Cloud-based Phone System

[AshleyJ-PSMIC]

Good afternoon,

I'm curious if anyone has a cloud-based phone system and how they account for such service? Our invoices include a subscription total and a hardware (which is rented) total. The invoices are received on a monthly basis and are not prepayments. The amount of the software (subscription), and hardware are each/individually below our capitalization threshold. Therefore, I do not think we can record the amounts to the Cost or Depreciation of EDP Equipment line, and I don't think it would go to Telephone expense as this is not a traditional Telephone and is really software/hardware. Any advice would be greatly appreciated!

Kind regards,

[Lisa]

Ashley,

We would recommend reviewing SSAP No. 16R Electronic Data Processing and Software. Paragraph 11 begins the discussion around accounting for cloud computing arrangements. The guidance in this statement for cloud computing hosting arrangements varies based on whether the cloud computing is a service contract.

Thank you,
Lisa Mullen
Regulatory Education Director at Sovos

[AshleyJ-PSMIC]

Good afternoon,

After review of SSAP 16R, which discusses cloud computing arrangements (made up of software as a service, platform as a service, etc.), I have come to the conclusion that the hosting arrangement is a service contract. As such, SSAP 16R states that the service contract hosting arrangement shall be accounted for in accordance with SSAP No. 22R - Leases. When reviewing SSAP No. 22 R - Leases, and when reviewing Note 15 Lease examples in the Annual Statement, I am struggling a bit. The service contract is a month-to-month subscription, with no end date. So, I'm not sure if it is OK to record as a lease even though this is what the SSAPs are saying I should do. I am also having trouble of finding an example of a Note 15 Lease that has a SaaS.

Kind regards,

[Lisa]

Ashley,

I am glad you found the guidance in SSAP No 16R useful in determining your hosting arrangement is a service contract. Based on your response, it sounds like you are referring to paragraph 13d where your service contract hosting arrangement excludes implementation, set-up and other upfront costs incurred in a hosting arrangement and refers you to SSAP 22R. I did review SSAP 22R Leases, the annual statement instructions for Note 15 and a couple lease footnotes from the 2020 blank for some large insurers. Based on my general understanding of your situaton, I believe the amount should be expensed as incurred. I would recommend discussing the specific expense account and disclosures with your outside auditor or regulator.

Thanks

Lisa Mullen
Regulatory Education Director at Sovos