In today's post, we're going to dive deep into the realm of GASB 96 and the subscription-based IT agreements (SBITAs) it governs. Let's start by clarifying what GASB 96 and SBITAs are.
Breaking Down GASB 96 and SBITAs
In May 2020, the Governmental Accounting Standards Board (GASB) released Statement No. 96. This standard provides guidance for governmental entities on how to handle SBITAs, which can be thought of as software rental agreements with recurring payments to the provider.
Similar to GASB 87, which tells us how to deal with leases, GASB 96 sees the government's right to use a software as an asset and the ongoing subscription payments as a liability. Think about GASB 96 as being an extension of GASB 87 but with the scope now extending to these SBITAs. GASB 96 states, “To the extent relevant, the standards for SBITAs are based on the standards established in Statement No. 87, Leases, as amended.”
This standard took effect for fiscal years beginning after June 15, 2022 and is applied retroactively when feasible.
Determining the Scope of GASB 96
Identifying whether your SBITA falls under GASB 96 involves asking a few key questions:
- Does the SBITA contract grant the right to use IT software for a specified period in an exchange or exchange-like transaction?
This is the basic criterion for defining an SBITA. - Is the SBITA governed by different guidelines?
Sometimes, SBITAs might not be subject to GASB 96 but instead fall under different rules. Here are a few scenarios when this might occur:
a. Package Deals: If you're dealing with an SBITA that is part of a package, where the bundle includes IT software and physical capital assets (like a computer or smart copier), GASB 96 might not apply. This is especially the case when the software is a relatively minor part of the package compared to the physical asset.
b. Government-Provided Assets: In cases where the government provides other entities with the right to use its IT software and associated tangible assets via SBITAs, these might not be under the purview of GASB 96.
c. Partnership Contracts: If your SBITA is part of a public-private or public-public partnership (as defined in paragraph 5 of Statement No. 94), GASB 96 might not be applicable. For instance, a situation where a government revamps its IT infrastructure in collaboration with a private IT firm, with payments made either as a fixed fee or based on usage over time.
d. Perpetual Licensing Arrangements: Finally, SBITAs that provide governments with a perpetual license to use a vendor’s software might be ruled by Statement No. 51 (Accounting and Financial Reporting for Intangible Assets) rather than GASB 96. An example here would be a local government buying a perpetual license to use property tax assessment software. - Are your SBITAs of low dollar value?
GASB doesn't set a specific threshold for low-value SBITAs. Instead, it recommends using professional judgment to determine if excluding smaller ticket SBITAs would significantly impact financial reporting. Consider using a similar approach as done with fixed asset capitalization policies. - Is your SBITA short-term?
An agreement with a maximum possible term of 12 months or less, including any options to extend, is considered short-term. In these cases, payments are recognized as they occur, and payments made in advance or arrears are recognized as assets or liabilities respectively. - Is your SBITA long-term?
Long-term SBITAs are accounted for in a similar way as long-term leases under GASB 87. See below for a full example of how this is done.
Accounting for Long-Term SBITAs
Long-term SBITAs follow two main stages: initial recognition and amortization.
During initial recognition, the present value of all future expected SBITA payments is calculated to recognize a subscription liability. The discount rate used is either the rate implicit in the lease or the incremental borrowing rate if the implicit rate can't be determined. This computed subscription liability is then used to recognize a subscription asset, after adjusting for any prepayment, incentives, or other capitalizable implementation costs.
In the amortization phase, interest expense is recognized in each period based on the discount rate used, and it's also recognized as an accrued interest liability during periods with no payments. Subscription payments are first allocated towards clearing any accrued interest balance, and then the rest goes towards reducing the subscription liability. The subscription asset should be systematically amortized over the subscription term, often using the straight-line method.
Example journal entries of both short-term and long-term SBITAs.
First Quarterly Payment JE (Payment in advance)
Short Term SBITA
- Debit Prepaid Subscription – Standard prepaid, no discounting needed.
- Credit Payable (or cash) – represents the subscription payment required for the period.
Long Term SBITA
- Credit Subscription Liability – Present value of all future subscription payments (discount rate used in calculation is your incremental borrowing rate “IBR”)
- Debit Subscription Asset – Equals your subscription liability and first payment adjusted for SBITA incentives.
- Credit Payable (or cash) – represents the subscription payment required for the period.
July Amortization JE
Short Term SBITA
- Debit Subscription Expense – represents 1/3 of the quarterly payment.
- Credit Prepaid Subscription – represents 1/3 of the quarterly payment.
Long Term SBITA
- Debit Amortization Expense – S/L amortization over the term of the subscription. Computed as initial subscription asset balance divided by the term of the SBITA.
- Credit Accumulated Amortization – Equals your amortization expense for the period.
- Debit Interest Expense – Interest for the period on the running subscription liability balance.
- Credit Interest Payable – Equals your incremental interest expense for the period.
Second Quarterly Payment JE (Payment in advance)
Short Term SBITA
- Debit Prepaid Subscription – Standard prepaid, no discounting needed.
- Credit Payable (or cash) – represents the subscription payment required for the period.
Long Term SBITA
- Debit Interest Payable – Reduce the existing interest payable in full prior (3 months’ worth of interest) to allocating payment to reduce the subscription liability.
- Debit Subscription Liability – Reduce the subscription liability by the full value of the cash payment less the amount allocated to interest payable.
Credit Payable (or cash) – represents the subscription payment required for the period.
NetLease Can Help
Navigating GASB 96 for Subscription-Based IT Agreements can be time consuming and daunting, but software solutions like NetLease can help streamline the process significantly.
Tanner Larsen
Tanner Larsen, CPA, is an Account Executive at Netgain. After completing a Masters in Accountancy and a Minor in Information Systems, Tanner began his career at Tanner LLC, which he is quick to clarify that the firm wasn’t founded by him but is an Accounting and Advisory Firm with two offices in Utah. After Tanner LLC, Tanner worked with Ernst and Young in their audit practice working primarily with private technology clients in the San Francisco Bay Area. Having assisted companies in meeting financial reporting requirements, Tanner loves helping accounting and finance teams further leverage technology to improve their financial reporting and make their lives easier.
