Subscription-Based Information Technology Arrangements

Subscription-Based Information Technology Arrangements

Project Description: This project addresses accounting and financial reporting for subscription-based information technology arrangements (SBITAs), a type of information technology (IT) arrangement. The project will consider (1) potential accounting and financial reporting guidance for cloud computing arrangements (CCAs) that are not addressed in current guidance and (2) potential amendments to Statement No. 51, Accounting and Financial Reporting for Intangible Assets, and related questions and answers in the Comprehensive Implementation Guide.

Status:
Initial Deliberations: August 2018

Subscription-Based Information Technology Arrangements—Project Plan

 

Background: Cloud computing refers to the use of a network of remote servers hosted on the Internet to deliver on-demand storage, management, processing, and other applications. Through the most commonly known service models—Software as a Service (SaaS), Platform as a Service (PaaS), and Infrastructure as a Service (IaaS)—providers of CCAs typically allow end users to access software or hardware remotely from any location and to store data with the providers for a length of time typically longer than a year. The migration from on-premise IT systems to CCAs has been taking place across all sectors in recent years, including state and local governments.

CCAs often involve contracts with a term that is longer than a year. Depending on the features of individual CCAs, it often is difficult to determine whether a CCA results in (1) an asset and a related liability or (2) a period expense. In addition, the nature of costs associated with initial implementation of CCAs often make it difficult to determine whether those costs should be capitalized or expensed.

Based on the pre-agenda research activities, it is evident that diverse opinions exist regarding the differences and similarities between CCAs and on-premise software licensing arrangements (on-premise arrangements). Diverse opinions also exist regarding the accounting treatments for CCAs. Some IT experts, preparers, and auditors who participated in the research believe CCAs and on-premise arrangements are fundamentally different transactions. They view CCAs as strictly subscription-based service arrangements between the vendor to the customer; whereas, on-premise arrangements provide customers with a perpetual software license. Consequently, those stakeholders believe the accounting treatments for the two transactions should be different.

Other IT experts, preparers, and auditors who participated in the research believe CCAs and on-premise arrangements are similar transactions. They believe that both arrangements (1) provide customers with access to use the software, regardless of the ownership, and (2) can provide similar functionality and services through the use of the software, regardless of where that software resides. Therefore, those stakeholders believe the accounting treatment for these transactions also should be similar.

In the absence of specific guidance on CCAs, preparers and auditors rely on their own professional judgement to determine which guidance to analogize. Some use Statement 51. Some look to Statement No. 87, Leases, even though it explicitly excludes contracts for intangible assets such as computer software from its scope. Some apply Concepts Statement No. 4, Elements of Financial Statements, to determine whether an individual cost item in their CCAs meets the definition of an asset, and then apply Statement 51 to determine if that cost belongs to the application development stage, assuming that cost is similar to costs associated with internally generated computer software. Additionally, some preparers and auditors who are familiar with FASB ASU No. 2015-05 analogize to that guidance to determine whether a CCA includes a software license and, therefore, should be accounted for in a manner consistent with the acquisition of other software licenses.

Another difficulty resulting from the lack of specific guidance on CCAs relates to the classification and accounting for the initial implementation costs associated with CCAs. The research indicates that, because initial implementation services generally are not included in the subscription fees for cloud computing services, initial implementation often are separately contracted. The research also suggests that stakeholders apply different methods to account for initial implementation costs, including (1) as assets other than capital assets (for example, a prepaid asset), (2) capitalized as part of an intangible asset resulting from a CCA, or (3) as period expenses.

Based on all of the input and recommendations received on the scope of this project, the Board also tentatively decided that the name of this project be revised from “Cloud Computing Arrangement” to “Subscription-based Information Technology Arrangements,” which would accurately reflect what this project is going to address.

Accounting and Financial Reporting Issues: The project is considering the following SBITAs:

  1. What are IT arrangements and what differentiates SBITAs from other IT arrangements?
  2. What should be the criteria to classify IT arrangements?
  3. Do SBITAs or a particular stage(s) of SBITAs meet the definition of an asset in Concepts Statement 4? If so, do SBITAs meet the Statement 51 definition of an intangible asset? How should SBITAs be defined for financial reporting purposes?
  4. What are the common characteristics of SBITAs that differentiate them from on-premise software arrangements? What are the similarities between the two types of transactions that may suggest they are economically similar transactions for financial reporting purposes?
  5. Given the differences and similarities between SBITAs and on-premise arrangements, should there be classification of different types of SBITAs? If so, should governments apply similar guidance to certain types of SBITAs and on-premise arrangements, but account for other types of SBITAs differently? If so, what should be the classifications and the accounting treatments?
  6. How should governments account for fees paid for SBITAs?
  7. If the contract for a SBITAs is separate from the contract for the initial implementation of that SBITAs, how should governments account for outlays incurred during the initial implementation of SBITAs?
  8. Should outlays associated with SBITAs be grouped into three stages, similar to the three stages described for developing and installing internally generated computer software in Statement 51? Further, should governments account for the outlays according to the stages and/or based on the nature of the outlay?
  9. Some SBITAs have multiple components that may go into service at different times. Should governments account for these components separately? If so, should they capitalize or expense each separate component, and why?
Project History:
  • Pre-agenda research approved: April 2017
  • Added to current technical agenda: April 2018
  • Task force appointed? No
  • Deliberations began: August 2018
Current Developments: The project was approved at the April 2018 Board meeting. The project staff is preparing for initial deliberations.

Work Plan:
 
Board Meetings Research Activities
December 2018: Multiple components in contracts of subscription-based IT arrangements: capitalization or expensing, and accounting for implementation cost and other cost components of subscription-based of IT arrangements
January 2019: Impairment, note disclosures, and remaining issues
March 2019: Review first draft of a standards section of an Exposure Draft; cost-benefit considerations; effective date and transition
April 2019: Review preballot draft of an Exposure Draft
May 2019 (T/C): Review ballot draft of an Exposure Draft and consider for approval
June–July 2019: Comment period
August–November 2019: Redeliberate issues based on due process feedback
January 2020: Review preballot draft of a final Statement
February 2020: Review ballot draft of a final Statement and consider for approval


Subscription-Based Information Technology Arrangements—RECENT MINUTES


Minutes of Meetings, November 14−16, 2018
 
The Board continued its discussion of subscription-based IT arrangements (SBITAs).  The first topic addressed was whether SBITAs should be considered a type of executory contract. The Board tentatively decided that SBITAs are not a type of executory contract. The Board then discussed whether the right to use the underlying hardware or software in an SBITA should be recognized as an asset by the government end user. The Board tentatively decided that the proposal should provide that the right to use the underlying hardware or software in an SBITA should be recognized as an asset by the government end user. The Board also discussed whether the obligation to make payments in an SBITA should be recognized as a liability by the government end user. The Board tentatively decided that the proposal should provide that the obligation to make payments in an SBITA should be recognized as a liability by the government end user. The Board discussed whether an exception similar to that provided for short-term leases should be proposed for short-term SBITAs. The Board tentatively decided that an exception similar to leases should be proposed for short-term SBITAs.

Next, the Board discussed whether the guidance in Statement No. 87, Leases, for separating multiple components and allocating contract prices, including the exception to treat the contract as one single unit under certain conditions, should be proposed for SBITAs with multiple components. The Board tentatively decided that the guidance in Statement 87 for separating multiple components and allocating contract prices, including the exception, should be proposed for SBITAs with multiple components. The Board then discussed whether the following guidance for capitalization of multiple components, based on Statement No. 51, Accounting and Financial Reporting for Intangible Assets, and Statement 87, should be provided for SBITAs.
  • Capitalize fees charged for the right-to-use the underlying hardware or software, which is to recognize an intangible subscription asset and a liability and recognize amortization expense and interest expense over the length of the contract.
  • Recognize an expense for fees charged for vendor’s support services if it is practicable to separate those service components from the subscription component and if it is practicable to allocate contract price to those components, based on the proposed guidance for multiple components in SBITAs.
The Board tentatively decided that the above guidance for capitalization of multiple components should be proposed for SBITAs.

Finally, the Board discussed whether, for the purposes of developing proposed standards for SBITAs, all relevant guidance in Statement 87 should be considered applicable to SBITAs. The Board tentatively decided that all relevant guidance in Statement 87 should be considered applicable to SBITAs, dependent on additional analysis of certain provisions. 

 Minutes of Meetings, October 2−4, 2018
 
The Board discussed potential characteristics to be included in a definition of a subscription-based information technology arrangement. The Board tentatively decided to propose that those defining characteristics include that (a) the arrangement is for information technology hardware, software, or a combination of both, including information technology infrastructure; (b) the arrangement grants governments the right to use information technology hardware or software, or a combination of both; (c) the arrangement is on a subscription basis over a period of time as specified in the contract; and (d) the arrangement is an exchange or exchange-like transaction. The Board also tentatively decided that information technology arrangements that solely provide support services should be excluded from the scope of the project. The Board then discussed a proposed definition of a subscription-based information technology arrangement. The Board tentatively decided to propose that definition to be a contract that conveys control of the right to use hardware, software, or a combination of both, including IT infrastructure, as specified in the contract for a period of time in an exchange or exchange-like transaction.

Minutes of Meetings, August 22−24, 2018

The Board discussed how to use existing standards to develop this project and considered two alternative paths. The Board tentatively decided to develop new standards that will build upon existing standards. The Board discussed how to frame the scope of this project and again considered two alternative paths. The Board tentatively decided to limit the scope to subscription-based IT arrangements. The Board also discussed whether the name of the project should be changed from “Cloud Computing Arrangements.” The Board tentatively decided to change the name of the project to “Subscription-Based Information Technology Arrangements.”

Minutes Archive
 

Subscription-Based Information Technology Arrangements—TENTATIVE BOARD DECISIONS TO DATE


In developing an Exposure Draft, the Board tentatively decided to propose that:
  • The scope of the project should be limited to subscription-based information technology arrangements (SBITAs).
  • The defining characteristics of an SBITA should include the following:
    • The arrangement is for IT hardware, software, or a combination of both, including IT infrastructure.
    • The arrangement grants governments the right to use IT hardware, software or a combination of both.
    • The arrangement is on a subscription basis over a period of time as specified in the contract.
    • The arrangement is an exchange or exchange-like transaction.
  • Arrangements that solely provide IT support services should be excluded from the scope of this project.
  • The definition of an SBITA should be as follows: a contract that conveys control of the right to use hardware, software, or a combination of both, including IT infrastructure, as specified in the contract for a period of time in an exchange or exchange-like transaction.
  • SBITAs are not a type of executory contract.
  • The right to use the underlying hardware or software in an SBITA should be recognized as an asset by the government end user.
  • The obligation to make payments in an SBITA should be recognized as a liability by the government end user.
  • An exception, similar to that provided for short-term leases, should be proposed for short-term SBITAs.
  • Guidance in Statement No. 87, Leases, for separating multiple components and allocating contract prices, including the exception to treat the contract as one single unit under certain conditions should be incorporated in the proposed standards for SBITAs.
  • The following guidance for capitalization of multiple components, based on Statement No. 51, Accounting and Financial Reporting for Intangible Assets, and Statement 87 should be provided in the proposed standards for SBITAs.
    • Capitalize fees charged for the right-to-use the underlying hardware or software, which is to recognize an intangible subscription asset and a liability and recognize amortization expense and interest expense over the length of the contract.
    • Recognize an expense for fees charged for vendor’s support services if it is practicable to separate those service components from the subscription component and if it is practicable to allocate contract price to those components, based on the proposed guidance for multiple components in SBITAs.
  • All relevant guidance in Statement 87 should be considered applicable to SBITAs, dependent on additional analysis of certain provisions.


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