Due to the high cost of infrastructure and other tangible resources to support and use enterprise software, companies in all industries have become more reliant on cloud-based information technology (IT) arrangements. In response to this trend, the Governmental Accounting Standards Board (GASB) issued Statement No. 96 to provide guidance on the accounting and financial reporting for subscription-based information technology arrangements (SBITAs). This new guidance, effective for fiscal years beginning after June 15, 2022, requires governmental entities to record a right-to-use subscription intangible asset and corresponding subscription liability. GASB 96 comes on the heels of GASB 87, Leases, so governmental entities should already be familiar with the concept of right-to-use assets and the associated liabilities. In fact, many of the concepts in GASB 87 are also applicable to GASB 96.
What is a SBITA?
A SBITA is defined by GASB as a contract that conveys control of the right to use another party’s IT software, alone or in combination with tangible capital assets, as specified in the contract for a period of time in an exchange or exchange-like transaction. The subscription term is the period during which an entity has a noncancellable right to use the underlying IT asset and includes periods covered by an option to extend or terminate (if it is reasonably certain that the entity or vendor will do so). This concept is extremely important as it excludes from GASB 96 reporting requirements, month-to-month agreements, and arrangements where the vendor and/or the entity have the ability to cancel at any time.
Additionally, GASB 96 does not apply to the following:
- Contracts that convey control of the right to use a combination of IT software and computer hardware when the cost of the software component is insignificant in comparison to the computer hardware and the arrangement meets the definition of a lease under GASB 87. Common examples would be a computer with operating software and a smart copier that is connected to an IT system.
- Short-term SBITAs where the maximum possible term at commencement is equal to or less than 12 months. This includes any option to extend and does not take into consideration the probability of the option being exercised.
- Contracts that meet the definition of a public-private or public-public partnership as described in GASB 94, Public-Private and Public-Public Partnerships and Availability Payment Arrangements. In these types of arrangements, a government contracts with an operator to provide public services by conveying control of the right to operate or use a nonfinancial asset, such as infrastructure or other capital asset, for a period of time in an exchange or exchange-like transaction.
- Perpetual software licenses in which the entity pays a one-time upfront price that grants the entity access to the software indefinitely. Typically, these arrangements still involve ongoing costs related to maintenance and other service agreements.
How are Subscription Liability and Asset Amounts Determined?
The subscription liability should be recognized when the subscription is placed in service, and it should be initially measured at the present value of subscription payments expected to be made during the term. Future subscription payments should be discounted using the interest rate the vendor charges the entity, which may be implicit or stated, or the entity’s incremental borrowing rate if the interest rate is not readily available. Amortization of the discount should be recognized on the subscription liability as an outflow of resources in subsequent financial reporting periods.
The subscription asset should be measured as the sum of the initial subscription liability amount, payments made to the vendor before the commencement of the term, and capitalizable implementation costs, less any incentives received from the vendor at or before the commencement of the subscription term. The entity should recognize amortization of the subscription asset as an outflow of resources over the term.
How Should Costs be Recognized?
Costs related to activities associated with the SBITA, other than subscription payments, should be grouped into the following three categories:
- Preliminary Project Stage – Costs associated with the entity’s decision to obtain the technology (evaluating alternatives, determining need, selecting a vendor, etc.) should be expensed as incurred.
- Initial Implementation Stage – Costs incurred during the implementation of the technology should be capitalized as an addition to the subscription asset.
- Operation and Additional Implementation Stage – Costs associated with subsequent implementation activities, maintenance, and other ongoing operational activities should be expensed as incurred unless they meet specific capitalization criteria.
Entities should determine classification into the appropriate stage based on the nature of the activity. It is important to note that training costs should be expensed as incurred, regardless of the stage in which they are incurred.
Contracts that contain multiple components should be accounted for separately, and the contract price should be allocated to the different components unless it is not practicable to determine an estimate for price allocation for some or all components. If determined to be not practicable, the components should be accounted for as a single SBITA.
What Should Entities Disclose?
GASB 96 requires entities to disclose information about their SBITAs (other than short-term SBITAs). Some examples of this new disclosure include a general description of an entity’s SBITAs, the total amount of subscription assets, accumulated amortization, other payments not included in the measurement of the liability, and principal and interest requirements for the liability.
What are the Transition Requirements?
As entities work to implement this new guidance, they should recognize and measure assets and liabilities resulting from SBITAs using the facts and circumstances that existed at the beginning of the fiscal year in which GASB 96 is implemented. If presenting comparative statements, the provisions should be applied retroactively by restating the financial statements, if practicable, for all prior periods presented. If restatement is not practicable, the cumulative effect, if any, of adopting this statement should be reported as a restatement of beginning net position of the earliest fiscal year presented.
Entities are permitted, but not required, to include costs associated with the initial implementation stage and the operation and additional implementation stage (which meet the capitalizable criteria) incurred prior to the implementation of GASB 96 in the measurement of assets existing as of the effective date.
It should be noted that GASB 96 specifically states, “The provisions of this Statement need not be applied to immaterial items.” As such, entities should determine how their existing capitalization policies can be applied to GASB 96 and if the need for modification of such thresholds should be revisited.
For assistance in identifying SBITAs or for any other GASB 96 implementation questions you might have, please feel free to contact PYA executives at the e-mails below or by calling (800) 270-9629.