GASB Statement No. 96: Subscription-Based Information Technology Arrangements

GASB issued Statement No. 96 in May 2020. The statement takes effect for fiscal years beginning after June 15, 2022 (June 30, 2023, and December 31, 2023 year-ends).

Understanding SBITAs

Implementing GASB Statement No. 96 requires understanding how subscription-based information technology arrangements (SBITAs) work. These arrangements allow governments to benefit from IT software use without maintaining a perpetual license or title to the software. This benefits both the government and the vendor.

GASB already provides guidance for intangible assets through Statement No. 51. However, that Statement does not cover SBITAs as defined below.

What Qualifies as an SBITA

GASB used similar concepts from Statement No. 87 (Leases) when defining SBITAs. The standard defines an SBITA as a contract that conveys control of the right to use another party’s IT software. This includes software alone or combined with tangible capital assets. The arrangement must specify a period of time in an exchange or exchange-like transaction.

Excluded Arrangements

The standard excludes these arrangements:

• Contracts that convey control of IT software and tangible capital assets meeting Statement No. 87’s lease definition when the software component is insignificant compared to the underlying tangible capital asset cost
• Governments that provide their IT software and associated tangible capital assets to other entities through SBITAs
• Contracts meeting the public-private and public-public partnership definition in GASB Statement No. 94
• Licensing arrangements providing perpetual licenses to governments for vendor computer software (subject to GASB Statement No. 51)

Important Exclusions

The Statement excludes contracts that solely provide IT support services without a right-to-use IT assets component. Similar to Statement No. 87, short-term SBITAs don’t require recognition of a subscription asset and liability. Short-term means a maximum possible term of 12 months at commencement. This includes any renewal or extension options, regardless of whether the government will reasonably exercise these options.

Recognition and Measurement Requirements

Initial Recognition

Governments must recognize a subscription liability and subscription asset when the subscription term commences. The commencement occurs when the government obtains control of the right to use the underlying IT asset.

Measuring the Subscription Liability

Calculate the initial subscription liability as the present value of total subscription payments expected during the subscription term. Discount the total future payments using the interest rate the vendor charges the government. This may be the interest rate implicit in the SBITA. If you cannot readily determine the implicit interest rate, use an estimated incremental borrowing rate for the present value calculation.

Measuring the Subscription Asset

Calculate the subscription asset as the initial subscription liability value:

Plus:

• Payments made to the vendor at subscription term commencement
• Capitalizable initial implementation costs

Less:

• Any vendor incentives received at subscription term commencement

Amortization

Amortize the subscription asset systematically and rationally. Use the shorter of the subscription term or the useful life of the underlying IT asset.

Implementation Phases and Cost Treatment

Three Typical Implementation Phases

Preliminary Project Stage: This encompasses activities associated with a government’s decision to obtain the technology. Expense costs incurred during this stage.

Initial Implementation Stage: This includes activities related to funding implementation efforts. Examples include data migration, installation, testing, and configuration. Capitalize costs required to set up the technology assets provided by the SBITA in addition to the subscription asset.

Operation and Additional Implementation Stage: Expense costs incurred during this stage, such as maintaining technology asset function (troubleshooting, tech support, maintenance). Exception: Capitalize costs that meet paragraph 40 criteria of the Statement.

Learning from GASB Statement No. 87 Implementation

GASB Statement No. 96 essentially applies Statement No. 87 concepts to SBITAs and cloud-computing arrangements. The recognition and measurement principles are quite similar. Many clients may feel like they completed a similar exercise over the last 12-18 months for leases.

Avoid Being Cavalier

We caution clients against taking a casual approach to implementing GASB Statement No. 96. This Statement may significantly affect financial statements, particularly for colleges, universities, and K-12 schools.

Common affected arrangements include:

• School-learning software
• Software licenses for special-needs learner programs
• Online teaching programs

Governments with many separate online or cloud-based software programs may discover that potential assets and liabilities are quite significant.

Implementation Roadmap

Getting Started

If you haven’t already, create your implementation roadmap now. Identify the department or personnel group that will lead the Statement’s implementation team.

Data Gathering

Start gathering all potential SBITA contracts. Summarize all key contract points:

• Length of subscription term, including extension 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

Be Comprehensive

Ensure comprehensive initial data gathering. Like many GASB Statements, you need not apply provisions to immaterial items. However, auditors must first test the completeness of the SBITA listing before determining item materiality.

Proactive Contract Management

Be proactive regarding any solicitation of new SBITAs. Clearly spell out key contract terms such as the subscription term or costs incurred during certain phases. This eases the burden of accounting for 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.