I have a new brief on Apcela's AppHUB, a hybrid computing platform that enables workloads to be deployed on different computing models (hardware only, hybrid (cloud/hardware), and fully virtualized) and ties them together with a high performance network. What follows is a bit of a wonkish view on the accounting implications.
That network is key, since Apcela's origins as CFN Services, a network services provider, allows it to tie the workloads with a high performance network that can accelerate business critical workloads.
But the part that is most interesting to me is that the platform enables the choice of deploying workloads in different models. Let us delve into the business and financial aspects. (Here is the wonkish part.)
The choices in the computing model provides end-users the ability to shift costs from capital (amortized) expenses to operational expenses. In the United States, the Federal Accounting Standards Board (FASB) has issued guidance on how IT customers account for fees paid in a cloud computing arrangement. One guidance published as Accounting Standards Update 2015-05, and in subsequent proposed Accounting Standards Update(s), and this topic is undergoing change.
While ESG is not providing specific accounting guidance to its readers (please talk to your accountants), it is worthwhile to note that it is possible to capitalize some of the costs associated with a service contract in addition to expensing the appropriate costs of the service element, depending on how it belongs to the implementation activities of the cloud computing arrangement.
This means that specific costs of a cloud computing arrangement can be aligned with the preferred expense profile for the IT organization, especially for costs for internal-use software licenses.
So what does this mean for IT organizations? Are some implementation fees treated as expenses in their income statements? Or is it considered an amortized asset? If you take a hit on the income statement, then retained earnings takes a hit and some firms prefer to avoid that. Unfortunately there has been some ambiguity in what belongs where, which leads to head scratching. How do you treat implementation costs of setting up a network to connect on-premises systems to a cloud counterpart?
This means that a seemingly innocent choice in a cloud computing arrangement can affect the financial statements. So a technology choice can create surprises for the CFO.
If you go down one path (with its technical constraints), you may be stuck with a particular expense model that may be hard to back out of. The CFO may be grumpy for years.
Is there an alternative? One way is to choose an application platform that enables portability between different models. This way, you can choose to deploy or host workloads in different models that fit the organization's expense or amortization preferences.
AppHUB is an example of both a portable application platform and an arrangement for cloud computing. The workloads get associated with that application platform, and you can choose the underlying foundation when appropriate, which means that you can treat them differently financially.
The brief for ESG subscribers is located here.