ASU 2018-15

ASU 2018-15 answers a question that became pressing as companies moved to SaaS: how should the cost of implementing a cloud service be accounted for? Before it, companies could capitalize the costs of implementing software they licensed and installed, but many expensed the costs of implementing hosted software they only accessed as a service. ASU 2018-15 aligned the two, allowing qualifying implementation costs for cloud arrangements to be capitalized using the same rules as internal-use software.

The update matters to any organization that implements large SaaS or cloud-based systems, such as enterprise resource planning, human capital management or customer relationship management platforms. Implementation projects for these systems can cost millions of dollars. For IT financial management, ASU 2018-15 determines how much of that cost appears as an expense immediately and how much is spread over the life of the subscription.

Definition of ASU 2018-15

ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, was issued by the Financial Accounting Standards Board in August 2018. It amended ASC 350-40 to cover implementation costs for hosting arrangements that do not include a software license.

Under the update, a customer applies the same criteria it uses for internal-use software under ASC 350-40 to decide which implementation costs to capitalize. The update became effective for public business entities in fiscal years beginning after December 15, 2019, and for other entities a year later.

Which Costs Can Be Capitalized

Costs that would be capitalized if the organization were developing or obtaining internal-use software can be capitalized for a cloud arrangement. These typically include configuration, customization, integration with other systems and testing performed during implementation.

Costs that would be expensed for internal-use software are also expensed for cloud arrangements. These include training, data conversion, project management in the planning phase and general overhead. The subscription fees themselves remain an operating expense.

Following the changes to ASC 350-40 made by ASU 2025-06, the timing of capitalization for these implementation costs will follow the new probable-to-complete threshold once that update takes effect.

Amortization and Presentation

Capitalized implementation costs are amortized on a straight-line basis over the term of the hosting arrangement, including renewal options the customer is reasonably certain to exercise. Amortization begins when the relevant module or component is ready for its intended use.

The amortization is presented in the same income statement line as the hosting fees, not as depreciation or amortization. On the balance sheet, the capitalized costs are presented in the same line as prepaid hosting fees would be, and the cash payments are classified in the same way as the hosting fees in the cash flow statement.

This presentation means the capitalized costs reduce operating income over the term, just as the subscription does, which affects how the costs appear in measures such as EBITDA.

Importance of ASU 2018-15 in IT Financial Management

As organizations replace on-premises systems with cloud platforms, implementation projects have become some of the largest technology investments. ASU 2018-15 determines whether those investments hit the income statement immediately or over several years.

It also affects budgeting and how project costs are tracked. Implementation partners, internal staff and subscription fees all need to be recorded in a way that separates costs to be capitalized from costs to be expensed, which requires planning before the project starts.

Because the capitalized costs sit in operating lines rather than depreciation, they also affect comparisons between companies that use different accounting presentations.

Smoothing Implementation Costs

Without capitalization, a large cloud implementation would create a spike in operating expense in the implementation year. ASU 2018-15 allows qualifying costs to be spread over the subscription term, aligning expense more closely with the period that benefits.

This makes cloud implementations more comparable with on-premises implementations, where capitalization was already allowed, and reduces the accounting bias between the two.

It also means that the full cost of a cloud platform, subscription plus amortized implementation, can be reported in the same line, which simplifies analysis.

Tracking and Classification

To capitalize implementation costs, organizations need to track them in detail, separating capitalizable work such as configuration and integration from costs that must be expensed, such as training and data conversion. Implementation partners' invoices should be structured to support this split.

Classification decisions should follow the organization's capitalization policy, so that similar projects are treated consistently.

Internal staff time spent on qualifying implementation work can also be capitalized, which requires time tracking by project and activity.