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Can we capitalize software license fees payable over time if hosting arrangement meets ASU 2015-05 criteria?

Mackenna Rose's Profile

In 2015, the FASB released ASU 2015-15 pertaining to cloud computing software arrangements (i.e., hosting arrangements). The purpose of this Update is for cloud computing customers to assess whether the hosting arrangement essentially transfers a software license, based on meeting certain criteria (350-40-15-4A), and if so, the software license should be accounted for consistent with other license of intangible assets. Therefore, a software license within the scope of 350-40 gives rise to an asset consistent with the recognition of assets under ASC 350-30, General Intangibles Other Than Goodwill. ASC 350-30-30-1 states that such an asset should be initially measured based on the guidance included in 805-50-15-3 and 805-50-30-1 through 30-4. So my question is, if the hosting arrangement meets the criteria under 350-40-15-4A, and the software license fees are payable over the contract term, would you need to capitalize those future payments (along with implementation and hosting costs, PV'd of course) and an offsetting liability (i.e., similar to a capital lease under the old guidance (350-40-25-16), which pointed you to Leasing guidance (840-10), which was superseded by ASU 2015-05)? Otherwise, how would you capitalize a "software license" unless you paid all of the fees upfront? Do you just capitalized the implementation cost and upfront usage fees, if any, or is there more to it?

Answers

Stephen Turk
Title: Principal
Company: Stephen Turk, CPA
(Principal, Stephen Turk, CPA) |

The ASU to which you are referring is 2015-05 (not -15).
You are correct that, in the somewhat unusual circumstances under which a cloud computing customer would account for the arrangement as a license of internal-use
software, the license would be initially measured based on the guidance in 805 for "Acquisition of Assets Rather than a Business."
805-50-30-2 states that "if the consideration given is not in the form of cash (that is, in the form of noncash assets, liabilities incurred, or equity interests issued), measurement is based on either the cost which shall be measured based on the fair value of the consideration given or the fair value of the assets (or net assets) acquired, whichever is more clearly evident and, thus, more reliably measurable." Most likely, therefore, you would end up recording the software license based on the fair value of the liabilities incurred - i.e., the NPV of the future payments.

Mackenna Rose
Title: Accounting
Company: Banking
(Accounting, Banking) |

Thank!

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