Accounting for Implementation Costs of a Hosting Arrangement (ASU 2018-15)

March 15, 2021

Many of us are entering into agreements for cloud computing services these days. Whether it’s a new customer relationship management system or simply upgrading your accounting software, the costs can be high, and the accounting can be tricky. The Financial Accounting Standards Board’s Accounting Standards Update (ASU) 2018-15 addresses the accounting for implementation costs in a cloud computer agreement or hosting arrangement that is a service contract. Accounting Standards Codification (ASC) 350-40, previously included guidance on when a cloud computing arrangement includes a software license or should be considered a services contract. If a software license is present, the associated costs should be recorded as an intangible asset, and related liability (if paid overtime). While services contracts are typically expensed when incurred.

ASU 2018-15 provides guidance on implementation costs incurred as part of a hosting arrangement (i.e. the customer doesn’t take possession of the software, but only accesses it). Specifically, implementation costs incurred in a hosting arrangement obtained in a service contract should be accounted for similarly to internal-use software under ASC 350-40-25 with costs incurred in the preliminary project stage and postimplementation stage expensed and costs incurred in the application development stage capitalized. Capitalized costs should be amortized over the expected life of the agreement, taking into consideration extensions and termination clauses, and are subject to possible impairment. The capitalized costs should also be presented in the balance sheet, income statement, and statement of cash flows on the same line items as other expensed costs associated with the hosting arrangement—not in fixed assets and depreciation expense.

ASU 2018-15 becomes effective for public business entities for fiscal years beginning after December 15, 2019, and all other entities for annual reporting periods beginning after December 15, 2020. Early adoption is permitted.

For more information, please contact Mark Robins at or 240.364.2645