By LeaseCrunch® on April 21, 2023 at 1:00 AM
On March 29th, LeaseCrunch held a live webinar discussing the definition, exclusions, and implementation of GASB 96, along with SBITA examples, measurements, and tips for adopting this accounting standard. If you missed the webinar, don’t worry. In this blog, we recap it all and tell you everything you need to know about GASB 96.
What is GASB 96?
Subscription-based revenue models have become an increasingly popular mode of payment for many business entities recently and are only continuing to grow as the subscription economy is estimated to reach $1.5 trillion by 2025. However, 48% of these entities struggle to meet the accounting and reporting standards their business models require. Thus, the Governmental Accounting Standards Board (GASB) introduced GASB 96 to standardize the transparency and accuracy of government financial reporting.
GASB 96 is a statement that guides government entities' guidance on reporting SBITAs in their financial statements. Besides defining SBITAs and providing capitalization criteria for implementation costs, GASB 96 enhances the relevancy and reliability of a government’s financial statements, disclosing the scale and importance of SBITAs for a government.
What Is a SBITA?
Before we give SBITA examples, let’s define a SBITA. A Subscription-Based Information Technology Arrangement (SBITA) is a contract between a government entity and another party (such as an IT Vendor) that grants the right to use IT software for a period of time in an exchange or exchange-like transaction.
Let’s break this definition down.
SBITAs Broken Down
To have control of a SBITA, government entities must have (a) the right to obtain the present service capacity of the IT asset as specified in the contract AND (b) the right to determine the nature and manner of use of the underlying IT asset. In definition (a), “present service capacity” means that the government has access to the IT asset without the SBITA vendor being able to use it at any point during the term. In definition (b), “nature and manner” means that the government can use the IT asset however they desire. If the government doesn’t meet these definitions, then the definition of control is not met, and the IT asset may not classify as a SBITA.
A period of time in the above definition means a noncancellable right a government has to use an asset, including its options to renew, otherwise known as a subscription term. An exchange or exchange-like transaction essentially means a cash payment to a vendor.
Some types of SBITAs are:
- Software as a Service
- Platforms as a Service
- Infrastructure as a Service
SBITA examples include:
- Microsoft Teams
There are a few things to keep in mind concerning SBITAs:
- There is no such thing as a lessor in GASB 96. Rather, people who lend the use of a SBITA are known as vendors. Should a government believe they are a vendor, they should review revenue recognition and speak with their CPA firm.
- Perpetual contracts are excluded from reporting under GASB 96.
- Cancellable terms where the government or the IT vendor has the option to terminate the subscription without permission from the other party are excluded from GASB 96.
- Cloud-based storage may not always be a SBITA (refer back to the definition of control).
- SBITA does not apply when the IT software component is insignificant when compared to the costs of the tangible capital asset.
- Tangible assets are also excluded in SBITAs and are likely accounted for under GASB 87.
What Are the Stages of SBITA Implementation?
There are three stages of implementation for SBITAs:
Preliminary Project Stage
This stage includes conceptual formulation and evaluating alternative IT assets, determining the existence of needed technology, and the final selection of alternative IT assets to solve that need. Expenses are incurred through this process.
Initial Implementation Stage
This stage includes ancillary charges related to the configuration, coding, testing, and installation of chosen subscription assets. This stage is completed when the subscription asset is placed into service and when costs are capitalized as part of the subscription asset over the subscription term.
Operation and Additional Implementation Stage
This stage includes maintenance, troubleshooting, and other activities associated with the government’s ongoing access to the IT assets. In this stage, cash outflows might be expensed as incurred or capitalized as part of the Subscription Asset
To report SBITAs in lease accounting, two distinct phases of measurement need to be reported: initial measurement and subsequent measurement. Here are the phases of payments that must be included in each measurement type:
At the commencement of the subscription term, governments will measure the subscription liability and subscription assets. To determine the subscription liability first, determine what qualifies as a payment:
- Fixed Payments
- Variable payments that depend on an index or rate, measured using the index or rate as of the commencement of the subscription term
- Variable payments that are fixed in substance
- Payments for penalties for terminating the SBITA if the government expects to exercise an option to terminate due to fiscal funding or a cancellation clause
- Subscription contract incentives receivable from the SBITA vendor
- Other Payments to the SBITA vendor associated with the SBITA contract that are reasonably certain of being required
Once payments have been identified, governments will determine the present value of future payments using the discount rate implicit in the agreement or the government's estimated incremental borrowing rate. Once the subscription liability has been determined, add back any payments made to the SBITA vendor at commencement, initial implementation costs and subtract incentives received from the vendor resulting in the subscription asset.
After initial measurement, the subscription asset should be amortized in a systematic and rational manner over the shorter of the subscription term or the useful life of the underlying IT asset. Amortization of the subscription asset should begin at the commencement of the subscription term.
Footnote Disclosure Requirements
Governments should disclose in their footnote the following information about their SBITAs:
- The general description of SBITAs including basis, terms, and conditions on which variable payments not included in the measurement are determined
- The total amount of subscription assets and related accumulated amortization, disclosed separately from other capital assets
- Amount of outflows of resources recognized in the reporting period for variable payments not previously included and other payments such as termination penalties not previously included
- 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
- Commitments under SBITAs before the commencement of the subscription term
- Components of any loss associated with an impairment
- For the fiscal year 2023 only, include balance restatement details
Tips for GASB 96 Implementation
To successfully transition to GASB 96, start collecting your SBITAs now. Evaluate each agreement and the terms within each. Apply what you learned from implementing GASB 87 to the GASB 96 implementation. Finally, use an accounting software like LeaseCrunch to make the process easier.
LeaseCrunch’s easy-to-use software is developed by CPAs, former FASB staff, Big Four auditors, and accounting academics, so you’ll never have to calculate GASB 96 or any of the new lease accounting standards manually again. To learn more, contact us, or book a demo to see LeaseCrunch’s software in action.
Frequently Asked Questions
What Is an Example of a SBITA?
Some SBITA examples include subscription-based software services such as Software as a Service (SaaS) platforms. These arrangements provide users with access to software applications and IT infrastructure, typically through a subscription fee model.
What Is a SBITA in GASB 96?
A SBITA in GASB 96 refers to a Subscription-Based Information Technology Arrangement, which involves acquiring access to IT systems and infrastructure through subscription contracts. GASB 96 provides guidance on accounting and financial reporting for these arrangements, helping government entities accurately reflect their IT expenses and assets.
When Was GASB 96 Issued?
GASB 96 was officially issued on June 25, 2020, and became applicable for fiscal periods subsequent to June 15, 2022.
What Are Subscription-Based Information Technology Arrangements?
Subscription-based Information Technology Arrangements (SBITA) are agreements where a customer pays a periodic fee to access and utilize a vendor's IT infrastructure, software, or services. Under GASB 96, these arrangements are treated as capital assets and require proper accounting treatment for government entities. Some SBITA examples include Zoom, Canvas, Dropbox, Skyward, other financial accounting services, and LeaseCrunch.