A finished ACC-685 Topic 1 hosting arrangement characterization memo example, classifying an ERP contract as a service, sorting $2.4 million of costs by stage and placing $1.45 million beside hosting fees. Searches like "acc 685 topic 1 assignment example", "acc685 topic 1 sample" and "acc-685 topic 1 example" land here.
What a finished ACC-685 Topic 1 hosting arrangement characterization memo looks like
The finished memo restates the question before it answers anything. Whether any of the $2.4 million can be capitalized depends first on what the contract is, so the memo reads it: the distributor has no right to take possession of the software, and running it elsewhere would require a new license, which makes the arrangement a service contract under ASC 350-40 rather than internal-use software the company owns. Amounts are illustrative. Implementation costs are then sorted by project stage. Configuration and integration, $1,450,000, are capitalized; project planning at $200,000, data conversion at $400,000 and training at $350,000 are expensed. The capitalized amount is expensed over a five-year hosting term, $290,000 a year, in the same line as the hosting fees, which is where the controller's real concern, the lender's EBITDA, surfaces.
How an ACC-685 Topic 1 example is structured
Three questions, taken in order, give the memo its shape. It opens with the controller's question as asked and the two it depends on: what the contract bought, and where the answer will be presented. The contract section quotes the possession and termination terms and applies the license test, concluding that no software asset exists. The cost section follows the project budget line by line, assigning each cost to the preliminary, development or post-implementation stage with the evidence for that assignment. A term section sets the expense period at five years, the three-year noncancelable term plus a renewal the distributor is reasonably certain to take. Presentation comes next: the capitalized cost sits with prepaid hosting, its expense beside hosting fees and its cash in operating activities. The memo closes by handing the covenant question to the treasurer with the facts the lender will need.
The questions underneath the one asked
Capitalization depends on what the contract bought, so the memo settles that before touching the budget and tells the controller why the order matters.
A license test the contract fails
Without a right to take possession of the software without significant penalty, the arrangement is a hosting service, and no internal-use software asset is recognized.
Implementation costs sorted by project stage
Configuration and integration in the development stage are capitalized, while planning, data conversion and training are expensed as incurred, each assignment tied to a project record.
An expense period including a likely renewal
The capitalized $1,450,000 is expensed over the noncancelable term and a two-year renewal the distributor is reasonably certain to take, giving $290,000 a year.
Presentation that follows the hosting fees
The asset sits with prepaid hosting, the expense beside hosting fees and the cash in operating activities, rather than among intangibles and amortization.
The covenant question routed onward
Whether the lender's EBITDA adds back the $290,000 depends on the credit agreement, so the memo sends the treasurer the facts instead of guessing at the definition.
Where marks go in ACC-685 Topic 1
Answering yes or no to the controller, without first asking what the contract is, costs the most, since the capitalization answer depends on that finding. Papers that treat the arrangement as purchased software put an intangible asset on the balance sheet the contract does not support, and record amortization in a line where it does not belong. The reverse error expenses all $2.4 million because 'cloud costs are service costs', ignoring guidance that permits capitalizing development-stage work. Data conversion and training are commonly swept in with configuration, and a reviewer looks for that sorting. Expense periods that ignore a renewal the company plans to take understate the term and overstate each year's charge. Memos that resolve the accounting and never notice why the controller asked leave the real decision, covenant headroom, unaddressed.
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Send the ACC-685 Topic 1 instructions, your rubric and the contract, case or reporting question your section provided. A custom example is written to them, with the question underneath identified, the arrangement characterized against the guidance, each cost placed and the presentation stated, returned in 24 to 48 hours. The first one is free.
ACC-685 Topic 1 questions, answered
When does a cloud arrangement include a software license?
Under ASC 350-40, a hosting arrangement includes a license only if the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty, and it is feasible for the customer to run the software on its own hardware or through another party. Failing either condition makes the arrangement a service contract, which is what the distributor's contract turns out to be.
Why can implementation costs be capitalized in a service contract?
Because the guidance applies the internal-use software stage model to implementation costs of a hosting arrangement that is a service contract. Costs of the application development stage, such as configuration and integration, are capitalized, while preliminary project costs, training and most data conversion are expensed. The capitalized amount is then expensed over the hosting term and presented with the hosting fees, not as amortization of an intangible.
Why does presentation matter to the controller?
Because the same $290,000 a year sits inside operating expenses beside hosting fees here, whereas under a license it would appear as amortization, and lender definitions of EBITDA often treat those differently. The accounting presentation follows the guidance whatever the covenant says, so the memo reports where the expense will appear and leaves the meaning of EBITDA to the credit agreement and the treasurer.