IT Subscriptions Have New Accounting Impacts for Governmental Entities (GASB 96)
Governmental entities across the United States rely more and more on cloud-based software and IT solutions to drive productivity and efficiency. Now, they must recognize these subscriptions on their financial statements.
Governmental Accounting Standards Board Statement No. 96, Subscription-Based Information Technology Arrangements (GASB 96), applies to contracts that allow governmental entities to use IT assets owned by a third-party vendor in exchange for a series of subscription payments.
With the new GASB 96, governmental entities must now recognize a liability for contractual agreements where they pay periodically for the right to use third-party assets. This includes subscription-based information technology arrangements (SBITA) like cloud-based software or cybersecurity tools.
What is GASB 96?
GASB 96 is a new accounting standard for governmental entities that establishes a uniform definition of a SBITA and improves the reporting associated with them. It defines key concepts for measuring and reporting SBITAs and outlines three stages of implementation for classifying activities associated with a SBITA (other than making subscription payments to the IT vendor).
When will governmental entities implement GASB 96?
The requirement is effective for fiscal years starting after June 15, 2022.
Why was GASB 96 introduced?
GASB 96 is based on the idea that a contract granting control of an underlying asset represents a financing arrangement. GASB 96 improves the reporting to convey a government’s financial obligations associated with the SBITAs.
What is a SBITA?
According to GASB 96, a SBITA is “a contract that conveys control of the right to use another party’s IT software, alone or in combination with tangible capital assets, as specified in the contract for a period of time in an exchange or exchange-like transaction.”
Under GASB 96’s definition, a few examples of a SBITA would include:
- Document creation and management programs like Microsoft 365 and Adobe Creative Cloud
- Video conferencing and collaboration platforms like Zoom or Microsoft Teams
- Cloud-based finance, payroll or HR software
- Cybersecurity or data backup tools
- Any Subscription as a Software (SaaS) platform
How will this impact a governmental entity’s financial statements?
GASB 96 requires governmental entities to recognize and account for the value they receive from using IT assets through a subscription, resulting in a subscription asset and a subscription liability.
The subscription asset represents the value of the benefits that the entity will receive from the subscription, and the subscription liability represents the corresponding amount they owe to the vendor; both are spread out over time. These changes help provide a clearer picture of the government’s financial situation related to these subscriptions.
What are the stages of implementing GASB 96?
GASB 96 outlines three stages of implementation for classifying activities associated with a SBITA. These stages define key timetables for IT project development and determining the proper accounting treatment for expenses other than subscription payments.
Preliminary Project Stage
Outlays associated with activities in this stage should be expensed as incurred. This stage cannot be considered completed until management has authorized and committed to funding the SBITA with a specific vendor.
Activities in the preliminary project stage include:
- Conceptual formulation
- Evaluation of alternatives
- Determining the existence of needed technology
- The selection among the alternative vendors
Initial Implementation Stage
This stage is completed when the subscription asset is placed into service. In most cases, outlays that finance activities in this stage generally relate directly to an underlying subscription asset and should be capitalized subject to certain exceptions.
Activities in the initial implementation stage include:
- Designing
- Configuring
- Coding
- Installing
- Testing associated with the government’s access to the underlying IT assets
- Converting data needed to make the underlying assets operational
- Other ancillary charges necessary to place the subscription asset into service
Operation and Additional Implementation Stage
Generally, outlays during this stage should be expensed as incurred unless the outlay results in either increased functionality or efficiency of the subscription asset. The definitions of increased functionality and efficiency are expressly defined in GASB 96.
Activities in the operation and additional implementation stage include:
- Training users
- Converting data (other than conversions necessary to make underlying assets operational)
- Maintenance
- Troubleshooting
- Ongoing access support
- Development of additional modules
Are there any exceptions to GASB 96?
There are several types of arrangements that are specifically excluded from the scope of GASB 96, including:
- Short-term SBITA contracts that have a maximum possible term of 12 months or less
- Contracts that solely provide IT support services
- Licensing arrangements that provide a governmental entity with a perpetual license to use a vendor’s computer software
- Contracts that don’t allow a governmental entity to obtain the present service capacity from use of the underlying software or determine the nature and manner of use of those underlying IT assets
How should your entity move forward with GASB 96?
The good thing about implementing this new standard is that it shares many common elements with GASB No. 87, Leases, which governments have already implemented.
The knowledge your entity has gained through knowing where to find all of your leases and what is considered a lease mirrors the process of tracking down your SBITAs. Leverage that experience of collecting all of the applicable information for existing SBITAs and start now to prepare to update your processes for any newly established SBITA contracts moving forward.
If you have questions about implementing GASB 96, reach out to your Warren Averett advisor directly, or ask a member of our team to reach out to you.
