Social Capital Theory and Research - PDF

Running head: EXPOSURE DRAFT 1
EXPOSURE DRAFT
Exposure Draft:
Proposed Accounting Standards Update, Intangibles-Goodwill and Other-Internal-Use
Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a
Cloud Computing Arrangement That Is a Service Contract; Disclosures for Implementation
Costs Incurred for Internal Use Software and Cloud Computing Arrangements.
Introduction
The aim of this exposure draft is to help institutions evaluate the accounting for fees paid
by a customer in a cloud computing arrangement by providing guidance for determining when
the arrangement includes a software license. If a cloud computing includes a license to internal-
use software license, then the software license is accounted for by the customer. This basically
means that an intangible asset is recognized for the software license. Also, the extent that the
payments attributable to the software license are made over time, a liability is recognized. If a
cloud computing arrangement does not include a software license, then the entity should account
for the arrangement as a service contract. This generally means that the fees associated with the
hosting element (service) of the arrangement are expensed as incurred. (Dubos, 2017)
Is it introduced to the ‘public Interest?’
Yes, it is. The amendment aligns the requirements for capitalizing implementation costs
obtained in a hosting arrangement that is a service contract with the requirements for capitalizing
implementation costs incurred to develop or obtain internal-use software. Thus, a customer is
aware of the costs needed for their service contract. Also, the amendment requires a customer to
follow the guidance in Subtopic 350-40 on internal-use software to know which costs to employ
the service contract and which costs will be expensed. Thus a customer has a guide on internal-

use software and thus is knowledgeable on the area. Finally, the amendment requires a customer
to expense the capitalized implementation cost of a hosting arrangement and the term of the
hosting arrangement. This way the customer is able to account for his or her money without
pressure from anyone (Friedman, 2017). By paying for the capitalized implementation, he or she
agrees with the service contract and is satisfied with it and confident that the money is a good
investment.
COMMENT LETTERS
1. By Western Digital Corporation
In this comment letter the views presented are: We are currently undergoing a complex
cloud enterprise resource planning (ERP) system implementation. The nature, type, and structure
of this cloud system are the same as those that were addressed in ASC 350-40 for internal use
software. These cloud ERP systems are complex and for this reasons, we support the ability to
apply the guidance of the ASC 350-40 and to capitalize on relevant costs such as those paid to
the third party implementer that is not a cloud host provider. In addition, we are upgrading and
implementing on internal software and the proposed ASU will eliminate any complexities that
come. Also, we agree with ASU in transferring the license to the customer thus they are able to
expense for the implementation costs incurred in the internal-use software arrangements (Grunig,
2017)
This comment letter is for the regulation as evident below: For example, the comment
“We believe that it would be appropriate to capitalize certain implementation costs incurred in
cloud computing arrangements during the application development phase, as those costs incurred
do not provide a one-time benefit at implementation. Rather, the costs incurred to benefit the
entity throughout the term of the arrangement, thereby, providing better matching of expenses

with the period of benefit through recognition in profit or loss over the term of the arrangement.”
The Western Digital Corporation agrees with the amendment in letting the customer incur the
costs because they believe this benefits the customer throughout the term of the contract.
The comment letter is also against the regulation as evident below. They do not fully
agree with the amendment in terms of licensing since it does not address contracts that have a
minor hosting element. For example, the comment’ the revised definition eliminates confusion as
to whether or not hosting arrangements (that do not contain a software license) is in scope for
ASC 350-40. However, we believe the proposed amendments to the definition of a hosting
arrangement could be further modified to address contracts that have a minor hosting element. ‘
2. By The California Society of CPA's (CalCPA)
The views presented are: The CalCPA Committee agrees with the proposed accounting
and believes it will result in reasonably consistent accounting for arrangements that are similar.
The committee also believes that the guidance in Subtopic 350-40 for determining the project
stage can be constantly applied to a hosting arrangement. The committee believes that a
customer should apply an impairment model to implementation costs of a hosting arrangement
that is a service contract as stated in Subtopic 350-40.
The comment letter is for the regulation as presented below: For example the comment
‘the Committee believes that the amended definition of a hosting arrangement and the
application of existing GAAP are sufficient to determine if arrangements meet the scope of this
proposed ASU.’ In this comment, CalCPA believes that the guidance given in the draft is
sufficient to determine arrangements even minor therefore no more guidance required.
3. By Apple Inc.

The views presented are: The Company agrees with the discussion in paragraph BC7 of
the Proposed ASU that acknowledges that implementation costs incurred in a cloud computing
arrangement that is a service may provide a future benefit that enhances the right to receive the
related service and, therefore, could be capitalized as an asset. However, we do not agree with
the disclosures in Proposed Subtopic 350-40-50-2 because we do not believe it will provide any
useful information in decision making to investors. We, therefore, encourage the Board to
maintain, the current disclosure guidance in Subtopic 350-40-50-1.
This comment letter is against the regulation as presented below: Apple Inc. totally
believes that the implementation costs discussed in Subtopic 350-40 and in the Proposed ASU
only focuses on one type of cost-setting that may be incurred bring a fixed asset to its intended
condition and location for use. The amendment excludes certain cost like pre-production design
and development costs related to long-term supply arrangements. An example is the comment
‘We do not believe that there is a more inherent risk or subjectivity related to implementation
costs for internal-use software, as compared to any other fixed asset set-up cost, that would
warrant additional, targeted disclosure guidance.’
4. By MindtheGAAP
The views presented are: MindtheGAAP supports the proposed ASU and notes that it
resulted from a project to “provide additional guidance on accounting for implementation costs
incurred in a cloud computing arrangement that is considered a service contract, due to the
diversity in practice”. Existing U.S. GAAP2 provides guidance on how companies that license
software should account for the costs of acquiring and implementing that software. This poses a
problem since there is diversity in how a customer of a cloud computing arrangement should

account for costs in implementing that kind of arrangement. The proposed ASU addresses this
type of issue.
The comment letter is for the regulation as presented below: For example in the comment
letter’ for instance, in the alternative views presented in paragraphs BC20-BC26 of the Proposed
ASU, some FASB Board members believe that implementation costs associated with a cloud
computing arrangement accounted for as a service contract do not meet the conceptual definition
of an asset, and therefore should not be accounted for as such. We disagree with that assertion ‘.
MindtheGAAP disagrees and believes that implementation costs associated with a cloud
computing arrangement define an asset.
Application of the Theories of Regulation
Public Theory
This theory applies when an institution acts in the interest of the public that is their
customers or target audience (Mansbridge, 2018). The first comment letter acts in the interest of
the public where they agree that the license should be handed to the customer. This way they are
focused on their customers and what is best for them and thus believe by handing the license to
them is best. This theory is the most effective in explaining these comments. All the companies
mentioned have agreed with the proposed ASU in ways that are of interest to their customers
rather than to the company itself.
Private Theory
This is when an institution acts to the interest of the industry (Van Gunsteren, 2018).
Comment letter three acts in the interest of the company where they mention that the Proposed
ASU does not cover all implementation costs. This way they cannot know what costs to cover
and the amount which is a problem to the company. This theory is the least effective in

explaining these comments. Most of the comments are of interest to the customers rather than to
the company itself.
Capture Theory
This is when a governmental agency is established to regulate an industry for the benefit
of the society acts to the interests of the industry. None of the comments have applied this theory
and therefore it is the least effective.

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