Governments are required to adopt the provisions of the Governmental Accounting Standards Board Statement (GASBS) No. 96, Subscription-Based Information Technology Arrangements (GASBS 96 or the Statement) for fiscal years ending after June 15, 2023. GASBS 96 addresses accounting and financial reporting issues related to subscription-based information technology arrangements (SBITAs).
Background
SBITAs are frequently found in government entities and are expected to become even more prevalent as both the assortment of SBITAs available and the desire by governments to avoid purchasing physical information technology (IT) assets with perpetual licensing agreements expands. A common example of a SBITA is a cloud-based software application (such as an accounting or enterprise resource planning (ERP) system) which is accessed remotely.
The growing pervasiveness of SBITAs among governments, in conjunction with the absence of specific guidance in GAAP and inconsistent accounting and financial reporting of SBITAs, served as the catalyst for the GASB to undertake research related to the issue and eventually draft GASBS 96.
Accounting Recognition
GASBS 96 defines a SBITA as a contract that conveys control of the right to use another party’s (a 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.
A government should generally recognize a right-to-use subscription asset (an intangible asset) and a corresponding subscription liability. The subscription liability should be initially measured at the present value of subscription payments expected to be made during the subscription term, discounted to present value using the interest rate charged by the SBITA vendor or the government’s incremental borrowing rate if the vendor’s rate is not readily determinable. The subscription asset is initially measured as the sum of the initial subscription liability, pre-commencement payments made to the vendor and capitalizable implementation costs, less incentives received from the vendor at or before commencement. In subsequent financial reporting periods, a government should amortize the discount of the subscription liability as an outflow of resources (e.g., interest expense). The subscription asset should be amortized over the shorter of the subscription term or useful life of the underlying IT assets as an outflow of resources (e.g., amortization expense).
Key Considerations
Short-term SBITAs
A SBITA with a maximum possible term under the SBITA contract of 12 months or less, including any options to extend, regardless of probability of being exercised, is considered a short-term SBITA. An asset or liability is only recognized in association with a short-term SBITA if there are advance payments or payments to be made subsequent to the reporting period. Otherwise, a government should recognize short-term SBITA payments as outflows of resources (e.g., expense) based on the payment provisions in the SBITA contract.
Recognition of SBITAs in Governmental Funds
Governments should recognize an expenditure and other financing source in the period in which the subscription asset is initially recognized. Subscription payments should be accounted for similar to debt service payments on long-term debt.
Contracts with Multiple Components and Combinations
Governments should account for contracts containing both a subscription and non-subscription component as separate contracts.
Contracts entered into at or near the same time with the same SBITA vendor should be considered part of the same contract if the contracts are negotiated as a package with a single objective or the amount of consideration to be paid in one contract depends on the price or performance of the other contract.
Outlays Other Than Subscription Payments
GASBS 96 identifies three stages of implementation associated with SBITAs, as follows:
| Stage | Description of Related Activities | Accounting Recognition |
| Preliminary | Conceptual formation and evaluation of alternatives, determination of the existence of needed technology, final selection of alternatives for the SBITA | Outlays expensed as incurred |
| Initial Implementation | Ancillary charges related to designing the chosen path (e.g., configuration, coding, testing, installation associated with access to the underlying IT assets) | Capitalized as part of the subscription asset. If no asset is recognized (e.g., contract is a short-term SBITA) expense outlays as incurred |
| Operation and Additional Implementation | Maintenance, troubleshooting, other activities associated with the government’s ongoing access to the underlying IT assets. May also include additional implementation activities | Outlays expensed as incurred, unless those outlays increase functionality or efficiency of the subscription asset, which should be capitalized |
Relationship Between Leases and SBITAs
All SBITAs meet the definition of a lease. Whether or not the contract is accounted for under GASBS 87, or GASBS 96 depends on the composition of the underlying asset. The following chart summarizes which standard to apply based on the composition the underlying asset:
| Underlying Asset | Applicable Standard |
| IT software alone | GASBS 96 |
| Tangible capital assets alone | GASBS 87 |
| IT software in combination with tangible capital assets |
|
Given the effective date of GASBS 87 occurring one year prior to the effective date of GASBS 96, any tangible capital asset associated with a SBITA recognized under GASBS 87 will require restatement upon adoption of GASBS 96.
Discount Rates
Future subscription payments should be discounted using the interest rate charged by the SBITA vendor. In many contracts, the vendor’s rate is not explicitly stated. If the interest rate cannot be readily determined by the government, the government should use its own estimated incremental borrowing rate. This rate will not be universal across all SBITAs and should be determined based on the relevant characteristics (e.g., subscription term, commencement date) of each subscription.
Implementation Considerations
Effective Date and Transition
Governments should recognize and measure subscription assets and liabilities using the facts and circumstances that existed at the beginning of the earliest period restated. For a government with a June 30, 2023 fiscal year-end presenting single-year financial statements, the effective date of adoption is July 1, 2022. A government with a June 30, 2023 fiscal year-end presenting comparative financial statements would implement GASBS 96 as of July 1, 2021.
Governments are permitted, but not required, to include in the measurement of the subscription asset capitalizable outlays associated with the initial implementation stage and the operation and additional implementation stage incurred prior to the implementation of GASBS 96.
Preparation for Implementation
The effort required to implement GASBS 96 will vary by government. Nevertheless, there are certain considerations and related procedures all governments should undertake regardless of their exposure to SBITAs.
Governments should review and update as necessary their internal policies and procedures, including internal controls. Governments should implement a system to capture relevant information associated with SBITAs (e.g., terms, payments and other components affecting the subscription asset and liability). A listing of potential SBITAs should be compiled along with subscription agreements and other relevant documents. This information should be reviewed to identify contracts meeting the definition of a SBITA. In situations where ambiguous terms are identified, legal counsel should be consulted.
For contracts meeting the definition of a SBITA, governments should review thoroughly to confirm the subscription term, payment provisions and any components that must be accounted for separately or require the allocation of the contract price. In situations where the contract does not explicitly state the interest rate charged by the vendor and the government uses its incremental borrowing rate as the discount rate, significant effort may be required to determine the appropriate rate for the arrangement.
Governments should reflect on their experience implementing GASBS 87 when designing an implementation plan for GASBS 96. In particular, governments should review the time spent and resources used to implement GASBS 87 and assess whether the same will be necessary for GASBS 96. Elements of GASBS 87 that required the exercise of professional judgment, such as determining whether a contract met the definition of an exchange or an exchange-like transaction, the estimation of the discount rate or allocation of the contract price, are also likely to arise when implementing GASBS 96.
Items to Communicate to Those Charged With Governance
GASBS 96 will improve financial reporting for governments by defining a SBITA and instituting uniform guidance for the accounting and reporting of SBITAs. Prior to GASBS 96, determining a government’s exposure to SBITAs through review of the financial statements was next to impossible. With the implementation of this Statement, assets and liabilities related to SBITAs will be clearly recorded in the financial statements, representing a government’s right-to-use IT assets and the corresponding obligation due in future periods. The cost to use IT assets in the reporting period will be clearly stated. Other useful information, such as scheduled principal and interest payments on SBITA liabilities in future periods and the current period amortization of right-to-use IT assets will be included in the notes to the financial statements.
Implementation of GASBS 96 will not be easy and will require management be provided with the appropriate resources. Time and money spent now to assist in implementing GASBS 96 will provide a positive return in future periods.
Written by Sam Thompson. © 2023 BDO USA, LLP. All rights reserved. www.bdo.com