The ITAM Review

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Cloud accounting changes on the horizon

Cloud computing continues to grow and bring benefits across a range of business sectors but, at the same time, it can represent challenges for the finance/accounting departments and ultimately, the CFO. How you pay for cloud is a big consideration for many organisations – there are several financial considerations that must be tackled whenever cloud is an option and how you divide the spend between your CAPEX and OPEX budgets is one of them.

What’s changed?

In late 2018, the Financial Accounting Standards Board (FASB) – the organisation responsible for setting public company accounting standards and establishing GAAP (Generally Accepted Accounting Principles) in the US – issued new guidance around accounting for implementation, set-up, and other up-front costs related to cloud projects. Under the new regulations, organisations will be able to capitalize certain cloud implementation costs in the same as they would for on-premises software. The changes begin in 2020 for “public business entities” and in 2021 for all other entities.

Generally, anything to do with cloud computing has been an OPEX expense which reduces the EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortisation) of a company. This new guidance allows some of the costs involved with cloud to be capitalised and recognised over the lifetime of the service, reducing the immediate impact on EBITDA. Understanding your organisation’s views around accounting preferences and the need to protect EBITDA etc. can influence cloud related discussions with vendors.

Helping the CFO

The CFO will be making decisions about how cloud impacts earnings and tax and having a clear picture of your software position regarding cloud – what can move there, what can’t, etc. will help them ensure they have all the facts when considering the possible impact of cloud and other software decisions.

Being able to give the CFO (and other execs) a complete and current view of your cloud usage – and how it relates to your software licensing position – is very important. To ensure compliance with accounting regulations, there needs to be a clear picture of things like:

  • Which are standalone services
  • Which include licenses
  • Where on-premises licenses have been moved to the cloud

And when these positions change too. Costs are generally split out between on-premises, cloud, internal, third-party etc. and any changes may impact the accounting – positively or negatively.

What can ITAM do?

Whether these FASB changes apply in your territory or not, correct accounting around cloud is important – and ITAM is well placed to be pivotal in these conversations and decisions. Knowing where assets are (on-premises, the cloud, dedicated third party etc.), what they are (perpetual license, IaaS, SaaS etc.), and how they can be used is all key to helping an organisation make the appropriate decisions. Using the data that you have and pro-actively taking it to the different parts of the business is a great way to enhance ITAM’s position internally. Don’t forget, software compliance isn’t the only type of audit an organisation might face!

Further Reading

PWC blog post
PWC guide
CFO article
FASB Guidance

About Rich Gibbons

Rich has been in the world of IT and software licensing since 2003, having been a software sales manager for a VAR, a Microsoft licensing endorsed trainer, and now an ITAM analyst looking at software licensing and cloud.

A Northerner renowned for his shirts, Rich is a big Hip-Hop head, and loves travel, football in general (specifically MUFC), baseball, Marvel, and reading as many books as possible. Finding ways to combine all of these with ITAM & software licensing is always fun!

Connect with Rich on Twitter or LinkedIn.

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