By LeaseCrunch® on June 20, 2023 at 9:00 AM
As the apparent need for new accounting guidelines arises, accounting organizations work around the clock to craft rules that address the grumbles of the people and 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 implementation of GASB 96.
GASB 96 is an accounting statement that was developed as a response to the increased popularity of an arrangement called a SBITA. With this popularity came the need to formally regulate the accounting for those arrangements.
What Is GASB 96?
GASB 96 is a statement by the Governmental Accounting Standards Board that provides 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:
What Is a SBITA?
- Defines a SBITA.
- Establishes that a SBITA arrangement results in an intangible subscription asset and a corresponding subscription liability.
- Provides capitalization criteria for things such as implementation costs.
- Sets a precedent of requiring governments and their entities to note disclosures regarding SBITAs.
- Defines the term of the subscription as a period of time during which the government entity has a noncallable right to use the underlying IT assets.
What Is a SBITA?
The acronym SBITA stands for Subscription-Based Information Technology Arrangements. These types of arrangements have risen in popularity due to the increase in cloud computing as a means of storing information and utilizing IT services.
Oftentimes, the governments 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, as two parties agree upon the temporary use of an asset.
What Counts as a SBITA?
There are a couple of classifications to keep in mind when talking about SBITAs. One, GASB 96 is only meant for government entities, not IT vendors. Two, SBITAs under GASB 96 grant government entities the right to use IT software at their present service capacity for whatever purpose the government entity desires. This is otherwise known as a subscription asset.
Additionally, SBITAs predominantly come in the form of Software as a Service (SaaS), Platforms as a Service (PaaS), and Infrastructure as a Service (IaaS). Some examples of SBITAs include Canvas, Skyward, Microsoft Teams, Dropbox, and LeaseCrunch.
How to Account for a SBITA
SBITAs should be accounted for in a similar manner to leases under GASB 87. When a government entity enters into a SBITA, they recognize the subscription asset and a related subscription liability on financial statements. The value of these is determined by calculating the present value of subscription payments that are due over the term of the SBITA and discounted by a discount rate. The government entity should then amortize these assets in a systematic and rational manner over the subscription term, further reducing the subscription liability by payments made during the term.
Which Parts of Subscription-Based Costs Should Be Capitalized?
Let’s start by answering the question: what is capitalization? Capitalization is an accounting term that essentially spreads out the cost of an asset over the amount of time an asset will be used. Let’s take a SBITA for example. Rather than incur the cost all at once, the cost of the SBITA will be spread over the SBITA’s term. The costs of a SBITA that should be capitalized during this time frame will be the fixed payments, variable payments that depend on an index or rate, non-refundable upfront fees such as implementation or set-up costs, and other payments that are fixed in nature.
What Are the Footnote Disclosure Requirements for a SBITA?
Here is what should be included in terms of footnote disclosure requirements under GASB 96:
- A description of the SBITA including its basis, terms, and conditions on which variable payments are not included in the measurement of the subscription liability.
- The sum of subscription-based assets and related accumulated amortization, disclosed separately from other capital assets.
- The outflow of resources recognized in the reporting period for variable payments not previously included in the measurement of the subscription liability. Other payments such as termination penalties paid that were not included in the subscription liability should also be disclosed.
- The principal and interest requirements to maturity presented separately for the subscription liability for each of the five subsequent fiscal years and in five-year increments thereafter.
- Details of SBITAs that have been committed but not yet commenced.
- The components of any loss associated with an impairment.
- Balance restatement details for the fiscal year 2023 only.
In addition, it is worth noting that accounting standard GASB 96 has a strong correlation to the lease accounting standard GASB 87.
How to Measure the Initial Subscription Liability
The initial subscription liability represents the obligation a government has to any IT vendor over the course of its contract. To measure the initial subscription liability, you must take into account the present value of future payments. This means applying the discount rate to future subscription payments and discounting them back to the present value of the payments. To determine the discount rate, first use the rate implicit in the contract. If that is not readily available, the incremental borrowing rate should be used.
How Is a SBITA Asset Measured?
A SBITA asset is measured as the sum of three things:
- The initial subscription liability amount.
- Payments made to a SBITA vendor before the commencement of the subscription term.
- The capitalizable implementation costs.
What Are the Three Stages of a SBITA?
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 should be accounted for as a part of the three stages of a SBITA:
- 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.
- Initial Implementation Stage: activities include ancillary charges related to designing, configuration, coding, testing, and installation of the subscription assets and these charges are capitalized as part of the subscription asset.
- Operation and Additional Implementation Stage: activities that relate to maintenance, troubleshooting, and other activities associated with ongoing access to the underlying IT assets. Activities in this stage may be capitalized as part of the subscription asset.
How to Implement and Comply with GASB 96
GASB 96 became effective for fiscal years beginning after June 15, 2022, and for all reporting periods thereafter, with a requirement to restate prior periods., this new statement applies to all state and government entities with in-scope SBITAs.
The best way to implement GASB 96 and account for SBITAs, however, is with an easy-to-use SBITA and lease accounting software, like LeaseCrunch. Stop using inefficient and risky spreadsheets for your lease and SBITA accounting. At LeaseCrunch, we help you maintain compliance with all of the new lease and SBITA accounting standards with streamlined and automated lease accounting software, so you can save yourself and your clients time and money. To learn more, contact us, or request a demo to see firsthand how LeaseCrunch increases efficiency and reduces errors in SBITA and lease accounting across the board.
GASB 96 FAQs
What Is a Short-Term SBITA under GASB 96?
Under GASB 96, SBITAs that have a term of 12 months or less are considered short-term and are exempt from being recognized as a subscription asset or liability. Short-term SBITAs have a maximum term of 12 months, including renewals or extensions.
What Is GASB Summary Statement No. 96?
GASB Summary Statement No. 96 is issued by the Governmental Accounting Standards Board (GASB) and provides guidance detailing the accounting and financial reporting for Subscription-Based Information Technology Arrangements (SBITAs). This standard aims to increase consistency and transparency in accounting for these arrangements across government entities.
What Is the Difference Between GASB 87 and 96?
GASB 87 and GASB 96 both provide accounting standards that capitalize assets for different areas. GASB 87 was effective first and requires government entities to recognize a lease liability and a right-of-use asset on tangible assets. GASB 96 goes further by defining Subscription-Based Information Technology Arrangements (SBITAs), providing standards for their accounting and financial reporting.
What Is an Example of a SBITA?
An example of a SBITA could be a Software as a Service (SaaS) platform like Slack, Zoom, or LeaseCrunch. Other examples included Platforms as a Service (PaaS) and Infrastructure as a Service (IaaS).
Does LeaseCrunch Handle Calculations for GASB 96?
Yes, LeaseCrunch is built with everything you need to implement GASB 96 for your Subscription-Based Information Technology Arrangements (SBITAs).
GASB 96 must be implemented for fiscal years beginning after June 15, 2022, with a requirement to restate all prior periods presented.
If the Initial Application Date for GASB 96 is different from the date used for GASB 87, add a new Reporting Entity with the Initial Application Date for GASB 96. We recommend naming the Reporting Entity with “GASB 96” for easy distinction. Ex. My Municipality - GASB 96.
Next, create a new Asset type called SBITA in Administration - Customization.
Once subscriptions are added with the appropriate Reporting Entity and Asset Type, run appropriate reports by selecting this information from the filters on My Leases, noting that the Footnote Disclosure for GASB 87 and GASB 96 should be run separately.