New Accounting Rules May Limit Usage of Hosting and Public Cloud Services

One of the major customer benefits associated with moving application workloads to either a public cloud or managed hosting environment is that it turns IT into an operating expense that makes their balance sheets look a lot better to investors.

But over the next couple of years there are new accounting rules that may soon change all that. Proposed accounting rules from the U.S. Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB), expected to be finalized this year, will require a company’s leased assets – such as real estate, vehicles and other equipment – to be added to their balance sheet as a capital asset.

IT organizations are going to have to start accounting for IT infrastructure as a capital expense regardless of where that IT infrastructure actually resides. If it’s a managed hosting environment, that IT infrastructure will be viewed as an asset of the customer’s asset regardless of who actually owns the equipment. In addition, organizations will also be asked to account for the percentage of IT infrastructure they are using in software-as-a-service (SaaS) deployment or public cloud computing environment.

According to John Clark, IBM category manager for integrated workplace management systems, these changes in accounting rules are an outgrowth of an effort to provide investors with more transparency into business operations. Many organizations have used leasing and other financial mechanisms to hide the true state of their liabilities. The new accounting rules, says Clark, will be applied to everything from buildings and cars to IT equipment and the data centers it resides in.

Given the scope and breath of these rules changes, Clark says they won’t go into effect until the 2014-2015. But finance departments are already roiling from the potential impact, which is creating a lot of demand for upgrades to financial systems that better reflect the forthcoming changes in accounting rules. In fact, a recent IBM study shows that 92 percent of those surveyed believe they are not prepared to implement the pending rules.

On one level that may create some business opportunities for solution providers. But on another level it may cause them to reevaluate certain business models and practices. Without the ability to move application software and IT infrastructure off their books by invoking leasing and cloud services, many more organizations may opt to build their own private clouds inside their own data centers. That could be a positive development for solution providers that sell equipment and services used to build these private clouds, but it may prove to be a challenge for solution providers that are selling cloud services that they either built or resell on behalf of someone else.

The real immediate downside, however, may be the uncertainty these new rules will create. Most organizations don’t have a lot of detail in any of their leasing contracts. Finance organizations are first going to have to reexamine all their leasing contracts, and then come up with new formulas for figuring out when they should lease/rent something versus actually buy it.

The new rules are still in draft form, so naturally there is still a lot of lobbying go on concerning their final form. And whether these new rules will survive intact any potential change in presidential administrations is anybody’s guess. But at this point it’s clear that substantial change is coming to the way leasing is defined, which is going to a significant impact on hosting, managed services and cloud computing business models across the entire channel.