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GASB 96: Understanding SBITA

As the apparent need for new accounting guidelines arise, accounting organizations work around the clock to craft rules that address the grumbles of the people; the gaps in the current standing principles that need to be addressed. One of these organizations is GASB, or the Governmental Accounting Standards Board. They work to develop standards in financial accounting and reporting that foster visibility and clarity.

A perfect example of this phenomenon is the situation that caused the creation and future implementation of GASB 96. This accounting principle was developed as a response to the increased popularity of an agreement called a “SBITA”. With this popularity came the need to formally regulate those agreements.

So What is a SBITA?

Before we move on to discussing GASB 96, we must define its subject matter: the SBITA. The acronym stands for “Subscription-Based Information Technology Agreements”, and these types of agreements have risen in popularity due to the increase in use of cloud computing as a means of storing information and utilizing IT services.

Oftentimes, the companies that utilize these cloud services enter into contracts to use them for a specific period of time. Therefore, these contracts have similar characteristics to leases, seeing as they are an agreement between two parties for the temporary use of an asset (which matches the definition of a lease).

Moving On— What is GASB 96?

GASB 96 is a decree by the Governmental Accounting Standards Board providing guidance on accounting and financial reporting best practices for SBITAs, specifically when it comes to contracts with governments and government entities.

More specifically, GASB 96:

  1. Defines a SBITA
  2. Establishes that a SBITA agreement results in an intangible right-to-use asset and a corresponding subscription liability.
  3. Provides capitalization criteria for things such as implementation costs
  4. Sets a precedent of requiring governments and their entities to note disclosures regarding SBITAs
  5. Defines the term of the subscription as a period of time during which the lessee, also known as the governmental entity in this case, has a noncallable right to use the underlying IT assets

In addition, it is worth noting that the standards published in GASB 96 are based on the standards in GASB 87 standard for lease accounting. You can read more about GASB 87 in our blog post here.

How is a SBITA Asset Measured?

A SBITA asset is measured as the sum of three things:

  1. The initial subscription liability amount
  2. Payments made to a SBITA vendor before the end of the subscription term
  3. The capitalizable implementation costs

Furthermore, the amortization of the subscription asset should be recognized as an outflow of resources over the term of the subscription, and any activities associated with a SBITA should be accounted for as a part of the:

  1. Preliminary Project Stage - activities associated with an entity’s decision to obtain the technology provided by the SBITA. Any cost incurred in the preliminary project stage will be expensed as incurred, rather than a capitalized addition to the subscription asset.
  2. Initial Implementation Stage - activities related to funding implementation efforts for the migration of data, installation, etc. Anything that is required to set up the technology assets provided by the SBITA is capitalized in addition to the subscription asset.
  3. Operation and Additional Implementation Stage - activities that relate to maintaining the function of the technology asset (troubleshooting, tech support, maintenance). These services are not capitalized as a part of the subscription asset because they did not enhance the functionality of the asset in question.

GASB 96 Implementation Date

GASB 96 is effective beginning June 15, 2022 for all reporting periods thereafter. And, like all GASB reports, this new principle applies to all state and government entities that enter into a Subscription-Based Information Technology Agreement.

Conclusion: Act Now

June will come quickly and government entities will have to fall into line with the standards set in GASB 96. Here at LeaseCrunch, we recommend that entities start developing accounting practices that comply with GASB 96 as early as possible to ensure a smooth and compliant transition come June. 

Contact us at LeaseCrunch to learn more about how our lease accounting software can help you maintain lease accounting standards that are compliant with GASB 96, so you don’t have to worry about the changing guidelines.