GASB 96, covering Subscription-Based Information Technology Arrangements (SBITAs), was released by the Governmental Accounting Standards Board (GASB) in May 2020. It requires government entities to recognize a right-to-use subscription asset and corresponding subscription liability for such contracts with a specified term. To the extent relevant, the standards for SBITAs are based on the standards established in Statement No. 87, Leases, as amended.
As cloud-based data management, storage and computing have grown, more organizations are using subscription-based and time-bound IT contracts known as SBITAs, which have similar traits to traditional leases.
The GASB 96 effective date applies to fiscal years beginning after June 15, 2022, and all reporting years thereafter. The principle is applicable to every state and government entity that enters into an SBITA.
The changes should be applied retroactively by restating financial statements, if practicable, for all prior fiscal years presented. If restatement is not practicable, the cumulative effect, if any, should be reported as a restatement of beginning net position for the earliest fiscal year restated. Assets and liabilities should be recognized and measured using the facts and circumstances at the beginning of the fiscal year in which the standard is implemented.
Prior to GASB 96, there was no specific accounting guidance for SBITAs. GASB 96 provides guidance for the following areas:
A SBITA is defined as contract that conveys control of the right of use of IT software (belonging to SBITA vendors) for a term and consideration as specified in the contract.
The subscription term is the period during which the government has a non-cancellable right to use the underlying asset. The term also includes option to extend the contract (If it is reasonably certain that the option will be exercised) or option to terminate the contract (if it is reasonably certain that the option will not be exercised).
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 implicit rate (if the implicit rate is determinable) or the government’s incremental borrowing rate.. The government should amortize the discount on subscription liability (for example, interest expense) in subsequent financial reporting periods.
GASB provides an exception for short term SBITAs, which are 12 months or less, including any options to extend, regardless of their probability of being exercised. Subscription payments for short-term SBITAs would be recognized as outflows 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.
A governmental organization should disclose the following in notes to financial statements about its SBITAs:
Determine if the contract is within the scope of GASB 96 by answering these questions.
Does the contract meet the defnition of SBITA and need to be accounted under GASB 96?
(Note : If answer is Yes then the contract is within the scope of GASB 96 and meets the definition of SBITA )
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