GASB 96 Definitions, Guidelines, and Best Practices

The SBITAs that qualify under GASB 96 must meet the following criteria:

1. Control of the Right to Use: The government (the lessee) must have control over the use of the underlying IT assets. This means the government has both:
    
   • The right to obtain the present service capacity from use of the underlying IT assets.
   • The right to determine the nature and manner of use of the underlying IT assets.
     
     
2. Contractual Agreement: The arrangement must be contractual, specifying the terms and conditions for the right to use the underlying IT assets.
3. Exchange or Exchange-Like Transaction: There must be an exchange or exchange-like transaction, where each party receives and gives up essentially equal values.
4. Specified Period: The arrangement must cover a specified period of time, which could be a fixed term or renewable terms, depending on the contract.
5. Not a Perpetual Agreement: The arrangement should not be a contract that provides perpetual access and use of the underlying IT asset. Usually these agreements contain a one-time payment or purchase.

Qualifying SBITAs

• Subscriptions to cloud-based software services
• Licenses for enterprise resource planning (ERP) systems that are hosted and managed by the vendor
• Contracts for access to online databases or digital libraries

Non-Qualifying SBITAs

• Outright purchases for perpetual use of software or IT equipment
• Maintenance contracts for IT systems owned by the government (don’t impact access/use)
• Contracts that do not convey control over the use of IT assets
• Contracts that include use of both software and hardware assets, where the hardware represents a significant portion of the cost
• Contracts that include a mutual termination clause or are considered year-to-year/cancellable

What is an Example of a SBITA?

1. Cloud-Based Software Subscriptions: Subscriptions to cloud-based software applications, where the government pays a monthly or annual fee to access and use the software.
2. IT Service Contracts: Contracts for managed IT services where the government subscribes to a package of IT support and services over a specified period.
3. Software-as-a-Service (SaaS): Arrangements where the government subscribes to use a SaaS product, gaining access to the software hosted by the provider.
4. Platform as a Service (PaaS): A cloud computing model where a third-party provider delivers hardware and software tools to users over the internet. 
5. Infrastructure as a Service (IaaS): A cloud computing model that provides on-demand access to computing resources such as servers, storage, networking, and virtualization.

GASB 96 applies to financial reports from:

• Local government (counties, municipalities, school districts)
• Higher education (public colleges and universities)
• Public hospitals and healthcare providers

GASB 96 became effective for reporting periods beginning after June 15, 2022, meaning entities with a June 30th fiscal year-end were the first to implement for their fiscal year 2023.

GASB 96 mandates that governments must disclose detailed information about their SBITAs, excluding short-term SBITAs. This includes:

• The value of the subscription asset
• Accumulated amortization of the asset
• Any additional payments not part of the subscription liability calculation
• Principal and interest obligations related to the subscription liability
• Other crucial details to provide a clear understanding of the SBITAs

These disclosures aim to enhance transparency and provide a comprehensive view of a government's IT subscription commitments.

What is the GASB 96 Short-Term Exception?

The GASB 96 rule includes a short-term exception that allows certain SBITAs to be excluded from the full recognition and measurement requirements set forth by the standard. Here are the details of the short-term exception:

Definition of Short-Term SBITAs

A short-term SBITA is defined as a subscription-based information technology arrangement that:

1. Has a maximum possible term of 12 months or less, including any options to extend, regardless of their likelihood of being exercised.
2. Does not include a purchase option that the government is reasonably certain to exercise.

Accounting Treatment for Short-Term SBITAs

For SBITAs that qualify as short-term, the GASB 96 standard allows a simplified accounting treatment. Governments are not required to recognize a subscription liability and a corresponding intangible right-to-use asset. Instead, they can account for short-term SBITAs in the following manner:

1. Expense Recognition: Payments made under short-term SBITAs should be recognized as an expense over the subscription term, in the period in which they are incurred.
2. Disclosure: Governments should provide relevant disclosures about short-term SBITAs, such as a description of the arrangement and the amount of expense recognized during the period.

Every organization uses some sort of IT subscription service (e.g., ERP System, Office 365, Zoom, DocuSign). These subscription payments are usually expensed, often providing minimal visibility into the organization’s obligations or liabilities. GASB 96 helps to increase transparency in the accounting and disclosure for these contracts.

GASB 96 was developed to address and enhance the accounting and financial reporting standards for SBITAs within governmental entities. The Governmental Accounting Standards Board aims to increase the quality, reliability, and transparency of financial information reported by these entities. GASB 96 provides a structured approach to recognizing and measuring SBITAs, ensuring a more accurate reflection of an organization’s financial obligations and resource utilizations.

Under the standard, SBITAs are treated in a manner similar to leases, recognizing subscription liabilities and corresponding intangible right-to-use subscription assets. This consistent approach supports uniformity in financial reporting, contributing to greater clarity and comparability. Additionally, GASB 96:

Promotes uniformity across governmental financial statements.

By adopting a single model for recognizing and reporting SBITAs, GASB 96 standardizes how these transactions are treated across different governmental entities. This includes the recognition of subscription liabilities and right-to-use subscription assets, which enhances the comparability and consistency of financial statements.

Enhances the informational value of financial statements for users.

GASB 96 mandates detailed note disclosures regarding the terms, magnitude, and purposes of SBITAs. These disclosures provide stakeholders with critical insights into the nature and impact of these arrangements, aiding in informed decision-making.

Simplifies accounting for SBITAs and improves transparency.

The standard categorizes SBITAs into a clear framework, distinguishing between short-term arrangements and those with significant commitments. This simplification, combined with comprehensive disclosure requirements, greatly enhances the relevance and decision-usefulness of financial reports. GASB 96 aligns with GASB’s overarching goal of improving financial transparency and accountability in government entities.

Project costs are cash outlays for activities associated with selecting, implementing, and maintaining SBITAs. These costs are additional to subscription payments.

The intangible asset value of SBITAs equals the present value of lifetime subscription payments plus capitalized project costs. While determining the lifetime value of subscription payments is straightforward as it is outlined in the contract with your SBITA vendor, identifying capitalizable project costs is more complex.

To properly identify and capitalize project costs, you need to understand two main components:

1. Stages in a project's life cycle
2. The accounting treatment of costs in each stage

Project Stages

The activities associated with a SBITA should be grouped into three stages:

1. Preliminary Stage
2. Initial Implementation Stage
3. Operational and Additional Implementation Stage

Preliminary Stage Costs

Cash outlays in the preliminary stage of a project include all activities that ultimately lead to the final selection of the technology and SBITA vendor. During this stage, an organization may incur costs related to evaluating various vendors and technologies, defining system requirements, and selecting a vendor.

Once a vendor is selected, the project moves into the initial implementation stage.

Initial Implementation Stage Costs

Cash outlays in the initial implementation stage of a project include all ancillary charges necessary to place the subscription asset into service. During this stage, an organization may incur design, configuration, coding, testing, and installation-related costs, either by internal IT teams or external advisors/consultants assisting with the software implementation. Initial implementation activities may also include data migration from an old system to the new one.

The commencement of the subscription term occurs at the completion of the initial implementation stage. At this time, your organization has obtained control of the right to use the underlying IT assets, and the subscription asset is in service.

The project then moves into the operational and additional implementation stage.

Operational and Additional Implementation Stage Costs

Cash outlays in the operational and additional implementation stage relate to the maintenance of the system and other activities necessary for an organization's ongoing operations related to the SBITA. During this stage, an organization may incur costs related to system updates and ongoing support.

Treatment of Costs Incurred in Each Stage of a Project

Once you have identified the costs associated with each project stage, the next step is to accurately account for these costs. This involves determining which costs can be capitalized and which should be expensed, ensuring compliance with GASB 96 guidelines.

By thoroughly understanding and categorizing the stages and associated costs of a SBITA project, organizations can effectively manage their financial reporting and ensure the accurate valuation of their intangible assets.

To learn more about accounting for GASB 96 subscription project costs, read “Project Costs: What They are & How They’re Relevant to GASB 96.” 

GASB 96 introduces new guidance specifically for SBITAs, which is distinct from prior standards that did not explicitly address these types of agreements. This statement represents a pivotal change in how organizations account for and disclose their IT subscription arrangements.

This standard marks a departure from the previous lack of specific guidance on SBITAs, aligning more closely with modern practices that recognize the importance of transparency in subscription-based services.

What are the Differences Between GASB 87 and GASB 96?

GASB 87 and GASB 96 are both standards issued by the Governmental Accounting Standards Board. 

GASB 87 focuses on lease agreements, requiring governments to recognize lease assets and liabilities on the balance sheet for contracts that convey control of the right to use non-financial assets. 

GASB 96 addresses SBITAs, which are contracts for the right to use IT software or services, also requiring recognition of right-to-use assets and subscription liabilities. 

Read “What is the Difference Between GASB 87 & 96” to learn more.

What are the Differences Between GASB and FASB?

The Governmental Accounting Standards Board and the Financial Accounting Standards Board (FASB) are two distinct organizations responsible for establishing accounting standards, but they serve different types of entities. 

GASB sets accounting and financial reporting standards for U.S. state and local governments, ensuring transparency and accountability in the public sector. Its standards are tailored to the unique aspects of governmental operations and funding. 

FASB develops accounting standards for private sector entities, including businesses and nonprofit organizations, focusing on providing relevant and reliable financial information to investors, creditors, and other users.

What are the Differences Between GASB 96 and GASB 51?

GASB 96 focuses on SBITAs for state and local governments. It mandates recognizing a subscription asset and liability on the balance sheet, along with detailed disclosures about amortization, additional payments, and principal and interest obligations.

GASB 51 addresses a broader range of intangible assets, including patents and copyrights. It provides guidance on recognizing, measuring, and disclosing these assets, emphasizing amortization over their useful lives.

While both standards aim to enhance transparency in financial reporting, GASB 96 targets IT subscriptions specifically, whereas GASB 51 covers various intangible assets with a broader scope. Each standard tailors its requirements to meet the distinct needs of governmental financial reporting.

DebtBook delivers a complete, straightforward solution to address all aspects of ongoing GASB 96 compliance:

• Upfront SBITA Organization & Data Extraction: Our team can help organize and extract data from all of your contracts and have you verify the information, or we can guide you through the process to enter the information in the application.

• Reporting Exports: DebtBook generates all schedules, audit notes, and journal entries necessary to comply with GASB 96. Share with your team and external auditor(s) for use and verification.

• Ongoing Compliance: With 24/7 accessibility and more efficient collaboration across departments, you can ensure all future contracts and amendments are accounted for and uploaded in a timely, stress-free manner.

Schedule a demo today to see how DebtBook enables easy and confident compliance with GASB 96.