July 9, 2020
GASB Issues New Accounting Pronouncement on the Treatment of Subscription IT Services
As cloud-based computing and other subscription services have become increasingly common among state and local governments, the Governmental Accounting Standards Board (GASB) issued Statement No. 96, Subscription-Based Information Technology Arrangements (SBITAs). The accounting treatment described in the guidance is based on standards established in Statement No. 87, Leases, including establishing an intangible right-of-use asset and corresponding subscription liability.
GASB defines an SBITA as “a contract that gives an entity the right to use a vendor’s information technology software, alone or in combination with tangible capital assets, as specified in the contract for a period of time in an exchange or exchange-like transaction.” This definition differentiates SBITAs from software that is internally developed or purchased through a perpetual licensing agreement, which is addressed in other GASB guidance.
The subscription liability should be recorded when SBITAs are considered long-term (greater than 12 months). The liability is initially measured at the present value of the payments expected to be made over the term of the subscription, using the discount rate implicit in the lease. If not readily determinable, the government’s incremental borrowing rate should be used. The corresponding subscription asset is initially measured as the sum of:
- the initial subscription liability amount;
- payments made to the vendor before the subscription term begins; and
- capitalizable implementation costs, less certain incentives received before the subscription term begins.
The SBITA liability should be remeasured if two or more of the following changes occur:
- change in the subscription terms;
- change in the estimated payment amount included in the liability;
- change in interest rate; and
- changes in variable payments.
The right-of-use asset and the discount applied to the subscription liability are amortized over the subscription term, resulting in an outflow of resources.
If an SBITA has more than one module and the modules are implemented at different times, the subscription asset is placed into service when initial implementation is completed for the first independently functional module or for the first set of interdependent modules, regardless of whether all remaining modules have been completely implemented.
The accounting for SBITA costs other than subscription payments depends on the stage under which the cost is incurred:
- Preliminary Project Stage – Includes costs related to determining technology needs, evaluating alternatives, and vendor selection. These costs should be expensed as incurred.
- Initial Implementation Stage – Includes costs necessary to place the subscription asset into service. These costs are capitalized and included in the initial measurement of the subscription asset.
- Operation and Additional Implementation Stage – Includes maintenance costs and other outlays associated with ongoing operations. These costs are expensed as incurred unless they meet specific capitalization criteria.
The nature of the activity should be the determining factor in classifying costs among the three stages. However, all training costs are expensed as incurred.
The subscription term is defined as “the period during which a government has a noncancellable right to use the underlying IT assets.” This includes periods covered by an option to extend (if it is reasonably certain that the option will be exercised) or to terminate (if it is reasonably certain that either party will not exercise that option). The standard distinguishes short-term SBITAs as those with a maximum possible duration of twelve months including all options to extend, regardless of the probability of exercise. Subscription payments under short-term SBITAs should be expensed.
When an SBITA contract contains multiple components for which a standalone price can be reasonably estimated, the contract price should be allocated across the agreement’s discrete elements. Each component should be accounted for separately, including separate SBITAs and nonsubscription elements.
The standard provides additional disclosure requirements related to other-than-short-term SBITAs, including the amount of the subscription asset, accumulated amortization, other payments not included in the measurement of a subscription liability, principal and interest requirements for the subscription liability, and other essential information.
Statement No. 96 is effective for fiscal years beginning after June 15, 2022. Early application is encouraged.
If you have any questions about this, contact the Johnson Lambert team.