Bill Lynch - July 20, 2016

Why AWS Reserved Instance amortization matters and how to do it

Amortizing AWS Reserved Instances costs can be challenging. Upfront charges can be difficult to account for with default billing features alone. Let’s explore how, with the right tools in place, AWS users can amortize the costs of RIs throughout the course of the term.

One challenge for IT and DevOps management is to match revenues with their specific, overall AWS costs at any given point in time. But, upfront charges, like the fees to use Reserved Instances (RIs), can be challenging to account for with default billing features alone. Let’s explore how, with the right tools in place, AWS users can amortize the costs of RIs throughout the course of the term.

How to amortize and report on AWS Reserved Instance charges

AWS Reserved Instances (RIs) are a great way to save on cloud spending. Rather than paying an on-demand rate for services like EC2 or RDS, AWS users can prepay for either a one or three year term for a lower hourly rate. These RI terms require either a no-upfront, partial-upfront, or all-upfront fee.

While it’s simple to match the monthly AWS spending to monthly cash-based financial reporting, it’s much more challenging to amortize, report upon, and visualize one-off RI charges and how they influence the accounting throughout the one or three-year term.

A company might have hundreds if not thousands of RIs at any given point of time, making it quite challenging to track all active reservations in its AWS cloud. Each reservation would typically have a unique schedule, like a certain start and end date. In addition, the RI could be modified to a set of new RIs, requiring the original fixed price to be divided properly among all new target RIs.

It can be quite challenging for any team to manually track and amortize all RIs in their organization. Before jumping into how to use Cloudability to help you properly amortize RIs, let’s look a bit into why you should be interested in amortizing RIs to begin with.

Why DevOps and Finance care about amortizing RI sign up charges

Traditionally, IT and DevOps teams were responsible for a company’s private data center, procuring new hardware to meet the ever-growing needs of the business. These teams would depreciate the cost of the machine, allocating a portion of the cost every month until the machine’s useful life was exhausted. This was a relatively simple process to follow and it enabled management to have insights into the costs of running their private data center with a given snapshot of time.

With the move to the cloud, the aforementioned approach can no longer be used. Now, companies pay for usage on demand as they consume various cloud services. And RIs can make accrual-based account a bit tricky, since RIs can include upfront charges along with its (lower) monthly costs.

Management now needs to take not only the hourly rate of the machine, but also the amortized portion of the RI into consideration when computing its cloud cost. Without a cloud cost management solution to amortize these costs, it can be an arduous, manual task by finance teams.

To help accrual-based accounting teams report on and properly expense AWS RI upfront fees, let’s first identify said costs and compare them from how they’d look in a cash-based operation versus an accrual-based one. And then, we can explore how to use Cloudability to assist with amortizing RI spending.

Cash-based vs. accrual-based RI spend tracking

In this example, a user purchased a one-year, all-upfront RI on June 1st, 2016 with a sign up cost of $12,000. Cash-based accounting would recognize this as a $12,000 expense on June 1st. An accrual accounting method requires spreading the sign up cost of $12,000 equally across all twelve months, recognizing just $1,000 in June, and $1000 throughout the next 11 months.

Month Cash-based Cost Accrual-based Cost
June 2016 $12000 $1000
July 2016 $0 $1000
August 2016 $0 $1000
September 2016 $0 $1000
October 2016 $0 $1000
November 2016 $0 $1000
December 2016 $0 $1000
January 2017 $0 $1000
February 2017 $0 $1000
March 2017 $0 $1000
April 2017 $0 $1000
May 2017 $0 $1000

This example is simplified to make it easy to understand at first. We actually amortize at the hourly level. So, in this case, it’s not over one year, but 8,760 reserved hours.

Using Cloudability to amortize RI charges

Here’s how accrued RI spending can be reported on and expensed over the RI term using Cloudability, for example. The RI Amortization feature gives users the option to monitor all RI-related costs using either a cash-based or accrual-based accounting method. Accrual accounting is captured using the Cost (Amortized) metric, while cash based accounting is represented with the Cost (Total) metric.

Users can also see the impact of both methods in a single cost chart, by adding both metrics, Cost (Total) and Cost (Amortized), as shown below. In this example, RIs were purchased on April 29 and May 20, where you can see the 2 large spikes on the Cash Basis line. On the other hand, the Accrual Basis line spreads these large one-time purchases across each day of the term (you can see the light blue Accrual Basis line is slightly higher than the dark blue Cost Basis line).

Now IT and DevOps teams can confidently understand how much they actually spend on AWS RIs per month, on an amortized basis. See how this manifests when viewed at a monthly level, over time:

Beyond these examples, users can see these amortized costs combined with a number of dimensions like Transaction Type, Account Name and ID, Instance Type, and more — and put together a collection of charts and tables into a comprehensive dashboard for review with a single click. It definitely beats manually tracking every RI (some companies can track up to hundreds of AWS resources and related RIs) to determine its amortized costs.

Interested in seeing your cloud spend using the accrual accounting method? Use this example report to compare your monthly amortized costs to existing cash basis costs over a given quarter. Or, use this example report that breaks down amortized costs by Transaction Type to see Amortized Charges compared to existing One-Time Charges. For more information, please check out our check out our Knowledge Base article.

Don’t have an account? Feel free to get in touch for a free Cloudability trial to see RI Amortization at work.

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