GASB Statement No. 96, Subscription-Based Information Technology Arrangements, was issued in May 2020 and is effective for fiscal years beginning after June 15, 2022 (June 30, 2023, and December 31, 2023 year-ends). Subscription-based information technology arrangements (SBITAs) allow governments to benefit from the use of IT software without maintaining a perpetual license or title to the software, which is beneficial to both the government and the vendor. The GASB already issued guidance for intangible assets through statement No. 51; however, that Statement does not encompass SBITAs as defined below.
The GASB utilized similar concepts to Statement No. 87, Leases, in defining SBITAs and providing guidance for accounting for these arrangements. The standard defines an SBITA as a contract that conveys control of the right to use another party’s (an SBITA vendor’s) IT software, alone or in combination with tangible capital assets (the underlying IT assets), as specified in the contract for a period of time in an exchange or exchange-like transaction. The standard does not apply to the following arrangements:
- Contracts that convey control of the right to use another party’s combination of IT software and tangible capital assets that meet the definition of a lease in Statement No. 87 in which the software component is insignificant when compared to the cost of the underlying tangible capital asset;
- Governments that provide the right to use their IT software and associated tangible capital assets to other entities through SBITAs;
- Contracts that meet the definition of a public-private and public-public partnership in GASB Statement No. 94;
- Licensing arrangements that provide a perpetual license to governments to use a vendor’s computer software, which is subject to GASB Statement No. 51.
It is important to note that the Statement does not include contracts that solely provide IT support services without a right-to-use IT assets component. In addition, similar to Statement No. 87, short-term SBITAs (a maximum possible term of 12 months at the commencement of the subscription term, including any renewal or extension options regardless of whether or not the government is reasonably certain to exercise these options) do not require the recognition of a subscription asset and liability.
Recognition and Measurement
Governments should recognize a subscription liability and a subscription asset at the commencement of the subscription term (defined in paragraph 9 of the Statement) of the SBITA, which occurs when the government obtains control of the right to use the underlying IT asset. The initial subscription liability is measured as the present value of the total subscription payments expected to be made to the vendor during the subscription term. The total future payments are discounted using the interest rate the vendor charges the government, which may be the interest rate implicit in the SBITA. If the implicit interest rate is not readily determinable, the government may use an estimated incremental borrowing rate for the present value calculation.
The subscription asset is measured as the initial value of the subscription liability:
- Plus payments made to the vendor at the commencement of the subscription term;
- Plus capitalizable initial implementation costs;
- Less any vendor incentives received at the commencement of the subscription term.
The government will amortize the subscription asset in a systematic and rational manner over the shorter of the subscription term or the useful life of the underlying IT asset.
There are three typical phases for SBITA implementation. The first is the preliminary project stage which encompasses the activities associated with a government’s decision to obtain the technology. Costs incurred during this stage should be expensed. The second is the initial implementation stage, which encompasses activities related to funding implementation efforts for the migration of data, installation, testing, configuration, etc. Costs that are required to set up the technology assets provided by the SBITA are capitalized in addition to the subscription asset. Finally, costs incurred in the operation and additional implementation stage, such as maintaining the function of the technology asset (troubleshooting, tech support, maintenance) should be expensed, unless they meet one of the criteria of paragraph 40 of the Statement.
Applying Lessons from GASB Statement No. 87 Implementation
Simply put, GASB Statement No. 96 is essentially GASB Statement No. 87 for SBITAs and cloud-computing arrangements. The recognition and measurement principles are quite similar. Many clients may be feeling like they just did a similar exercise over the last 12-18 months for leases. We have cautioned many of our clients to avoid being cavalier with the implementation of GASB Statement No. 96. Particularly for colleges and universities and K-12 schools, this Statement may have a significant effect on the financial statements. Arrangements such as school-learning software, software licenses for programs for special-needs learners, and online teaching programs may all fall under this Statement. In addition, governments with many separate online or cloud-based software programs may find that the potential assets and liabilities may be quite significant.
If you have not done so already, now is the time to create your implementation roadmap. Identify the department or personnel group that will be leading the Statement’s implementation team. Start gathering all potential SBITA contracts and summarizing all of the key points of the contracts such as:
- Length of the subscription term, including extension options and termination options;
- Subscription payment amounts for inclusion in the subscription liability;
- Payments made, or incentives received, at commencement for inclusion in the subscription asset;
- Expenses other than subscription payments.
Make sure to be comprehensive in gathering the initial data. As with many of the GASB Statements, the provisions of the Statement need not be applied to immaterial items. However, auditors will first need to test the completeness of the SBITA listing before determining whether items would be material.
Governments should also be proactive with regard to any solicitation of new SBITAs. Make sure to clearly spell out key terms of contracts such as the subscription term or costs incurred during certain phases to ease the burden of accounting for the SBITAs.
We Can Help
We have helped dozens of clients adopt GASB Statement No. 87 and are eager to apply the lessons learned to GASB Statement No. 96. Our teams have developed tools and templates to ease the burden of implementation. Contact one of our government team members to let us know how we can help you navigate the implementation of this impactful standard.
by Danny Sklenicka, CPA, Principal (Gahanna office)