to go buy a new system.”

Some companies can incur millions of dollars in upfront fees to set up cloud computing services. These costs are generated from additional steps companies must take to build connectors so that their system can interact with a cloud arrangement.

Fees vary by company. The costs are separate and substantially higher than the hosting fee, which is charge paid to a cloud company for housing and maintaining data.

Currently there isn’t specific accounting rules for how to book such costs. Companies therefor differ in how to account for them. Some book them as an expense others capitalize them.

Cloud Becoming the Norm

How companies should book implementation costs is a prevalent issue among private companies, the discussions indicated. As security concerns grow, more companies will move to the cloud over internal software programs.

“I see it quite a bit. It’s becoming more the norm than not,” PCC Chair Candace Wright, said. “Security of hosting your own data is expensive,” said Wright, a director with Louisiana-based accounting and business advisory firm Postlethwaite & Netterville.

FASB’s Emerging Issues Task Force unit will address the topic July 20. FASB’s task force tackles technical Securities and Exchange Commission practice Issues that arise from implementing current rules.

The issue will be addressed narrowly as opposed to making broad changes.

To contact the reporter on this story: Denise Lugo in New York at dlugo@bna.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bna.com

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