Accounting for cloud computing arrangements

Shooting for the cloud: Understanding how the structure of arrangements may impact accounting

As new tech capabilities arise, organizations all over the world are exploring cloud-based technologies––especially with the recent increase in demand for work-from-anywhere and other agile work arrangements.

The potential benefits of transitioning from on-premise technology-related hardware to cloud computing arrangements are quite well-known: increased scalability, higher system availability, disaster recovery optionality, and more. Overall, these benefits, coupled with taking the burden off hardware ownership and management, have been the primary drivers for continued cloud adoption.

Yet, this sudden change is exposing information technology (IT) groups and finance departments to potential economic challenges and budgeting constraints, as the structure of the arrangement could impact the resulting accounting, which, in turn, is driving the need for increased collaboration between IT and accounting professionals to properly structure the arrangement to achieve the desired accounting outcome.

How can IT and accounting teams work together to identify contracting structures that allow investment in technology solutions while achieving a specific accounting treatment?

For starters, it’s important to note that the structure of cloud computing arrangements will drive the accounting outcome. With costs often front of mind, organizations are constantly looking for potential savings to offset investment costs. However, with this complexity comes opportunity, as different arrangements may drive different expense recognition patterns and balance sheet impacts which may or may not be consistent with an organization’s budget and finance objectives.

What to know about accounting for cloud computing costs:

• The transition to a cloud computing arrangement is becoming more and more prevalent
• Cloud computing can provide organizations with a number of operational and technological benefits, but may also provide organizations with cost savings and/or positive financial statement impacts
• Accounting for cloud computing arrangements can be complex, with contracting and operational nuances driving the ultimate accounting treatment
• Differences in financial results can be due to the capitalization of certain implementation costs, as well as the need to classify ongoing costs based on specific rules, which may, in turn, result in operating expenses or interest and amortization expenses
• Opportunities may exist for organizations to structure contractual terms of service to align with specific financial objectives

As organizations explore IT transformation, it is critical for them to ask whether they can run software on their own servers or a third party’s servers, or whether they are restricted to only accessing the technology through the cloud. The answers to these questions can further impact accounting for cloud computing arrangements. Further, an organization should determine whether or not its arrangement contains a lease of equipment. If so, the organization would generally be required to recognize the leased equipment on its balance sheet as an asset (related to the right to use the equipment) and a liability (related to payments owed).

A cloud transition is never out of the question

When exploring different options for migrating to cloud-based technology, organizations should consider the complexity and nuances of accounting for cloud computing. Interested parties should not rule out a migration to the cloud simply because of perceived cost, but should instead consider the impact this shift could have on their organization overall. Early collaboration between CIO and CFO teams is an important step in finding the right cloud computing arrangement to suit a company’s financial objectives. What CIOs can do today is take action to work closely with their CFO and controllership organizations to plan the structure of their cloud computing contracts to meet certain accounting treatments.