REMINDER: Since January 1, 2024, a new accounting rule has been in force: the Accounting Guideline (AcG 20). It changes the way closely-held companies have to account for their cloud services, better known as cloud solutions.
Clearly, if your SME uses software or platforms hosted online, you now have to choose how to present these costs in your financial statements.
Why the change to NOC 20?
Cloud services have become an essential tool for hosting software, data and applications. Before the reform, each company applied its own practices, creating inconsistencies. NOC 20 puts things in order by proposing a clear framework and two distinct approaches.
Two methods for recording your costs
The first, simplified, approach is to account for all costs associated with cloud computing agreements as expenses. This method is fast, uniform and reduces administrative complexity. For example, if your SME pays $15,000 for cloud software and implementation, the entire amount will be expensed in the year. This solution is particularly suited to companies that prefer simplicity and want to avoid detailed calculations.
The second approach, called detailed, involves breaking down costs to determine which can be capitalized. In accordance with Section 3064 of the ASPE, it is necessary to analyze whether the software component constitutes an intangible asset or a service software. In concrete terms, implementation costs directly linked to software commissioning can be capitalized, while training or reconfiguration costs remain as expenses. This method provides a more accurate picture of the company’s assets, but requires more work and follow-up.
This choice is not insignificant, as it influences the presentation of financial statements and the perception of results by financial partners.
Increased disclosure obligations
Whichever approach is chosen, companies are required to update their notes to the financial statements to explain the method used and specify the material amounts. This transparency is essential to ensure compliance and inform financial partners.
A strategic choice for managers
NOC 20 is not just about compliance. It represents an opportunity to modernize accounting practices and bring financial presentation into line with digital reality. Before making a decision, executives should take stock of their cloud contracts, assess the impact of the two approaches on their bottom line, and document the choice made. This choice can influence the perception of lenders and investors, making it a real strategic issue for the company.
In a nutshell
NOC 20 marks a major accounting shift. Between simplicity and precision, each SME must choose the method that best suits its strategy and operational needs. Understanding these options and their impact is essential to making an informed decision. If you need further clarification, don’t hesitate to contact your CPA at Amyot Gélinas!
An article by Suzie Glazer, CPA
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