Copyright © 2012 NTT DATA, Inc. October, 2012 Offshore Revenue Determination Team NTT DATA Cloud Computing and Revenue Recognition

1Copyright © 2012 NTT DATA Corporation What is Cloud Computing?

Copyright © 2012 NTT DATA, Inc.2 Worldwide, revenue from “Cloud Computing” services is forecast to reach $240 billion in 2016, up from $77 billion in 2011, according to Visiongain. At year end 2016, more than 50 percent of Global 1000 companies will have stored customer-sensitive data in the public cloud, Gartner researchers also believe With Cloud Computing, users typically access IT infrastructure and software through the Internet on an "as needed" basis and pay only for the resources they use Cloud Computing provides more flexibility. Companies can more easily manage their IT infrastructure. For example, under a traditional IT model, if a company's needs change, it will likely take significant time to react (e.g., purchasing and deploying the equipment, upgrading the entire organization, etc.), coupled with the cost of upgrades. If the increased need for IT support was temporary, the company would be left with underused equipment and resources With Cloud Computing, capacity is available when the company needs it. Types of Arrangements in Cloud Computing a) Infrastructure as a service (IaaS) b) Platform as a service (PaaS) c) Software as a service (SaaS) Under IaaS, hardware and network resources are delivered by the cloud provider while the customer continues to control its own applications and operating systems With PaaS offerings, the cloud provider delivers the hardware, network, and operating systems, and the customer provides the application code to the cloud provider and runs the applications remotely For SaaS offerings, the cloud provider controls the hardware, network, operating system, and applications, and the customer accesses the applications through the Internet. Overview of Cloud Computing

3Copyright © 2012 NTT DATA Corporation Benefits and Concerns - switching to Cloud Computing

Copyright © 2012 NTT DATA, Inc.4 Quick implementation process:- Most vendors claim their applications can be up and running in a few minutes because there is no software to install. The implementation process also is easier for companies with multiple locations or remote workers to all have access to the same version of the application simultaneously Anytime access from anywhere with an Internet connection:- which again includes the ability for employees to work remotely Lower upfront costs:- Instead of paying a license fee and for annual maintenance, most models allow users to pay as they go (usually monthly, though some require annual contracts). They can pay per user and easily add more users. With Cloud Computing, capacity is available when the company needs it. This also tantamount to Economies of Scale to the Vendors providing Cloud Services because their systems are built to allow several customers to share infrastructure (both servers and storage areas) in a way that is transparent to users and does not allow those customers access to each other’s data. * However, it may not be an apple to apple test to conduct a cost comparison of doing business on-premise versus in the Cloud unless a company has moved all its business off-premise Other directly attributable benefits include:- - Reduced support costs - Realignment of IT resources to core activities - Easier and more frequent upgrades - Disaster Recovery and Backup capabilities Cloud Computing provides more flexibility. Companies can more easily manage their IT infrastructure. For example, under a traditional IT model, if a company's needs change, it will likely take significant time to react (e.g., purchasing and deploying the equipment, upgrading the entire organization, etc.), coupled with the cost of upgrades. If the increased need for IT support was temporary, the company would be left with underused equipment and resources. With Cloud Computing, capacity is available when the company needs it. Because Cloud offerings typically have usage-based, "pay as you go" pricing, the cost of an IT solution directly relates to the volume of a company's business, compared with a constrictive, fixed-cost model. Benefits of Cloud Computing

Copyright © 2012 NTT DATA, Inc.5 Safety and Integrity of the Data stored in the “sky”:- one of the biggest concerns expressed by those considering switching over to cloud applications is the safety of their data and their clients’ data. It’s a concern cloud vendors have been fighting to overcome for years. AICPA’s Role:- AICPA has developed Service Organization Controls Report (SOC) [formerly known as SAS 70 Report] to provide guidance on conducting highly specialized examination of a service organization’s internal control. There are three types of SOC reports:- - SOC 1: Report on Controls at a Service Organization Relevant to User Entities’ Internal Control over Financial Reporting - SOC 2: Report on Controls at a Service Organization Relevant to Security, Availability, Processing Integrity, Confidentiality and/or Privacy - SOC 3: SysTrust Reports. General use reports Vendors undergo stringent evaluation on its controls over the system or service it provides to user entities. The controls address the components of a system which include: Infrastructure. The physical and hardware components of a system (facilities, equipment and networks) Software. The programs and operating software of a system (systems, applications and utilities) People. The personnel involved in the operation and use of a system (developers, operators, users and managers) Procedures. The programmed and manual procedures involved in the operation of a system (automated and manual) Data. The information used and supported by a system (transaction streams, files, databases and tables). Security Concerns

Copyright © 2012 NTT DATA, Inc.6 Uptime and “five 9s”:- Another important consideration is unscheduled downtime and how easily customers can access their own data. There’s a concept of “five 9s” in the cloud world, which relates to “uptime,” or how often the system will be accessible by users—99.999% uptime, which amounts to 5.26 minutes of total unscheduled downtime per year. This does not include scheduled downtime, which many vendors say they set during weekends or overnight to limit interruptions to users This is often guaranteed as part of service-level agreements and, depending on the contracts, customers could be credited if the guaranteed performance is not met Of course, the cause of downtime can lie with the customers if they don’t have ample bandwidth or any Internet access, since access to data is driven by a company’s ability to access the Web. Operational Concerns

7Copyright © 2012 NTT DATA Corporation Revenue Recognition

Copyright © 2012 NTT DATA, Inc.8 As software is involved, the key accounting issue here is to determine whether the arrangement should be accounted for as a sale of software governed by the software revenue recognition guidance outlined in ASC or as a service as per the guidance outlined in the Securities and Exchange Commission (“SEC”) materials of ASC S99, read with Staff Accounting Bulletin (“SAB”) topic 104 In order to determine whether software guidance is applicable, one must determine whether a software element exists. A software element in a cloud computing arrangement is only present if both of the following criteria are met:- A) The customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty and, B) It is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software.  If the above two criteria are not met the arrangement is considered a service contract. Generally, in Hosted Software and SaaS arrangements, the customer does not have the right to take possession of the software without significant penalty nor the ability to run the software on its own hardware or to contract with an unrelated vendor to host the software. Therefore, in these circumstances the sale is accounted for as a service transaction with revenue being recognized on a straight-line basis over the term of the agreement unless the terms of the agreement indicate that revenue is earned in a different pattern Current US GAAP Approach

Copyright © 2012 NTT DATA, Inc.9 Additional Services Being Sold along with the base cloud services One area of accounting complication for cloud offerings under existing GAAP is when additional services are sold along with the primary or base service (access to and/or use of the desired software functionality). These additional services typically are for setup and consulting. Under the current accounting framework, the existence of these additional services in the arrangement often results in a deferral of revenue. This occurs because revenue cannot be allocated because of the lack of fair value, the lack of stand-alone value, or the SEC guidance that upfront fees should be deferred over the life of the contract or the expected life of the customer relationship, whichever is longer. In these cases, fees for these additional services are recognized concurrently with the base cloud services. Current US GAAP Approach

Copyright © 2012 NTT DATA, Inc.10 Similar to current US GAAP, cloud offerings will generally be accounted for using a services model under the proposed standard. Under the proposed model, companies will need to determine if usage-based services will be uncertain consideration or options to purchase additional services The proposed model will require companies to make a determination of how their performance obligation is discharged, thereby establishing the recognition pattern. Similar to current US GAAP, most companies will need to determine whether the recognition is ratable over the term, as usage occurs, or some other pattern that best reflects the underlying economics of the transaction As noted previously, additional setup and consulting services often are sold along with the base cloud service. If the company can conclude that the additional services are separate performance obligations under the contract, then the proposed standard will require separation and allocation of the total arrangement consideration to those performance obligations based on estimates of their selling prices. Approach under Proposed Converged Standard

Copyright © 2012 NTT DATA, Inc.11 PwC Publication “A shift to cloud computing and its impact on revenue recognition” [ Journal of Accountancy: Cloud Computing: What Accountants Need to Know [ CPA Journal: Revenue Recognition for Cloud-Based Computing Arrangements [ References

Copyright © 2012 NTT DATA, Inc.12 Questions

Copyright © 2012 NTT DATA, Inc.13 Thank You!!