Woman and man working in server room

What you need to know about accounting for cloud computing

Photographic portrait of Paul Beswick
Paul Beswick

Director of Accounting and Chief Accountant – Professional Practice, Ernst & Young LLP

2 minute read 23 Oct 2020
Related topics
Assurance
IFRS
CFO agenda

Businesses that enter into cloud computing arrangements need to consider the appropriate accounting treatment for the costs incurred.

Cloud computing has become increasingly popular in recent years as companies have looked for efficient and secure ways to store, manage and process their data.

This type of arrangement is based on networks of remote servers, usually accessed over the internet, with service models encompassing infrastructure, platforms and software. The customer accesses and uses the software on an as-needed basis.

Transitioning to the cloud or implementing a new cloud computing arrangement can involve significant costs for companies, and there are implications for how these costs are accounted for.

Accounting standards do not, however, provide explicit guidance on this. Businesses need to use judgement and may need to apply various IFRS standards, including IFRS 16 Leases and IAS 38 Intangible Assets.

Businesses entering into these cloud computing arrangements need to understand whether this is an acquisition of an intangible, a right of use, or a contract to receive services. The financial reporting implications are significantly different depending on the answer. When the question was put to the IFRS Interpretations Committee, guidance was provided on how to make the distinction.

Transitioning to the cloud or implementing new cloud computing arrangements can involve significant costs for companies, and there are implications for how these costs are accounted for.

How EY can Help

However, there remain questions about other fact patterns and how to account for the implementation costs of cloud computing arrangements. These issues are discussed in the EY publication Applying IFRS – Accounting for cloud computing costs, published in July 2020. This publication examines how a business might account for different types of cloud computing arrangements, including the various types of implementation costs, and is intended to help companies consider the requirements of accounting standards.

Summary

Transitioning to the cloud or implementing a cloud computing arrangement can involve significant costs for companies, and there are implications for how these costs should be accounted for. Accounting standards do not provide explicit guidance, and so businesses need to use judgement. A new EY publication examines how a business might account for different types of cloud computing arrangements and will help companies to consider the requirements of relevant accounting standards.

About this article

Photographic portrait of Paul Beswick
Paul Beswick
Director of Accounting and Chief Accountant – Professional Practice, Ernst & Young LLP
Passionate about high-quality financial reporting and capital markets. Proud husband and father of three. Follows the Premier League. Collector of Legos. Enjoys watching all genres of movies.
Related topics
Assurance
IFRS
CFO agenda

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.