Important Considerations for Media Companies Planning a Move to the Cloud

Important considerations for media companies planning a move to the cloudCloud computing has grown significantly over the past several years, and the trend shows no signs of slowing. Cloud computing offers virtual access to software applications, servers, data centers, and other IT-related items. An easy way to think of cloud computing is doing business on the web, thereby eliminating or reducing the need for in-house technology infrastructure such as servers and software, and eliminating or reducing the need to perform maintenance on both computer hardware and software.

The newspaper and media industry has seen considerable development of cloud-based systems and now has access to content publishing, circulation, and advertising on the web. As you evaluate whether to invest in new systems, it is important to consider the advantages and benefits of cloud-based systems versus the traditional methods of purchasing software, servers, maintenance, and IT support. Be aware that being cloud-based does not mean proper application software reviews should be circumvented. You still need to ensure selected cloud-based applications adhere to your operational and strategic capability requirements.

You should also conduct due diligence into the financial stability of the cloud system vendor, and the security and controls surrounding data and information maintained at the cloud service provider. Before investing in a cloud service provider, make sure the vendor and data center receive a Service Organization Controls Report (SOC), formerly known as a SAS 70 report. There is guidance developed by the AICPA to provide highly specialized examinations of service organizations’ internal controls.

 

Another area you should consider is the accounting treatment for the costs of a cloud-based system. There has been no industry-specific guidance on accounting for costs associated with providing or using cloud arrangements. As a result, you will need to consult various accounting resources to determine the correct accounting treatment. It can be difficult to determine which guidance may apply to your company’s specific situation.

Cloud users may incur costs for fee for service (subscriptions), fees for application of software, and other various costs. Fee for service relates to the use of the cloud service and the customer typically pays a subscription fee based on a rate determined in the contract with the cloud service provider. Contracts should contain specific terms of the arrangement including payment terms and whether the fee is fixed, variable, or based on some other measurement such as usage. Subscription fees are typically expensed in the period in which you receive the benefit of the services. In most instances, the period in which the benefit is received is clear; however, there may be circumstances in which you must use some judgment to determine the actual benefit period. These instances may include delays in the usage of the cloud service due to changes or development of the application specific to your needs. If this is the case, you may delay the recognition of expense until the cloud service begins. Depending on the timing of the payments, you may need to record an asset or liability on your books.

Fees for software application occur when you purchase the application from a third-party vendor. You may choose to house and maintain that software on a cloud network. In these instances, you own the software, and would record an asset on your books for the cost of the software and amortize it over the estimated useful life.

You may also incur various other costs which may include consulting costs. These costs should be evaluated and recorded in accordance with the applicable guidance.

Cloud arrangements may have a number of complexities. Since each cloud agreement can be uniquely structured to meet your company’s needs, each agreement should be carefully reviewed to determine the appropriate accounting treatment for both book and tax purposes.

Richard Snyder can be reached at Email or 215.441.4600.