On June 5, 2020, the Governmental Accounting Standards Board (GASB) released new reporting guidance for state and local governments that have subscription-based information technology (IT) arrangements. GASB Statement No. 96 was created in response to questions that were left unanswered by the governmental lease accounting standard that was released three years ago, GASB Statement No. 87. The lease standard had a major impact on the public sector, requiring many entities to report leases on their balance sheets as “right-to-use assets” rather than sequester leasing activity to the income statement. Though the lease standard was thorough, it did not address how to record IT subscriptions. GASB 96 answers that question.
Why This Guidance Was Necessary
In the past decade, cloud computing has become ubiquitous in almost all areas of business. This statement is true both within and without the governmental domain. But cloud computing is often left out of the narrative. The accounting standards released by the GASB and those released by its sister organization, the Financial Accounting Standards Board (FASB), have not always addressed cloud technology, and when software or data solutions are mentioned, the guidance often focuses on internally-developed software or perpetual licensing agreements. When software is purchased using a subscription, the standards fall short.
Basics of the New Standard
Governmental entities that utilize subscription-based information technology arrangements (SBITAs) or have plans to purchase subscription-based software in the future can learn the following from GASB 96:
What Are SBITAs?
As quoted from the Statement:
“A SBITA is defined as a contract that conveys control of the right to use another party’s (a SBITA vendor’s) information technology (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.”
More simply put, SBITAs are contracts that give governmental entities to right to use a vendor’s IT software for a specified time in exchange for payment. For these arrangements to qualify under GASB 96, the contract cannot be cancellable, and if there is a termination option at the end of the subscription term, it must be reasonably certain that neither the vendor nor the entity will exercise that option. SBITAs with terms of 12 months or less are excluded from these new reporting requirements and can be expensed as the IT services are utilized.
How Should I Record SBITAs?
If the software subscription meets the definition of a SBITA, the government should record a right-to-use intangible asset and a corresponding subscription liability at the present value of future subscription payments. They should discount their subscription payments using the stated or implied interest rate, or – if the interest rate is unavailable – at their incremental borrowing rate.
Which Costs Should I Capitalize?
All costs associated with the subscription service should be grouped into one of the following three categories.
- Preliminary Product Stage (e.g. costs of evaluating SBITA vendors, assessing technology needs, etc.)
- Initial Implementation Stage (e.g. installation fees, introductory training costs, etc.)
- Operational and Additional Implementation Stage (e.g. IT system maintenance costs, ongoing training costs, etc.)
In general, only expenses incurred in the Initial Implementation Stage (Stage 2) should be capitalized into the right-to-use subscription asset. Costs in the Preliminary Product Stage (Stage 1) and the Operational and Additional Implementation Stage (Stage 3) should be expensed as they are incurred.
What Else Should I Disclose?
In addition to the terms and subscription values themselves, governments should disclose:
- Information about contracts that include both SBITA and non-SBITA components and how the contract price was allocated between the two
- Accumulated amortization for each right-to-use subscription asset
- Principal and interest split for subscription payments
- Payments to be made to the vendor not already reflected in the subscription liability
While the lease accounting guidance is effective for all reporting periods that begin after June 15, 2021, GASB 96 does not go into effect until late 2022. Governmental entities should be complying with the new SBITA accounting standard on their financial reports for periods that begin after June 15, 2022. Early application of new accounting standard is encouraged by GASB.
Improved Financial Reporting
The GASB hopes that this Statement will improve comparability between governmental reporting entities by establishing fair and reasonable guidelines that all can follow. Reporting SBITAs separately will help readers of the financial statements understand just how much of a role SBITAs play for the government, which will be necessary as cloud computing continues to grow in popularity.