If you’re a governmental organization, you already have a mountain of acronyms to learn. To add to that list, the Governmental Accounting Standards Board (GASB) has written two lease accounting standards you need to consider – GASB 87 and GASB 96. GASB 87 applies to most lease types and is covered in more detail here. This blog focuses on GASB 96 which applies to subscription-based information technology arrangements (SBITAs) as of June 2022.
Here is a summary of what you need to know about GASB 96, SBITAs and the impact on your financial reporting and subscription terms.
GASB 96 is a set of accounting standards defining SBITAs for government end users. It governs the accounting and financial disclosure of cloud-based software subscription payments. Before GASB 96, there was no specific accounting guidance for an SBITA. To the extent relevant, the standards for SBITAs are based on the standards established in Statement No. 87, Leases, as amended.
GASB 96 does the following:
The subscription term is the non-cancellable period during which you have the right to use the underlying asset. The term also includes the option to extend or the option to terminate the contract based on reasonable certainty.
GASB provides an exception for short term SBITAs. These are contracts which are 12 months or less, including any options to extend, regardless of the option will be exercised or not. Subscription payments for short-term SBITAs would be recognized as outflows of resources over subscription term.
Subscription liability is initially measured as at the present value of subscription payments expected to be made during the subscription term. Future subscription payments should be discounted using the implicit rate if it is readily determinable or the incremental borrowing rate. You should recognize amortization of the discount on the subscription liability as an outflow of resources (for example, interest expense) in subsequent financial reporting periods.
The subscription asset would be recognized and initially measured as:
The subscription asset should be amortized and recorded as an outflow of resources over the subscription term.
Setup, payments, modifications, and terminations of SBITAs are essentially identical to leases. Modifications that result in a reduction of the right to use IT assets (specifically including either a reduction in the assets or a shortening of the term) are treated as partial terminations, in which the asset and liability are reduced, and a gain or loss recognized for the difference between the two. This is the same as for GASB 87.
GASB 96 applies to the senate, local governments, and government agencies using Generally Accepted Accounting Principles (GAAP). Any of these entities involved in subscription-based payments for information technology software should be aware of GASB 96.
As a governmental organization, you should report SBITAs’ information in your financial statements for categorization and disclosure purposes. The stipulation requires that you:
GASB 96 is required to be adopted for fiscal years starting after June 15, 2022. Earlier adoption is also permitted. The standard should be adopted retrospectively by restating financial statements, if practicable, for all prior fiscal years presented. If restatement is not practicable, then you should report the cumulative impact of adoption by restating the beginning net position for the earliest fiscal year. Subscription assets and liabilities should be recognized and measured based on the facts and circumstances at the beginning of the fiscal year in which the standard is implemented.
It is possible to implement both standards simultaneously regardless of the variations, which require slightly different procedures.
SBITAs and leased tangible assets share a few similarities.
GASB 96 improves financial reporting as it will:
We know that most governmental organizations are tight on resources and are facing adoption across multiple lease accounting standards (as well as many other acronym-based projects). Starting the process as soon as possible will make it easier to get compliant. EZLease is ready to help you simplify and meet GASB 96 requirements, whether you take on the project yourself or need outside help. Get started today with a free trial.