A company signs a multi-year subscription to a cloud accounting system and pays a consulting firm $120,000 to set it up. The consultant's invoices say "implementation." The bookkeeper expenses every one of them, or capitalizes every one as software. Both answers are usually wrong, and the right split sits in the invoice detail.
This guide covers only the implementation costs a customer incurs in a hosting arrangement that is a service contract, meaning no software license is transferred to the customer. It does not cover software the customer licenses and hosts itself, or software the company develops for sale. Those are in /us/blog/capitalized-software-asc-350-40-and-985-20-audit.
What does ASU 2018-15 do?
ASU 2018-15 aligns the accounting for implementation costs in a hosting arrangement that is a service contract with the accounting for implementation costs in an arrangement that includes an internal-use software license. Costs that legacy practice often expensed as incurred are now capitalized when they qualify and amortized over the term of the arrangement. The accounting for the service fee itself does not change. Arrangements in scope include software as a service, platform as a service and infrastructure as a service.
Effective dates: for public business entities, fiscal years beginning after December 15, 2019. For all other entities, annual periods in fiscal years beginning after December 15, 2020 and interim periods in fiscal years beginning after December 15, 2021. Early adoption was permitted. Entities could apply the guidance retrospectively or prospectively to implementation costs incurred after adoption.
Which guidance applies when: ASU 2018-15 stages or ASU 2025-06?
ASU 2018-15 sends the customer to the internal-use software guidance in ASC 350-40 to decide which implementation costs to capitalize. ASU 2025-06, issued in September 2025, rewrites that guidance. It removes the preliminary project, application development and post-implementation stages from ASC 350-40 and replaces them with a capitalization threshold. ASU 2025-06 is effective for all entities, public and private, for annual periods beginning after December 15, 2027, including interim periods within those years, and early adoption is permitted. The full model is on our ASU 2025-06 page.
| Period | Implementation costs of a hosting arrangement that is a service contract |
|---|---|
| Annual periods beginning on or before December 15, 2027, if the entity has not early adopted ASU 2025-06 | Assign each activity to a stage. Capitalize application development stage costs. Expense preliminary project and post-implementation costs. |
| Periods in which the entity has adopted ASU 2025-06 | Stage assignment drops out. Capitalize qualifying costs once management with authority has authorized and committed funding and it is probable the project will be completed and the software used as intended, and not while significant development uncertainty remains. |
| Either period | Training costs and most data conversion costs are not capitalized. Amortization runs over the hosting arrangement term and is presented with the hosting fee. |
A calendar-year entity therefore uses the stage model through its 2027 financial statements unless it adopts early, and the threshold model from 2028. The stage language in the sections below describes the model before ASU 2025-06 adoption.
Which implementation costs are capitalized?
The customer follows the internal-use software guidance in ASC 350-40 to decide. Before adopting ASU 2025-06, the customer first assigns each implementation activity to a stage: preliminary project, application development or post-implementation.
- Application development stage. Costs for qualifying implementation activities in this stage are capitalized, depending on their nature.
- Preliminary project and post-implementation stages. Costs are expensed as the activities are performed.
- Costs that cannot be capitalized under ASC 350-40. These cannot be capitalized here either. Training costs and certain data conversion costs are the standard examples.
When does the arrangement term end?
Capitalized costs are amortized over the term of the hosting arrangement. The term is not simply the stated contract period. It includes:
- the fixed noncancelable term,
- extension options the entity is reasonably certain to exercise,
- termination options the entity is reasonably certain not to exercise, and
- extension or non-termination options controlled by the vendor.
The customer reassesses the estimated term periodically, so a renewal that becomes reasonably certain changes the amortization period.
Where does the cost show up?
Presentation follows the hosting fee, not property and equipment or intangibles:
| Statement | Presentation of capitalized implementation costs |
|---|---|
| Income statement | Amortization expense is reported in the same line item as the hosting arrangement fee expense |
| Balance sheet | Capitalized costs sit in the same line item as a prepayment of hosting fees would |
| Cash flows | Cash flows are reported the same way as cash flows for the hosting fees |
Worked entries
All figures are illustrations. The company signs a five-year arrangement, including a renewal it is reasonably certain to exercise, and pays $120,000 to a consultant. The invoice detail below uses the stage model that applies before ASU 2025-06 adoption and assumes configuration and integration are application development activities:
| Activity | Stage | Amount | Treatment |
|---|---|---|---|
| Vendor selection and planning | Preliminary project | $10,000 | Expense |
| Configuration and integration | Application development | $80,000 | Capitalize |
| Data conversion | Not capitalizable | $15,000 | Expense |
| Staff training | Not capitalizable | $15,000 | Expense |
Entry when the consultant is invoiced.
| Account | Debit | Credit |
|---|---|---|
| Capitalized implementation costs (prepaid and other assets) | 80,000 | |
| Consulting expense | 40,000 | |
| Accounts payable | 120,000 |
Entry for annual amortization. Assume the five-year term begins on January 1 and $80,000 / 5 = $16,000 a year.
| Account | Debit | Credit |
|---|---|---|
| Hosting and subscription expense | 16,000 | |
| Capitalized implementation costs | 16,000 |
The amortization goes to the same expense line as the subscription fee. If the company later concludes that it will not renew and the term is three years, the remaining balance is amortized over the shorter period.
The $120,000 invoice is split $80,000 capitalized and $40,000 expensed ($10,000 + $15,000 + $15,000), so the debits equal the $120,000 credit. After ASU 2025-06 adoption the same entry results if management authorized and funded the project before the configuration work began and no significant development uncertainty remained. The $10,000 of vendor selection and planning done before that authorization is expensed in either model, and data conversion and training stay expensed.
Audit angle
Implementation costs are mostly paid to third parties, so the evidence is the invoice, the statement of work and the project timeline. The risks are cost classification, term, and presentation.
- Scope. Test that the arrangement is a service contract and the customer does not take possession of the software. If a license transfers, different guidance applies.
- Classification. Identify whether the entity has adopted ASU 2025-06, then obtain the statement of work and invoices and test each charge against the model in force: stages before adoption, the authorization, probable-completion and development-uncertainty threshold after. Look at the verbs: "plan," "design," "configure," "convert," "train," "support."
- Bundled invoices. Where a vendor bills a single implementation fee that includes training or data conversion, test the allocation.
- Internal costs. If management capitalizes payroll, ask for time records and test that the people worked on qualifying activities.
- Term. Read the contract for renewal and termination rights, including options held by the vendor. Test the reasonably certain judgment and agree the amortization to it.
- Presentation. Test that the amortization is in the same line as the hosting fee and the asset is not reported in property and equipment.
- Abandonment. Ask whether the customer has stopped using the system or is replacing it. A balance tied to a system that is no longer used needs a write-off assessment.
- Disclosure. Obtain the accounting policy and evidence that the cash flow classification matches the hosting fee.
Common misstatements: capitalizing training and data conversion, capitalizing preliminary project costs, amortizing over the useful life of a system instead of the arrangement term, and presenting amortization in depreciation expense.
For prepaid hosting fees and other deferred costs, see /us/standards/asc-340-contract-costs-prepaids.
CORAA prepares ready-to-review audit files for US CPA firms from QuickBooks books; you review and sign. See /us.
Sources
- Wipfli, FASB updates guidance on cloud computing with issuance of ASU 2018-15: https://www.wipfli.com/insights/articles/aa_fasb-updates-guidance-on-cloud-computing-with-issuance-of-asu-2018-15
- EisnerAmper, New Software Accounting Guidance Alert: ASU 2018-15: https://www.eisneramper.com/asu-2018-15-pc-blog-0220/
- KPMG, Cloud computing implementation costs post ASU 2018-15 (Hot Topic): https://kpmg.com/us/en/frv/reference-library/2021/cloud-computing-implementation-costs-post-asu-2018-15.html
- FASB, ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (effective dates, term, presentation, training and data conversion): https://storage.fasb.org/ASU%202018-15.pdf
- FASB, ASU 2025-06, Targeted Improvements to the Accounting for Internal-Use Software (effective date, early adoption, transition, capitalization threshold): https://storage.fasb.org/ASU%202025-06.pdf
- Crowe, FASB revises internal-use software cost guidance (ASU 2025-06 issue date, effective date, early adoption, stage removal): https://www.crowe.com/insights/take-into-account/fasb-revises-internal-use-software-cost-guidance
- BDO, New ASU on internal-use software costs guidance (ASU 2025-06 effective date, early adoption, capitalization conditions): https://arch.bdo.com/new-asu-on-internal-use-software-costs-guidance
- CFGI, ASU 2025-06 targeted improvements to the accounting for internal-use software (lists implementation costs for cloud computing arrangements as customer in scope): https://www.cfgi.com/asu-2025-06-targeted-improvements-to-the-accounting-for-internal-use-software/
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