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

The Governmental Accounting Standards Board mandates that governments adopt the provisions of the Governmental Accounting Standards Boards Statement (GASBS) No. 96, Subscription-Based Information Technology Arrangements (GASBS 96 or the Statement) for fiscal years that end after June 15, 2023. GASBS 96 concentrates on accounting issues and financial reporting for subscription-based information technology arrangements (SBITAs).

A Quick Background

Government entities regularly utilize SBITAs. Their prevalence is expected to increase as the variety of available SBITAs grows and as governments prefer to avoid purchasing physical information technology (IT) with perpetual licensing agreements. One example of a commonly used SBITA is a remotely accessed cloud-based software application, such as an enterprise resource planning (ERP) system. GASB decided to research this issue and draft GASBS 96 to address the pervasiveness of SBITAs among governments, the lack of specific guidance in GAAP, and the unreliable financial reporting and accounting of SBITAs.

Accounting Recognition

A SBITA, as defined by GASBS 96, is a contract that awards the right to use another party’s (a SBITA vendor’s) IT software, alone or with tangible capital assets (the underlying IT assets), as defined in the contract for a specific period in an exchange or exchange-like transaction. Governments should already recognize their right-to-use subscriptions assets and the connected subscription liability.

The initial measurement of the subscription liability should be at the present value of subscription payments expected to be made during the term. This should be discounted to present value using the interest rate charged by the SBITA vendor, or if the vendor’s rate is not readily determinable, then use the government’s incremental borrowing rate. The initial measurement is the sum of the initial subscription liability, the pre-commencement payments paid to the vendor, and the capitalizable implementation costs, minus incentives received from the vendor at or before commencement. In later reporting periods, governments should amortize the discount of the subscription liability as an outflow of resources (ex. interest expense). Amortize the subscription asset over the shorter of the subscription term or useful life of the underlying IT assets as an outflow of resource, such as an amortization expense.

Important Considerations

Short-term SBITAs

A short term SBITA is an SBITA that has a maximum possible term under the SBITA contract of twelve months or less, including any options to extend. The probability of that contract being extended does not impact that classification. If there are advance payments or payments to be made subsequent to the reporting period, an asset or liability should be recognized in association with a short-term SBITA. If this is not the case, a government should consider short-term SBITA payments as outflows of resources per the payment provisions in the SBITA contract.

Recognition of SBITAs in Governmental Funds

During the period where the subscription asset is initially recognized, the government should recognize an expenditure and other financing source. The government should account for subscription payments similar to debt service payments on long-term debt.

Contracts with Multiple Components and Combinations

Contracts containing both a subscription and non-subscription component should be accounted for as separate contracts. Governments should consider contracts entered into at or near the same time with the same SBITA vendor as parts of the same contract, but only if the contracts are negotiated as a package with one shared objective or the amount of consideration to be paid for one contract is dependent upon the price or performance of the other.

Outlays Other Than Subscription Payments

There are three stages for implementation associated with SBITAs identified in GASBS 96:

Leases and SBITAs

All SBITAs are considered a lease, but there can be confusion as to where the contract falls. To determine whether GASBS 87 or GASBS 96 is applicable, consider the underlying asset.

All tangible capital assets connected to a SBITA that were recognized under GASBS 87 must be restated after adoption of GASBS 96.

Discount Rates

Discount future subscription payments by using the SBITA vendor’s interest rate. However, the vendor’s rate may not be explicitly stated in many contracts. If the government cannot easily determine the interest rate, then the government should utilize its estimated incremental borrowing rate. All SBITAs will not have the same interest rate, so governments must consider all relevant characteristics for each subscription, such as the term and commencement date.

Considerations for Implementation

Transition and Effective Date

To measure and recognize subscription assets and liabilities, governments should use the facts and circumstances from the beginning of the earliest restatement period. A government that has a June 30, 2023 fiscal year-end presenting single-year financial statements would implement GASBS 96 as of July 1, 2022. For a government with a June 30, 2023 fiscal year-end presenting comparative financial statements, the effective date for adoption is July 1, 2021.

Governments may choose to include the quantity of the subscription asset capitalizable outlays connected with the initial implementation stage, but it is not required. Additionally, governments may choose to include the operation and additional implementation stage sustained before the implementation of GASBS 96.

Before Implementation

Implementing GASBS 96 will impact each government differently. However, regardless of exposure to SBITAs, all governments should undertake certain considerations and related procedures.

To begin, governments should apply a system to capture all relevant information connected to SBITAs, such as terms, payments, and other components affecting the subscription asset and liability. Governments should compile a list of potential SBITAs with all subscription agreements and other related documents, then review the information to detect qualifying SBITA contracts. If there are any cases where terms are ambiguous, legal counsel must be consulted.

Governments need to review contracts that meet the definition of a SBITA thoroughly to clarify the payment period, the subscription term, and other components that require the allocation of the contract price or must be accounted for separately. If the contract does not clearly state the vender’s interest rate and the government utilizes its incremental borrowing rate as the discount rate, then additionally efforts may be needed to evaluate the proper rate for the arrangement.

When planning to implement GASBS 96, governments should review their experience implementing GASBS 87. It is important to assess the time spent and resources required to implement GASBS 87 to determine if those will also be needed for GASBS 96. Like GASBS 87, implementing GASBS 96 will require the exercise of professional judgement when determining if a contract qualifies as an exchange or an exchange-like transaction, determining the discount rate or allocating the contract price.

Key Points to Communicate to Leadership

GASBS 96 improves government financial reporting through defining a SBITA and by providing clear guidance for their accounting and reporting. Before GASBS 96, it was near impossible to determine a government’s exposure to SBITAs by reviewing financial statements. Implementing this Statement allows for the clear record of SBITAs assets and liabilities in all financial statements, clarifying the government’s rights to use IT assets and future obligations related to those assets. This will allow for the clear statement for the cost to use IT assets in each reporting period. Financial statements will now be able to include other useful notes, such as SBITA liabilities scheduled principal and interest payments and current period amortization of right-to-use IT assets.

Management will need the appropriate resources to implement GASBS 96. Dedicating enough time and resources at present will allow for the smooth implementation of GASBS 96 and will result in a positive return in the future.