Understanding the Impact of ASC 842 on Cloud Computing

Understanding the Impact of ASC 842 on Cloud Computing

If you work in finance or accounting, there’s a good chance you’ve heard of the Accounting Standards Codification 842 (ASC 842). This new standard, which was issued by the Financial Accounting Standards Board (FASB) in early 2016, replaces the old leasing standard (ASC 840). It requires companies to report leasing obligations on their balance sheet, which can have a significant impact on their financial statements.

One area where ASC 842 is having a particular impact is on cloud computing. In the past, cloud computing was often treated as a service contract rather than a lease, which meant that the costs associated with cloud computing were typically treated as an operating expense. However, under the new standard, cloud computing contracts are classified as leases if the customer has the right to control the use of the underlying asset (the server or data center) and obtain the economic benefits of its use.

This change in accounting treatment could have several implications for companies that use cloud computing. Here are a few key considerations:

1. Increased transparency: The new standards require companies to report all lease liabilities on their balance sheet. This means that companies will need to thoroughly review their cloud computing contracts to determine whether they meet the criteria for lease classification. Additionally, companies will need to frequently update their balance sheets and income statements to incorporate any new leases they enter into.

2. Increased complexity: As companies adjust to the new standards, they may find that their lease accounting becomes more complex. For example, companies will need to determine the lease term, which can be challenging when dealing with cloud computing contracts that have flexible renewal options.

3. Possible impact on financial ratios: Because the new standards require lease liabilities to be reported on the balance sheet, some financial ratios (such as debt-to-equity ratio and interest coverage ratio) may be impacted. This could lead to changes in how investors and lenders view a company’s financial health.

4. Possible changes to lease arrangements: In order to avoid the impact of the new standards, some companies may choose to restructure their cloud computing contracts. For example, they may choose to reduce the length of the lease term or shift from a fixed payment structure to a variable payment structure.

It’s important to note that the impact of ASC 842 on cloud computing will vary based on a company’s specific circumstances. However, regardless of the impact, it’s clear that companies need to be proactive in understanding the implications of the new standards. This may involve working closely with their accounting and finance teams, as well as with their cloud computing providers, to ensure that the proper accounting treatment is applied.

In conclusion, the impact of ASC 842 on cloud computing is just one example of how changes in accounting standards can have far-reaching implications on businesses. As companies continue to adapt to the new standards, it’s important to stay informed and be prepared to make changes as necessary. By doing so, companies can ensure that they are accurately reporting their financial obligations and maintaining the trust of their stakeholders.