IT leaders must speak the Language of Finance

CIF and Deloitte outline how to achieve the right balance between operational and capital costs when deploying the cloud The capitalisation of certain aspects of cloud technology may be preferred, or even required by accounting standards for many organisations, despite the perception that few, if any, cloud related costs can be capitalised. However, to ensure the financial balance that is most appropriate for their organisation is achieved, it’s important that IT leaders work closely with the finance department. This is the prognosis of a joint industry roundtable on the issue of ‘Capitalising Your Cloud’ hosted by the Cloud Industry Forum (CIF) and Deloitte. When analysing the costs incurred in a typical cloud development project, which included multiple stages and work-streams, Deloitte found that organisations can potentially capitalise up to 80 per cent of the total project spend. Considering this, the Cloud Industry Forum recently hosted an executive roundtable in partnership with Deloitte that identified four core takeaways for both CIOs and CFOs:

• Traditional cloud sales models market opex as a key driver for adoption, but this is not necessarily desirable for organisations;
• Companies could be capitalising too few of their cloud software implementation costs;
• Organisations may have the opportunities to start capitalising cloud hardware costs under International Financial Reporting Standards (IFRS) in the next few years;
• Optimising financial factors during procurement decision making for cloud-centric business cases can be achieved by understanding the different profit and loss (P&L) impacts of on-premises vs cloud solutions and the balance sheet impacts (intangible vs prepayments).

A notable discussion point was that, under the traditional view of cloud services, hardware or infrastructure (IaaS) costs are commonly expensed. However, the emergence of a new IFRS lease accounting standard (IFRS 16), which will be effective from 1 January 2019, and enhancements in contracting models have meant that some service providers have been considering the impact that the changes could mean for companies, particularly the possibility to capitalise IaaS expenditure. Alex Hilton, CEO of CIF, said: “The role of the CIO has changed dramatically over the years; Deloitte continue to demonstrate thought leadership and give viable options to help businesses consider their best route to implement Cloud services. IT leaders now need to speak the language of finance to ensure they understand what the new changes to lease accounting mean for their organisation. As well as this, CIOs need to ensure their organisation can account for the different types of cloud expenditure so financial balance can be achieved. The move to the cloud is invariably a business driven decision so it’s crucial that all parts of the organisation pull together to ensure a procurement decision is made that is best for the company. Doing so will lead to successful cloud deployments with all financial factors optimised.” A copy of the Deloitte report “Capitalising Your Cloud” is available from the CIF website.