The Impact of ASC 842 on Cloud Computing: What You Need to Know

The Impact of ASC 842 on Cloud Computing: What You Need to Know

As technology evolves, so do the accounting standards that govern assets and liabilities. The new accounting standard, ASC 842, impacts the way companies account for leases. But, how does it affect cloud computing?

Cloud computing is the delivery of computing services such as servers, storage, databases, networking, and software over the internet. Companies choose cloud computing because it provides flexibility, scalability, and reduced IT costs. However, were these advantages affected by ASC 842?

In short, ASC 842 does not change how cloud computing services are classified. These services continue to be considered as “service contracts” and not leases. As a result, companies can continue to record cloud computing expenses as ongoing operating expenses rather than capitalizing them on a balance sheet.

However, there are some exceptions to this rule. If the cloud computing arrangement includes lease components, such as dedicated hardware or hosting services, then those components are subject to ASC 842. The value of the lease components must be separated from the value of the service contract, and the lease components must be capitalized and presented as a right-of-use asset and a lease liability.

Moreover, the distinction between service contracts and leases is not always straightforward. For instance, if a cloud computing arrangement involves customization or customization is contemplated by the parties, it could be considered a lease. In those cases, a company must assess all criteria of ASC 842 to determine if a lease exists.

It is also important to note that ASC 842 presents a major shift in lease accounting as it requires companies to recognize right-of-use assets and lease liabilities for most leases. This change has repercussions beyond cloud computing arrangements, and it will require companies to modify their existing accounting processes.

In conclusion, the impact of ASC 842 on cloud computing is narrowly focused on situations where lease components are present. In such cases, careful accounting and auditing are necessary to ensure compliance with the new standard. However, the overall benefits of cloud computing, including flexibility, scalability, and reduced IT costs, remain intact. Companies should continue to adopt cloud computing strategies to drive innovation while staying compliant with accounting standards.

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