Intangible Assets

FASAB Contact: Josh R. Williams, williamsjr@fasab.gov, 202-512-4051

Project Objective:

The Board initially considered intangible assets as part of the now archived software licenses project. Members decided to archive the software licenses project due to the breadth of guidance potentially needed to address intangible assets. This project began as a research topic in which staff worked with a task force to research the significance of intangible assets throughout federal reporting entities.

During the research efforts, staff identified potential intangible assets to include patents, trademarks, data sets, and software-based resources. During Board meeting deliberations, members agreed that research indicates a need to update software guidance. The Board also shared staff’s concerns with recognition challenges associated with the other types of identified intangible assets. Research showed that these assets exist throughout federal reporting entities but there are significant concerns with the practicality of measuring and recognizing their value.

Based on research results and deliberations, the Board ultimately approved an intangible assets project with the following objectives.

Develop updates for software reporting guidance
Develop a working definition of intangible assets for the Board’s internal use
Further assess the costs vs. benefits of developing reporting guidance for intangible assets

Staff is currently working with a task force on the first two objectives while the third objective is on standby.

Intangible Assets Task Force

FASAB formed a task force to assist the Board with the intangible assets project. The Intangible Asset Task Force webpage provides further information on the task force objectives and activities, to include past meeting agendas, minutes, and milestones.

History of Board Deliberations

October 17-18, 2023

Software Technology: Cloud-Service Arrangements

At the October 2023 meeting, the Board deliberated financial statement recognition and note disclosure requirements for cloud-service arrangements.

The proposed recognition guidance would establish that reporting entities should apply existing liability and prepaid asset guidance to cloud-service arrangements and expense payments for cloud services as incurred. Additionally, the proposed guidance would require reporting entities to disclose total annual cloud-service expenses along with a general description, terms and conditions, and risks and benefits of significant cloud-service arrangements in financial statement notes.

The Board generally supported the proposed recognition guidance but preferred the guidance to directly reference existing liability and prepaid asset recognition requirements in SFFAS 1, Accounting for Selected Assets and Liabilities. The Board had mixed opinions about whether the guidance should require reporting entities to disclose information on cloud-service arrangements.

Some members supported the requirements to disclose annual cloud-service expenses along with some of the proposed qualitative information on significant cloud-service arrangements. The members viewed cloud services as significant to federal IT spending and supported a forward-looking approach with issuing reporting guidance to address a fundamental change with how federal agencies use software technology resources.

However, some members did not support any of the proposed note disclosure requirements because they viewed the requirements as too burdensome relative to the benefits. The members questioned why the Board would require the note disclosures for cloud-service arrangements when the Board does not require reporting that level of information for other service contracts.

Some members did not believe that annual cloud-service costs would ever be material relative to what the federal government spends each year. Other members acknowledged that may be true for government-wide and some component entity financial reports. However, the members believed that the information would be useful to some stakeholders and thought it beneficial for reporting entities to have the reporting guidance to apply if cloud-service arrangements are determined by a reporting entity to be qualitatively or quantitatively material now or in the future.

For now, staff will defer disclosure guidance proposals and focus on recognition guidance needs for the software-technology project topics. Next, staff plans to coordinate with the working group to propose financial statement recognition options for cloud-service implementation costs for the Board to deliberate at a future meeting.

Briefing Materials – Topic F

September 2023

Software Technology: Cloud-Service Arrangements

At the June 2023 meeting, the Board agreed on a definition and scope for the cloud-service arrangement draft reporting guidance. Staff is coordinating with the working group and other stakeholders to research categories and characteristics of cloud-service expenses that would be useful as financial report disclosures. Staff plans to present reporting-requirement language at the October 2023 meeting for the Board’s consideration.

June 13-14, 2023

Software Technology

At the June 2023 meeting, staff recommended definition and scope language for the Board’s consideration in developing cloud-service arrangement standards. The purpose of the definition is only to inform readers about cloud-computing resources in the federal environment that the standards will address. However, the purpose of the scope is to provide authoritative guidance by explaining the economic transactions associated with cloud-service arrangements that would and would not apply to the standards.

The Board agreed to include the cloud-computing definition developed by the National Institute of Standards and Technology (NIST) Special Publication 800-145, The NIST Definition of Cloud Computing, in the draft reporting guidance proposal. Members generally agreed that the NIST definition along with a reference to the special publication thoroughly explains cloud-computing resources and including the definition in the standards would help readers understand the reporting guidance. Two members voiced concern that the NIST definition was detailed and technical and, therefore, may not be the most effective definition for financial reporting guidance. One member generally preferred to use a more generic and broad definition to provide flexibility in the reporting guidance.

The Board also agreed to include staff’s recommended scope language in the draft reporting guidance proposal. The scope generally includes the following guidance:

A cloud-service arrangement is defined as a contract or agreement that provides a federal entity access to IT resources over a network, provided by a vendor in exchange for consideration, without the federal entity taking possession of the IT resource.
The Statement applies to cloud services that federal entities acquire from nongovernmental vendors for internal use purposes in accordance with paragraph 2 of SFFAS 10, Accounting for Internal Use Software, as amended.
The Statement does not apply to
- cloud-based IT services acquired from other federal entities (such as, but not limited to shared services);
- internally developed or purchased commercial off-the-shelf software that is reported in accordance with SFFAS 10 and TR 16, Implementation Guidance For Internal Use Software;
- licensed software that allows the federal entity to possess and control the underlying software resource on its own hardware or systems that is reported in accordance with SFFAS 10 and TR 16; or
- arrangements that provide the federal entity the right to control the use of property, plant, and equipment that is reported in accordance with SFFAS 54, Leases, as amended.

Members agreed that the Board should revisit the definition and scope if a need arises while deliberating reporting requirements. Staff recommended that the Board eventually consider if the scope should also include shared services.

Staff will input the definition and scope language in a draft exposure draft and begin developing reporting-requirement language to propose for the Board’s consideration. Staff will coordinate with the working group and reach out to other stakeholders to research categories and characteristics of cloud-service expenses that would be useful as financial report disclosures.

Briefing materials – Topic B

April 18-19, 2023

Software Technology

At the April 2023 meeting, staff presented a cost-benefit analysis that considered potential preparer burdens and user benefits for the following financial reporting options for cloud-service arrangements:

Balance sheet recognition
Commitment disclosure
Expense disclosure
Expense recognition only

The Board overwhelmingly agreed with the cost-benefit analysis and supported staff’s recommendation that reporting guidance should require federal entities to disclose cloud-service expenses. Most members agreed that expense disclosure was optimal after considering the potential preparer burdens and user benefits of each reporting option. Additionally, the majority of members initially favored disclosing cloud-service expenses in required supplementary information rather than financial statement notes.

Staff will begin developing a draft exposure draft for guidance requiring expense disclosures for cloud-service arrangements. Staff will first coordinate with the working group to develop a definition and scope for the Boards consideration at a future meeting and will also research whether the best course of action is to draft a new SFFAS or amend SFFAS 10, Accounting for Internal Use Software, to issue the new cloud-service arrangement guidance.

Briefing materials – Topic D

February 2023

Software Technology

At the October 2022 meeting, the Board deliberated whether cloud-service arrangements were service contracts or right-to-use assets. Staff is currently reaching out to various federal and non-federal entities to research potential benefits of accounting for cloud-service arrangements in federal financial reports. Staff will also engage with the working group to consider multiple financial reporting options for cloud-service arrangements and will ultimately develop a cost-benefit analysis for future Board deliberations.

October 25-26, 2022

Software Technology: Cloud-Service Arrangements

At the October meeting, the Board continued deliberations on reporting guidance for cloud-service arrangements. Staff presented an issues paper that:

provides an analysis of how other standard-setting bodies have deliberated the differences between a service contract and a right-to-use asset, along with how those positions have influenced their cloud-service reporting guidance; and

examines FASAB’s previous discussions of tangible right-to-use assets and service contracts and analyzes whether cloud-service arrangements in the federal environment resemble right-to-use assets or service contracts.

The Board had different opinions on whether multi-year cloud-service arrangements were right-to-use assets or service contracts. One member favored referring to cloud-service arrangements as service contracts because it was difficult to conceive how an entity could exclude others from using an intangible right-to-use asset. Another member stated that cloud services and other types of service contracts possessed a spectrum of right-to-use asset and service components and was concerned that deciding cloud-service arrangements are right-to-use assets could open the door to considering whether other types of service contracts include right-to-use assets.

Several members agreed it was reasonable to conceptualize cloud-service arrangements as right-to-use assets but were concerned that the associated preparer burden and lack of reporting benefits may not justify the need for asset recognition on the balance sheet. The members suggested that disclosures could adequately provide information about the extent that federal entities use cloud-services for mission and operational needs versus purchasing or developing the IT resource internally.

Next, staff plans to research the benefits of reporting cloud-service arrangements in ways other than recognizing an asset in financial statements for future Board deliberations. Staff will continue to engage with the working group and seek out views from a wider range of federal financial report users that have an interest in cloud-service arrangements.

Briefing materials – Topic B

August 23-25, 2022

Software Technology

The Board continued deliberations on reporting guidance for cloud-service arrangements. Staff presented an issues paper that primarily proposed:

A framework of cloud-service arrangements that could meet the essential characteristics of an asset for financial reporting purposes
Potential benefits and challenges of reporting cloud-service arrangements as assets in federal financial reports

The Board generally supported staff’s analysis on whether certain cloud-service arrangement categories could meet the essential characteristics of an asset from SFFAC 5, Definitions of Elements and Basic Recognition Criteria for Accrual-Basis Financial Statements. Some members recommended more research to better understand how federal entities typically incur costs for long-term cloud-service arrangements. One member recommended more research and deliberation on whether cloud-service arrangements are typical service contracts or if they are more akin to leases or right-to-use assets.

The Board also generally agreed with staff’s analysis on the user benefits and preparer challenges with reporting cloud-service arrangements as assets in federal financial reports. One member stated that the identified reporting challenges were valid but thought that they could be overcome with proper guidance. A few members suggested further research and deliberation on the financial reporting benefits with notes disclosure options versus asset recognition in financial statements. Staff agreed with a member that it was important to continue to seek out the views of a wide range of federal financial report users that have an interest in cloud-service arrangement reporting.

Staff will continue to research and engage with the working group to address members’ requests so that the Board can continue to fine-tune a scope and framework for cloud-service arrangement reporting guidance.

Briefing materials – Topic E

June 22-23, 2022

Software Technology

At the June meeting, two panelists from the General Services Administration provided the Board an educational session on cloud-service arrangements. The panelists provided members an overview of the characteristics, service models, and deployment models of cloud computing and discussed ways that federal entities procure and pay for cloud services. Additionally, Board members, staff, and panelists discussed potential financial reporting needs and challenges associated with cloud-service arrangements.

The purpose of the session was for the Board to better understand cloud services in the federal environment as members continue to deliberate financial reporting guidance possibilities. Staff will continue to research and engage with the working group to provide the Board with relevant information so that members can make an informed decision on whether cloud-service arrangements can represent assets for financial reporting purposes.

Briefing materials – Topic A

April 2022

Intangible Assets Working Definition

The last time the Board discussed this topic was at the February 2022 meeting. Staff proposed a non-authoritative definition of intangible assets for the Board’s internal use. The Board overwhelmingly supported the proposed definition while providing thoughts and suggested edits that generally related to potential reporting requirement concerns. Staff has noted member comments for future deliberations if the Board ultimately approves a project to develop reporting guidance for intangible assets. At this time, staff considers this objective complete and continues to focus time and resources on the software technology project.

April 26-27, 2022

Software Technology

At the April meeting, staff presented characteristics of cloud-service arrangements along with an asset-guidance framework for which to apply the characteristics. The framework analyzes previous asset-guidance decisions that will assist the Board when deliberating whether cloud-service arrangements can represent assets in the federal government. There were three primary takeaways from the discussion:

The National Institute of Standards and Technology’s (NIST) cloud-computing characteristics are widely accepted and used in the federal government.
Based on the asset-guidance framework, it is appropriate to approach cloud-service arrangements as lease-type transactions that provide a federal entity access to a provider’s software technology resources for the federal entity to use as internal use software for a specified period.
More research and outreach is needed to develop an informed decision on whether cloud-service arrangements can meet all of the essential characteristics of an asset established in SFFAC 5, Definitions of Elements and Basic Recognition Criteria for Accrual-Basis Financial Statements.

The Board supported using NIST’s cloud-computing characteristics for developing financial reporting guidance for cloud-service arrangements. Several members agreed with staff’s observation that federal entities widely accept and use the NIST cloud-computing characteristics and that it is practical to defer to the information technology professionals when describing cloud-service arrangements.

The Board agreed with staff’s proposed asset-guidance framework and observation that it is particularly important to continue to research and deliberate whether cloud-service arrangements can meet the essential characteristics of an asset from SFFAC 5. Some members noted that for an asset to exist, the cloud-service arrangement must represent economic benefits and services that the federal government can use in the future. Other members stated that it is critical to determine whether a consumer of a cloud service could control access to the economic benefits and service of the underlying resource and, particularly, if the user could deny or regulate access to others in accordance with the arrangement.

Staff will continue to research and engage with the working group to provide the Board with relevant information so that members can ultimately make an informed decision on whether cloud-service arrangements can represent assets for financial reporting purposes. Staff views this as a critical decision that will influence reporting guidance development for cloud-service arrangements.

Briefing materials – Topic D

February 23-24, 2022

Software Technology

At the February meeting, staff presented an issues paper that provided a framework for developing reporting guidance updates for software technology assets. Specifically, the issues paper recommended a scope and project plan for developing updates for software guidance based on specific needs identified during research. The scope consists of four major categories of software resources that staff plans to address individually in the following order:

Cloud service arrangements
Shared services
Internal use software updates
Other software technology

The Board overwhelmingly supported staff’s recommended scope and planned approach. Additionally, members supported staff’s approach of addressing each scope category separately but noted that the categories would ultimately overlap and relate to one another. Staff plans to begin developing an asset guidance framework so that the Board can deliberate whether cloud service arrangements meet the characteristics of an asset in the federal government.

Briefing Materials – Topic E

Intangible Assets Working Definition

At the February meeting, staff proposed the following non-authoritative definition of intangible assets for the Board’s internal use.

A recognizable intangible asset is a resource that

Lacks physical substance
Represents a nonmonetary asset
Has a useful life greater than two years
Is identifiable as a separate asset from the entity
Embodies future economic benefits or services
The entity controls
Has measurable value

Staff also presented various federal resources that theoretically would or would not fall under the proposed definition. The Board overwhelmingly supported the proposed definition. Some members voiced concerns with potential reporting requirements associated with intangible assets that the Board could address in the future if members ultimately approve a project to develop reporting guidance for intangible assets. Staff will review member comments to consider any further edits to the definition.

Briefing Materials – Topic F

December 2021

Software Technology

Staff is developing an issues paper that will (1) present a scope of software-related resources for future guidance updates, (2) analyze existing software-related reporting guidance from FASAB and other standard setters, and (3) consider the pros and cons of amending versus rescinding FASAB software guidance when developing updates. Staff plans to present this paper and a framework for a working definition of intangible assets at the February 2022 Board meeting. The overall intent of the issues paper is to present initial findings on the updates needed to bridge the gap between current FASAB software guidance and guidance that stakeholders need.

Staff continues to communicate with working group volunteers to understand the extent of software-related resources that exist among federal entities to develop a scope of resources for future guidance updates. Staff is also performing an analysis to compare and contrast reporting requirements from FASAB and other standard setters to help identify missing and outdated federal guidance.

October 2021

Software Technology

Approximately 20 people volunteered to be in a working group to assist the Board with developing software guidance updates and a working definition of intangible assets. Volunteers consist of federal employees from several agencies with backgrounds in financial reporting, accounting, internal audit, acquisition, and information technology, as well as some volunteers from external audit firms. Staff is currently drafting a framework for the issues papers and identifying a wide range of software-related resources used in the federal government.

August 24-25, 2021

At the August meeting, staff offered recommendations for the Board to deliberate how to move forward with an intangible assets project as members considered adding it to the technical agenda. Based on research and Board deliberations from the June meeting, staff recommended dividing the intangible assets project into three objectives with individual timelines and deliverables. After considering and deliberating staff’s recommendations, the Board agreed to add an intangible assets project to the technical agenda with the following objectives.

Develop updates for software reporting guidance
Develop a working definition of intangible assets for the Board’s internal use
Further assess the costs versus benefits of developing reporting guidance for intangible assets

Staff will proceed with the first two objectives while the third objective is on standby for the foreseeable future. The Board generally agreed it is necessary to consider further the costs versus benefits of reporting guidance before deciding whether to develop intangible assets standards. However, the Board mostly agreed that this objective is not as high a priority as the first two due to research indicating that there is not a strong need for intangible asset reporting guidance. Members therefore agreed that it was not yet necessary to commit to a course of action.

Staff will work with a task force to draft an issue paper to establish a framework for developing updates for software guidance, as well as an outline for a working definition of intangible assets applicable to the federal government. Staff will coordinate with volunteers from the existing research task force but will also seek new volunteers with knowledge of accounting and operational issues about federal information technology to work on the software update objective.

Briefing Materials – Topic D

June 22-23, 2021

At the June meeting, staff presented research findings on federal intangible assets to the Board. The presentation highlighted potential intangible assets identified across federal reporting entities from information gathered from the task force survey responses, agency round table discussions, and other research. Staff also proposed a potential definition of intangible assets, potential approaches for scoping future guidance, as well as benefits and concerns with potential financial reporting guidance.

The agenda topic served as an information session and staff requested the Board’s general thoughts and concerns on the research results and associated guidance approaches. The Board agreed with staff that research indicates a need for updates to software guidance. The Board also shared staff’s concerns with potential recognition burdens associated with other types of identified intangible assets and concluded that caution is necessary in moving forward with developing reporting guidance without further considering the costs versus benefits.

The Board did not consider any specific staff proposals during this meeting. Staff plans to propose specific courses of action to the Board during the August meeting, when members deliberate adding an intangible assets project to the technical agenda.

Briefing Materials – Topic D

December 15-16, 2020

At the December meeting, the Board approved the technical plan for the intangible assets research topic. Staff will begin researching the significance of various intangible assets that exist throughout federal agencies. The Board predominantly agreed that this is an important and timely project and agreed with the proposed approach to begin the effort with a broad mindset to consider the spectrum of possibilities and then narrow the scope based on established criteria. Some members expressed the need to be sensitive to the importance of meeting financial statement user needs that current guidance does not already address and cautioned that an overly broad scope could be burdensome to preparers.

Staff will form a task force to research and consider all of the potential intangible assets throughout federal agencies. The task force will consist of financial statement users, preparers, and auditors, as well as relevant operational and technical experts.

Briefing materials – TAB E