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INSIGHT: Will Covid-19 Widen Cloud Computing Compliance Gap for Companies?

June 25, 2020, 9:01 AM

The COVID-19 pandemic and swift transition to remote work policies may have resulted in some companies accelerating their cloud transitions or finally making the jump to adjust to the demands of the new digitally transformed work environment. Some organizations are even considering extended—and in other cases permanent—adjustments to their onsite versus remote workforce ratios. This only further adds to the pressure to leverage the cloud to solve for heightened long-term demand for network and storage capacity, as well as connectivity for remote collaboration.

As businesses consider cloud migration, so too, should accounting and finance departments. The FASB’s cloud computing accounting standard update (ASU 2018-15) is mandatory for cloud-using U.S. public companies for fiscal years that began on or after Dec. 15, 2019, and for all other cloud-using companies, including private organizations, with fiscal years beginning on or after Dec. 15, 2020. Realistically, however, certain organizations may be challenged by the added information tracking and process changes required to comply amidst the current pandemic and economic environment.

As cloud adoption continues, cloud computing accounting must follow

First, let’s look back at the pre-pandemic rule adoption landscape. A January 2020 Deloitte poll revealed that about 79.4% of public companies would undertake some movement into the cloud during 2020. And yet, just one-third (33.7%) of these companies had only started implementing FASB’s cloud computing accounting rule despite the fast approach to first quarter filings.

Fast forward to today. Accounting and finance teams have a myriad of competing, high priority finance challenges to work through which have been exacerbated by the pandemic, including first-ever virtual financial closes that require new toolkits and work-from-home models. Despite competing priorities, complying with the cloud computing accounting standard is mandatory for public entities and cannot be ignored. Yet, based on the large spread between cloud usage and implementation pre-outbreak, there’s potential for public companies to fall further behind on compliance efforts as a result of today’s challenging environment.

Mandated requirements aside, it is more important now than ever for companies adopting or expanding cloud services to prioritize cloud computing accounting because it presents an opportunity for favorable financial impacts. As an example, the standard requires companies to amortize cloud costs over time rather than recognize them fully upfront (the latter of which was permitted under old guidance) resulting in a reduced initial impact to EBITDA. Depending on the amount of cloud costs that need to be amortized, this could provide some near-term reprieve to companies, especially those experiencing heightened financial statement volatility or distress as a result of today’s challenging economic situation.

What can companies do to ensure cloud computing accounting compliance stays on track?

With only half (54.6%) of public entities and half (47.8%) of private companies reporting a somewhat efficient experience prior to the pandemic in implementing various accounting standards, inclusive of ASU 2018-15, it is likely that businesses are now feeling an even greater squeeze on efficiency due to more limited resources.

For public organizations that need to report under ASU 2018-15 this calendar year, as well as privately- held entities working toward 2021 adoption, we recommend that organizations evaluate the following key considerations that could help lock in on-time compliance:

Design and document future state process—Adoption of any new standard requires planning and documentation. The changes brought forth by the required amortization of cloud computing costs over time means organizations need to design a process to identify impacted contracts, capture and allocate costs, and track amounts over time. Having a plan in place, vetting impacts with key stakeholders, and performing trial runs of processes will help identify gaps and help minimize surprises.

Tech solutions for compliance versus manual internal controls—While software solutions are becoming more popular with organizations to address challenges around key business functions such as accounting, some companies still rely on manual standbys and internal controls to manage and monitor compliance. Depending on the extent of cloud implementation activities that need to be evaluated and properly recorded, organizations may find that a manual approach is impractical right now and opt to deploy a technology solution. Other organizations may benefit more from small adjustments to internal processes and controls.

New training and protocols for employees—Once processes and controls are put in place, it is also important to ensure that the proper training is provided, and protocols established to ensure efficient implementation. Internally, employees who make cloud purchasing decisions should be trained on the new accounting requirements—something which could prove more challenging in a remote work environment—to ensure they are passing the right information through to finance.

Communication with vendors—Externally, organizations need to communicate with their cloud vendors to ensure they provide enough information to identify and allocate cloud costs and understand accounting implications of different services. It’s important that these conversations happen sooner than later, as constrained resources across industries, including third party partners, could make it difficult to pin down accounting-critical information quickly.

These are just a few of the considerations cloud-using entities can consider to ease the burden and stay on track with ASU 2018-15 implementation efforts. Even so, the financial statement benefits of the silver lining to the new cloud accounting standard should not be a forgotten incentive—especially during times of extreme market uncertainty.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Chris Chiriatti is an Audit & Assurance managing director, Deloitte & Touche LLP, where he leads new standard implementation service offerings and is part of the Audit & Assurance National Office. Chris has over 20 years of audit experience and works directly with clients addressing complex accounting issues.

Sean Torr is a Deloitte Risk & Financial Advisory managing director, Deloitte & Touche LLP, where he leads the accounting standards implementation group. He has more than 23 years of experience assisting organizations of most industries and sizes with those challenges and other financial reporting requirements.

This article contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

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