GASB 96 SBITA Accounting Example
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GASB 96 applies to Subscription-based IT Arrangements (SBITAs)
Let’s take an example of a payroll software subscription by the state government department that is active for two years at $20,000, beginning on January 1, 2023, and ending on December 31, 2024, paid annually at the beginning of the year. The implementation of the software will incur several costs:
is the estimated preliminary cost which will be consumed during the process of finding the vendor and will add no value to the software subscription.
is the estimated initial implementation cost which will enhance the value of the software as the software will include customizations requested by the state government department.
is the estimated operational cost which will be consumed in the maintenance of the software and will not add value to the existing software functionality.
The discount rate used for the arrangement is 4%.
The state government department will need to calculate the initial liability using the present value of the future cash flows: $39,231. Since there are initial implementation costs for the software on top of the subscription fee, those should be capitalized per the GASB 96 guidance to establish the initial asset, therefore:
Initial liability + Initial implementation cost = Initial asset
$39,231 + $3,000 = $42,231
Preliminary and operational costs do not usually add to the value of the SBITA implementation and are generally recognized as expenses, unless those expenses satisfy the criteria of capitalization.
Sample journal entries
The government organization will record the following entries on the effective date of the SBITA.
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| Recording initial SBITA asset and corresponding liability, including cash payment for initial implementation costs |
|---|
| GL Account | Debit | Credit |
|---|---|---|
|
SBITA right-of-use asset |
$42,230.77 |
|
|
SBITA current liability |
|
$20,000.00 |
|
SBITA long-term liability |
|
$19,230.77 |
|
Cash payment |
|
$3,000.00 |
Since the payment has been made in advance per the arrangement, it needs to be recorded in the month of January 2023. The entry below will reduce the SBITA liability by $20,000 and the remaining balance will be $19,230.77:
| Recording payment for the subscription |
|---|
| GL Account | Debit | Credit |
|---|---|---|
|
SBITA current liability |
$20,000.00 |
|
|
Cash payment |
|
$20,000.00 |
The liability due one year from now is reclassified from long-term to current.
| Reclassification of liability |
|---|
| GL Account | Debit | Credit |
|---|---|---|
|
SBITA long-term liability |
$19,230.77 |
|
|
SBITA current liability |
|
$19,230.77 |
At the end of the month, the government organization also needs to recognize the amortization of the SBITA asset.
| Amortization of SBITA asset |
|---|
| GL Account | Debit | Credit |
|---|---|---|
|
Amortization expense |
$1,759.62 |
|
|
Accumulated amortization |
|
$1,759.62 |
At the end of the month, the government organization also needs to recognize the accrued interest expense on the remaining SBITA liability.
| Accrued interest expense on remaining SBITA liability |
|---|
| GL Account | Debit | Credit |
|---|---|---|
|
Accrued interest expense |
$65.33 |
|
|
Accrued interest |
|
$65.33 |
Note: The monthly accrued interest is accumulated over the periods until the next payment is made.
To enter this SBITA in EZLease, follow these steps:
- Ensure that the Implementation and Application Dates in System Options, New Standards tab is entered as (1/1/2023), best before entering the term.
- Click 'Add new SBITA'.
- Enter a SBITA number or name.
- Double-click on the Base Term; in the box that appears, enter 24.
- On the Main data tab, in the Payment schedule grid, enter Payment of 20,000 and change the Pym Frequency to Yearly.
- Click 'Additional data' tab and enter 3,000 under Implementation Costs.
- Click 'Main data' tab and enter an Incremental Borrowing Rate of 4.
- Click Save SBITA. Note that the system automatically classifies this as a SBITA at a discount rate of 4%.
