In the world of accounting and finance, acronyms and abbreviations are commonplace. One such term that has been gaining attention in recent years, particularly in the context of governmental accounting, is SBITA, which stands for Subscription-Based Information Technology Arrangement. In this post, we explain what an SBITA is in relation to governmental accounting and GASB 96, as well as the implications of SBITAs for financial reporting and valuation.
Defining SBITA and GASB 96
An SBITA, or Subscription-Based Information Technology Arrangement, is a type of service contract that gives governments access to information technology (IT) software and infrastructure, typically through cloud-based services. Governments use these arrangements to access software applications, data storage, and processing capabilities without the need to own and maintain expensive IT hardware and software.
The Government Accounting Standards Board introduced GASB 96, an accounting standard, in May 2020 to address the accounting and financial reporting of SBITAs in governmental accounting. The statement provides guidance on recognizing and measuring SBITAs, as well as the related financial statement presentation and disclosure requirements.
Characteristics of SBITAs
There are several key characteristics that distinguish SBITAs from other types of assets:
Access to IT software and infrastructure
SBITAs provide governments with access to IT software and infrastructure, typically through cloud-based services. This allows governments to utilize advanced IT capabilities without the need to invest in costly hardware and software.
Subscription model
SBITAs are based on a subscription model, where governments pay periodic fees (usually monthly or annually) in exchange for continued access to the IT services. This differs from traditional IT procurement, where governments would purchase hardware and software licenses upfront.
Scalability and flexibility
SBITAs offer scalability and flexibility, as governments can adjust the level of IT services they require based on changing needs. This allows for more efficient use of resources and helps to avoid over-investment in IT assets that may become outdated or underutilized.
Financial reporting and valuation implications under GASB 96
GASB 96 has several implications for financial reporting and valuation of SBITAs in governmental accounting:
Balance sheet presentation
Under GASB 96, governments should recognize a right-to-use subscription asset (an intangible asset) and a corresponding subscription liability on their balance sheet when they enter into an SBITA. The right-to-use subscription asset represents the government’s right to access IT services, while the subscription liability represents the government’s obligation to make future payments for the services.
Amortization and interest expense
Governments should amortize the right-to-use subscription asset over the shorter of the SBITA term or the useful life of the underlying IT infrastructure. The amortization expense should be recognized as an outflow of resources (expense) in the statement of activities. Additionally, interest expense should be recognized on the subscription liability, following the effective interest method.
Financial statement disclosures
GASB 96 requires governments to disclose information about their SBITAs in the notes to the financial statements. This includes a general description of the arrangements, the total amount of subscription assets recognized, and the related amortization expense for the reporting period.
Achieving GASB 96 compliance
Achieving GASB 96 compliance becomes a seamless process with the help of EZLease. Our software solution helps with GASB 96 by ensuring that organizations accurately recognize subscription-based information technology arrangements (SBITAs) as right-to-use subscription assets and corresponding liabilities on their financial statements. The software automates calculations, generates amortization schedules, and offers comprehensive reporting capabilities, enabling government entities to efficiently track and manage their SBITA portfolios.
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