We all know how the cloud offers technological and business benefits. You’ve heard them: from cost savings and flexibility to faster project deployment and expansion. What you may not know is that new accounting rules are about to make the cloud extremely attractive to your accountant as well.
Here’s what’s happening. For years, a simple accounting technique has widely been used to reduce the capital footprint of many organizations. By structuring a capital investment such as computer equipment as a lease-back arrangement, IT departments effectively remove it from the company’s balance sheet.
But Financial Accounting Standards Board (FASB) chairman Leslie Seidman has said that “leases convey valuable rights and obligations that belong on the balance sheet.” As a result, the accounting standards for equipment leases are about to change dramatically, essentially nullifying current practices for existing and future leases. Many equipment leases will be regarded as capital expenses, with the costs front-loaded in the early phases of the lease and without grandfathering existing lease arrangements.
When leasing is no longer an attractive option, the next-best alternative for many companies will be to move computing resources into the cloud.
In Gartner’s recent research document Accounting Rule Changes Will Drive Increased Cloud Adoption , Darryl Carlton explains, “In 2017, changes to the accounting rules (FAS13 and IAS17) dealing with leased assets will force organizations to reconsider how they fund IT investments and will make cloud arrangements more attractive.” The good news, Gartner says, is that “Cloud services will still be expensed under the proposed changes to these accounting rules.”
Gartner’s counsel? Work closely with accounting professionals to understand the ramifications. Begin identifying the true costs of current capital equipment. And identify cloud services that meet the new requirements – avoiding what Gartner calls “cloud washing.”
If you already have plans for moving operations to the cloud, you’re in luck: the financial incentives just got very tangible, so the momentum should be in your favor. If you don’t have plans for the cloud, this could get the ball rolling – with corporate support.
In either case, moving to a well-vetted cloud service provider (CSP) offers you options you didn’t have before. A strong menu of cloud offerings can introduce new operational efficiencies, rapid scalability, built-in disaster recovery and even regulatory compliance. It may turn out that a quirk of accounting practice has positive ripple effects well beyond the green-eyeshade gang.
Naturally, caution is in order: nothing in the accounting field happens quickly. This leasing rule change has actually been in the works since the early 2000s, when Enron’s collapse revealed that “off-balance-sheet financing” had hidden the doomed company’s financial state. The current rules draft (ideal reading for a sleepless night) is proposed to be finalized in 2014 and fully effective in 2017, but the schedule has been delayed before.
Regardless of the exact schedule, it will take time to build a strong alliance with your finance folks, work out your strategy, partner with your cloud provider and move your operations to the new platform. A couple of fiscal years isn’t a lot of runway.
Review the Gartner research document with financial experts and begin to make plans now. Your accounting department will thank you.