Moving to the cloud: many companies are doing it but does it make financial sense? This article by Deloitte discusses some of the financial, accounting and investor-related questions that financial professionals should be asking before their organisation makes a switch to cloud computing.
1. The best way to pay?
Choosing to move onto a cloud-based system may mean a lighter IT footprint and could give access to a better grade of system compared to what would be possible in-house. It could be cheaper to run but there are some considerations and the fee structure should be considered carefully before signing up. Deloitte's article recommends looking at the payment options available. Are discounts available for upfront payment? And how should the fees be treated from an accounting perspective? The article states: “If the fee is for a specified period, for instance, the typical approach would be to recognize the related expense ratably over that period. But that could change if there is evidence you did not receive the benefit in a ratable way.”
2. How are third-party software applications used?
Whether you are using the cloud privately within your organisation's own firewall or accessing it through a public Internet connection, third-party applications are commonly used and these should be accounted for in the appropriate way. Deloitte says: “Either way, you should record each purchased application and amortize it over its expected useful life.”
3. Are there additional costs?
As well as the cloud computing service, there are often additional services such as consulting, maintenance and support, which may have separate accounting guidelines, depending on the type of cloud implementation. Deloitte's article notes: “Keep in mind there may be tax implications as well. Often these arise from timing differences between book and tax bases resulting from a shift from a capital expenditure (capex) model to an operating expense (opex) model. Other conditions with potential tax impacts include transfer pricing and receipt of energy credits.”
4. Strategic benefits
Running a more advanced system that doesn't require regular in-house IT support can bring wider cost-reduction and business opportunities, such as new lines of business, more market share, or greater customer satisfaction.
5. Persuading investors
Moving to the cloud can mean more variable costs and an increase in operating expenditures. According to Deloitte, some CFOs worry this could cause concern among analysts and investors. But research by the company suggests this isn't the case, although it adds: “Analysts did show interest in specific revenue opportunities from cloud adoption, underscoring the vital role CFOs can play in providing a persuasive story to share with the investment community.”
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