FEDERAL ENERGY REGULATORY COMMISSION 

Washington, D.C. 20426 

In Reply Refer To: 

Office of Enforcement 

Docket No. AI20-1-000 

December 20, 2019 

TO ALL JURISDICTIONAL PUBLIC UTILITIES AND LICENSEES, NATURAL 

GAS COMPANIES, AND CENTRALIZED SERVICE COMPANIES 

Subject: Accounting for Implementation Costs Incurred in a Cloud Computing 

Arrangement that is a Service Contract 

The Financial Accounting Standards Board (FASB) has issued Accounting 

Standards Update (ASU) No. 2018-15, Intangibles—Goodwill and Other—Internal-Use 

Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud 

Computing Arrangement, to reduce potential diversity in practice in accounting for the 

costs of implementing cloud computing arrangements that are service contracts. ASU 

No. 2018-15 aligns the accounting for costs incurred to implement a cloud computing 

arrangement that is a service contract with the guidance on capitalizing costs associated 

with developing or obtaining internal-use software. Specifically, ASU No. 2018-15 

clarifies that an entity obtaining a service contract in a cloud computing arrangement 

should follow the existing guidance in Accounting Standards Codification (ASC) 350-40 

to determine which implementation costs can be capitalized and which costs must be 

expensed, and further provides that the capitalized implementation costs shall be 

amortized over the term of the associated arrangement. In addition, ASU No. 2018-15 

requires the capitalized implementation costs to be reported on the balance sheet in the 

same line item as any prepayment of the service fees for the associated cloud computing 

arrangements. The related amortization expense is required to be reported in the same 

expense line item on the income statement as the expense for the service fees of the 

associated cloud computing arrangement. For most jurisdictional entities, ASU No. 

2018-15 is effective January 1, 2020 for accounting and financial reporting under 

generally accepted accounting principles (GAAP). 

Commission staff received many inquiries from industry participants regarding 

clarification on how to apply ASU No. 2018-15 within the framework and regulatory 

intent of the Commission's existing accounting requirements. As discussed herein, for 

regulatory accounting and reporting to the Commission, jurisdictional entities will be 

permitted to capitalize certain implementation costs and to amortize those costs over the 

term of the associated cloud computing arrangement. However, in capitalizing these 
Docket No. AI20-1-000 

costs, jurisdictional entities must adhere to the regulations related to plant construction 

costs set forth under Part 101, Part 201, and Part 367 of the Commission's regulations.1 

Jurisdictional entities must also follow the guidance provided herein with regards to the 

accounts they should use to record the capitalized costs and the related amortization 

expense. Service fees and other non-capital costs for the cloud computing arrangement 

are generally recorded as an expense. 

The accounting guidance included herein is intended to result in consistent 

accounting for the same types of costs incurred for cloud computing arrangements and 

internal-use software projects for accounting and financial reporting to the Commission. 

The Commission's accounting requirements are not intended to automatically reflect 

changes in FASB's Accounting Standards Codification, and FASB updates should not be 

construed as required for regulatory accounting and reporting to the Commission. 

However, upon analysis, the Commission may issue accounting guidance to clarify how 

provisions of an ASU can be reflected within the Commission's existing accounting and 

financial reporting requirements. Accordingly, this accounting guidance is intended to 

provide clarity and certainty on how jurisdictional entities should apply the 

Commission's accounting and reporting requirements related to cloud computing 

arrangements in response to ASU No. 2018-15. 

1. Question: How should jurisdictional entities capitalize implementation costs 

related to cloud computing arrangements? 

Response: Implementation costs related to cloud computing arrangements are 

similar to the costs incurred to develop internal-use software and should be accounted 

for on the same basis. Jurisdictional entities have historically determined capitalizable 

internal-use software costs in a manner consistent with the requirements of ASC 350-40, 

which is an acceptable approach for accounting and financial reporting to the 

Commission. Accordingly, it is also appropriate for jurisdictional entities to determine 

capitalized implementation costs related to cloud computing consistent with ASC 350-

40. Examples of implementation costs that may be capitalized include upfront costs to 

integrate with on-premise software, coding, configuration, and customization. 

1See 18 C.F.R. Part 101, Electric Plant Instructions No. 3 (Components of 

Construction) and No. 4 (Overhead Construction Costs). See also 18 C.F.R. Part 201, 

Gas Plant Instructions No. 3 (Components of Construction) and No. 4 (Overhead 

Construction Costs). See also 18 C.F.R. Part 367, Service Company Property 

Instructions No. 367.51 (Components of Construction) and No. 367.52 (Overhead 

Construction Costs). 

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Docket No. A120-1-000 

2. Question: What accounts should jurisdictional entities use to record capitalized 

implementation costs related to cloud computing arrangements for Commission 

accounting and reporting purposes? 

Response: Jurisdictional entities should record capitalized implementation costs 

associated with cloud computing arrangements as a utility plant asset, consistent with the 

Commission's accounting requirements for internal-use software. Accordingly, 

jurisdictional entities should record capitalized implementation costs in Account 303 

(Miscellaneous Intangible Plant), provided such costs are not specifically provided for in 

other utility plant accounts. For example, public utilities are required to record software 

used to support regional transmission and market operations in Account 383 (Computer 

Software). Accordingly, a public utility's capitalized cost related to cloud computing 

arrangements for regional transmission and market operations should be recorded in 

Account 383. 

3. Question: What accounts should jurisdictional entities use to record the 

amortization or depreciation of capitalized implementation costs related to cloud 

computing arrangements for Commission accounting and reporting purposes? 

Response: Jurisdictional entities should amortize or depreciate capitalized cloud 

computing costs consistent with the requirements of the utility plant accounts in which 

they are recorded. Specifically, the amortization of capitalized cloud computing costs 

recorded as intangible utility plant should be recorded in Account 404 (Amortization of 

Limited-Term Electric Plant)2for public utilities and centralized service companies, and 

Account 404.3 (Amortization of Other Limited-Term Gas Plant) for natural gas 

companies.3The amortization of capitalized cloud computing costs not classified as 

intangible utility plant should be recorded in Account 403 (Depreciation Expense). 

If a jurisdictional entity believes that its facts and circumstances warrant the use of 

alternative accounts other than those prescribed herein to record the capitalized costs and 

related amortization, the jurisdictional entity should request clarification or approval from 

the Chief Accountant to use the alternative accounting treatment. 

2 See 18 C.F.R. Parts 101 and 367 (2019). 

3 See 18 C.F.R. Part 201 (2019). 

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Docket No. AI20-1-000 

The Commission delegated authority to act on this matter to the Director of the 

Office of Enforcement or his designee under 18 C.F.R. § 375.311 (2019). The Director 

has designated this authority to the Chief Accountant. This letter constitutes final agency 

action. Your company may file a request for rehearing with the Commission within 30 

days of the date of this order under 18 C.F.R. § 385.713 (2019). 

Sincerely, 

tv4A/u )USteven D. Hunt 

Chief Accountant and Director 

Division of Audits and Accounting 

Office of Enforcement 

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