Pay-as-you-go is OPEX, Right? – Forbes blog by John Webster

By , Thursday, July 12th 2018

Categories: Analyst Blogs

Cloud computing ushered in an increased appreciation and appetite for treating enterprise computing infrastructure as an operating expense (OPEX). The pay-as-you-go model works for off-site computing resources so why not on-site as well? “Why not just make it all OPEX,” is a common attitude among those who are shifting and expanding workloads in the cloud. As a result, we see a growing number of vendors making available pay-as-you-go acquisition alternatives to their customers to meet increasing demand for off-balance sheet infrastructure.

But just as momentum builds for OPEX spending as opposed to CAPEX, two accounting standards bodies—the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB)—are poised to change the rules of the OPEX game. Starting December 15, 2018 for publicly held companies, even if your organization pays someone else a monthly fee out of your OPEX budget for the computing gear on the machine room floor, you will likely have to account for it as an asset none-the-less.

On February 25, 2016, FASB issued Accounting Standards Update No. 2016-02 on leases (Topic 842). FASB states that the rules update “will require organizations that lease assets (lessees) to recognize on the balance sheet the assets and liabilities (my emphasis) for the rights and obligations created by those leases.” According to FASB, the Topic 842 update was issued to induce a “more faithful representation of an organization’s leasing activities.”

At the moment, pay-as-you-go acquisitions are entirely OPEX transactions. We believe this assumption will no longer be the case when FASB 842 comes into effect on December 15 of this year for public companies and December 15, 2019 for all others. Here’s why:

I have just concluded a study of eleven storage-as-a-service (StaaS) offerings available from a range of sources that includes large outsources, infrastructure vendors, VARs and startups. In every case, there is an underlying lease that addresses ownership—essentially a lessor—of the pay-as-you-go asset base and payment for the use by the customer (lessee) of these assets. These leases come with “flexibility” options that typically allow the customer to pay more on a monthly basis for added capacity when its needed and less when it is not being used. Even so, the basic structure of an asset lease remains in place. Like a lease, a lessor owns the infrastructure and charges a monthly fee for its use. The user (lessee) has exclusive right to use the assets for some minimum term—twelve months or more. There are provisions under which the customer can terminate the agreement and return the infrastructure. In many cases however, if a customer cancels the pay-as-you-go agreement before normal termination, the customer is still required to make the remaining monthly payments whether they use the gear or not.

In light of the FASB’s Topic 842 guidance, I believe that pay-as-you-go agreements for infrastructure, even when they include additional services, should be reviewed by an accountant if an OPEX assumption is being made. Vendors are now adding cautionary language in their marketing and sales materials in reference to FASB guidance although sometimes it’s only as a footnote. I also urge public cloud users to do a similar review. Contracts between enterprise customers and public cloud service providers where the customer is given exclusive use of cloud infrastructure that would otherwise be shared among other CSP users may also qualify as a lease and become subject to the same accounting standards.

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