Idle Capacity on Cloud in Financial Statement

[Dien Muhammad]

Hi All,

Is there anyone from Cloud Service Provider who knows how their Financial & Accounting Dept treat the idle capacity in their Financial Statement? Need to justify the policy here.

Many thanks

Regards,

-dien-

[David Gibbons]

I'd love to see this as well -- in addition to how to effectively write off fraudulent transactions accounting-wise.

Cheers,

Dave

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[Dave Kramer]

Dave

 Which financial statement ? Income ?

HT 

David Kramer

(M) 972.636.5445

[Robert Jenkins]

Hi Dien,

There is no difference between unused capacity and used capacity, it is all capacity. If it was purchased outright that's fixed assets that depreciate over the useful life of the asset. If you are leasing then it won't necessarily appear on the balance sheet. The accounting treatment of such things depends entirely on the jurisdiction of the company. What is more interesting (and useful) is how you get visibility and manage the capacity internally as a management team. That isn't related to accounting specifically but is key to running a successful cloud. 

You can view a cloud as an office building and, just like an office building (albeit one that you are adding floors to over time!) the occupancy rate will determined its success from a business perspective. Utilization management is critical to competent cloud management.

Best wishes,

Robert

CTO

CloudSigma

[Ian Mills]

Can't speak for a CSP but in Utililities the capacity is not seen as
idle if it is connected but not used.

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[Dien Muhammad]

Hi Robert, All,

Thank you for the responses.

Our finance manager thinking about how to show the unsold capacity in the financial reports.

Yes we can do fixed assets that depreciated over the time. But he wants it to be more like inventory of capacity.

Please comment.

Regards,

-dien-

Indonesian Cloud

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[David Gibbons]

David,

Yes -- in particular, consider this case:

1) A 'client', using a stolen credit card, signs up for cloud hosting

2) The provider allows that client to operating for 45 days before receiving a charge-back from the credit card processor

3) The provider is now:

3A) Out the profit for the 45 days

3B) Liable to the credit card processor the the original amount of the transaction, plus the standard transaction fee, plus the chargeback fee

How are the other providers out there accounting for this loss?

I liken it to someone stealing an apartment for the duration of their time. The apartment owner is still liable to the utility companies, the bank for the mortgage, etc.

Anyone else confronting this?

Thanks,
Dave

[Ian Mills]

Like product stock you mean. So much depends on the accounting rules
of the country you operate in. In the UK you'd not be able to call it
anything other than a capital spend and count all of it, but if you
wanted you could write it off quickly and so not burden the balance
sheet with asset that really isn't.

--

[James Houghton]

Just a suggestion, but why not mimic the financial accounting methods used for rental cars or hotel rooms?  As far as Finance is concerned its same business model, just different depreciation schedules…

Jim

[jeff shukis]

I can't imagine the auditors agreeing to treating unused cloud capacity as inventory for a simple reason: unlike product inventory, it cannot be accumulated and sold later.

 

So what is unused cloud inventory? I see it being analogous to airline seats that go unsold or hotel rooms unfilled: representing the ability to expand without additional capex but also representing inefficient utilization.

 

-----

Jeff

 

From: Dien Muhammad <die...@gmail.com>
To: cloud-c...@googlegroups.com
Sent: Tuesday, March 13, 2012 3:45 AM
Subject: Re: [ Cloud Computing ] Idle Capacity on Cloud in Financial Statement

[Dave Kramer]

Dave

 On incone statement , a reversal to income... An adjustment to net income.

 As a balance sheet transaction it Is a reduction in receivables.

 On cash flow statement nothin really happens .

 Either way you want to understand your merchant agreements and what you have to take. Secondary processors charge a bit but can cover these risks if your services are cost effective and easier to process as credit card transactions ..

HT

David Kramer

(M) 972.636.5445

[Shawzer]

Hi Dien -

I've tackled this before. If you treat it like a support center (no
profit or lose) you credit/charge out the remainder per business unit
usage. Call it adoption rate. :) To back into this, let me expand on
the front end. This is a high-level discussion and variables do exist,
salt to taste.

Your first goals is to understand what over subscription rate you are
looking to benchmark against then you can divide out the approx.
"useful" capacity of a given set of resources, like CPU, RAM, Disk.
Then factor in your depreciation rate for more accuracy.


Given over subscription:
CPU 4/1
RAM 2/1
Disk 4/1 (think thin disk provisioning - splash of dedup too)

Given depreciation:
Server 48 months
Storage 42 months

This gives us a "maximum' allocation of resource. Take the maximum
allocation and subtract actual allocation to get "idle" resources. For
example

A quantity of 4 2-socket quad core servers with 1T RAM. That is 32
core and 4T RAM. Over subscription (virtual cores) at 4/1 should be
128 virtual cores and RAM at 2/1 should be 8T RAM

50T of disk over subscription at 4/1 is 200t disk.

Max allocation
128 virtual cores
8T RAM
200T disk

With this you can take "max" then subtract the sum of actual virtual
CPU, RAM, Disk and show an approx "idle" space.

For a bonus, you can back into resource cost too. Total resources
divided by an algorithm to derive resouce allocation cost.
Virtual core $100
RAM $50
Disk $10

Now you can tie ROI back to the business and tie financials to actuals
and apply toward forecasting capacity models. Over time, you should
see a cost adjustment, usually down, that represent the "fine tuning"
of actual resource allocations - as over subscriptions rates are a
guideline and not a hard fast rule.

[Tas Chr]

Here is an idea:

First you need to decide what "capacity" is: is it disk space? is it number of processor cores? is it number of virtual machines? .... Of course, it could be a combination of those things...

After defining what capacity means for you, then you may use "memo accounts" (in the Greek Chart of Accounts they start with the digit "0").

• Every time you add something to your infrastructure, you "debit" that memo account. E.g. if you add 100GB of disk space, then you debit account "DISK_SPACE" with "100.000.000".
• Every time you sell or consume a piece of that, you credit it. E.g. if a new customer has consumed 10MB in one month then you credit "DISK_SPACE" with 100.000. Next month, you credit again with the number of MBs that this and other customers have used etc. So, here there is an additional issue of "how often" will you update those accounts.
• In fact, if you wish, you can create personalized accounts, per customer (e.g. "DISK_SPACE_CUSTOMER_X" and "DISK_SPACE_CUSTOMER_Y" etc.) so that you can track the consumption per customer (nice but even more difficult!)
  
• The accounting balance of those "memo accounts" will give you the unused capacity for each metric! Still, I guess it's going to be a pain to keep it up to date.

Regarding the fixed assets issue: in some countries it is mandatory to keep tangible assets as fixed assets and make sure that you depreciate them (e.g. servers, routers, etc.) For the intangible stuff (like virtual servers, number of processor cores) it is not mandatory and most finance mgrs don't do anything.

In any case, let me know how it ends up.

Kind regards,

Tasos Christidis

Software Production Mgr

E-ON INTEGRATION S.A.

www.e-on.gr

www.eon-demand.com

http://gr.linkedin.com/in/anastasioschristidis

---

From: Dien Muhammad <die...@gmail.com>
To: cloud-c...@googlegroups.com

Sent: Tuesday, March 13, 2012 12:45 PM

Subject: Re: [ Cloud Computing ] Idle Capacity on Cloud in Financial Statement

[Dien Muhammad]

Thank you all for suggesting solutions.

We will discuss this internally. Will let you know which one we take once we're operating

Regards,

Dien Muhammad

Indonesian Cloud

[Tas Chr]

Hi all,

I am still working on the subject, but you may see this:

http://tchristidis.blogspot.com/2012/03/cloud-infrastructure-accounting-part-1.html

Best regards,

Anastasios Christidis

http://gr.linkedin.com/in/anastasioschristidis

---

From: Dien Muhammad <die...@gmail.com>
To: cloud-c...@googlegroups.com
Sent: Tuesday, March 13, 2012 12:45 PM
Subject: Re: [ Cloud Computing ] Idle Capacity on Cloud in Financial Statement