GASB STATEMENT NO. 96 SUBSCRIPTION-BASED INFORMATION TECHNOLOGY ARRANGEMENTS

WHAT IS GASB 96?

GASB Statement No. 96, issued by the Governmental Accounting Standards Board (GASB), provides guidance on the accounting and financial reporting for Subscription-Based Information Technology Arrangements (SBITAs) for government entities. The requirements of this Statement are effective for fiscal years beginning after June 15, 2022, and all reporting periods thereafter. The key points are as follows:

·         Definition: A SBITA is a contract that allows a government to use another party’s IT software, alone or in combination with tangible capital assets, for a period of time in an exchange transaction.

·         Right-to-Use Asset and Liability: Governments must recognize a right-to-use subscription asset (an intangible asset) and a corresponding subscription liability. The subscription liability should be recognized at the start of the subscription term, which is when the subscription asset is placed in service.

·         Measurement and Amortization: The subscription liability should be initially measured at the present value of subscription payments expected to be made over the subscription term. Future payments should be discounted using the interest rate charged by the vendor. Amortization of the discount on the subscription liability should be recognized as an outflow of resources in subsequent periods. On the other hand, the subscription asset should be initially measured as the total of the initial subscription liability amount, payments made to the vendor before the start of the subscription term, and certain capitalizable implementation costs. Amortization of the subscription asset should be recognized as an outflow of resources over the subscription term.

·         Disclosure: Governments are required to provide detailed note disclosures about their SBITAs. They must also provide a maturity analysis of the subscription liability, showing the future payments required under the SBITA.

GASB 96 IMPLEMENTATION CHALLENGES

Implementing GASB 96 presents several challenges for governments. Some of the key difficulties include identifying all SBITAs, determining the nature of the arrangement, capitalizing vs. expensing new costs, as well as meeting the disclosure requirements.

CHANGES IN THE SUBSCRIPTION ARRANGEMENT

If there is a change in the subscription arrangement, including a change in the term, estimated payments, or interest rate, the government entity should remeasure the subscription liability, adjust the financial statements accordingly, and ensure that the modifications and their financial impact are appropriately disclosed in the financial statement footnotes.

  EXAMPLE

Scenario

A city plans to implement a new license plate monitoring system, which includes sensors, cameras, and a cloud-based software platform.

SBITA Details

·         Contract Term: 5 years

·         Total Cost: $1,000,000

·         Annual Subscription Payment: $200,000

·         Interest Rate: 5%

Initial Recognition

At the commencement of the subscription term, the city recognizes the subscription asset and the subscription liability.

     Journal Entry:

·         Debit: Subscription Asset (Right-to-Use Asset) - $1,000,000

·         Credit: Subscription Liability - $1,000,000

Annual Subscription Payment

Each year, the city makes a subscription payment, reducing the subscription liability and recognizing interest expense.

     Journal Entry for Year 1:

·         Debit: Subscription Liability - $190,000

·         Debit: Interest Expense - $10,000

·         Credit: Cash - $200,000

Amortization of Subscription Asset

The subscription asset is amortized over the subscription term.

     Journal Entry:

·         Debit: Amortization Expense - $200,000

·         Credit: Accumulated Amortization - $200,000

Maturity Analysis

The city provides a maturity analysis of the subscription payments in the financial statement footnotes. This maturity analysis can be used by the city for budget planning, vendor negotiation, and long-term financial strategy.

HOW WILL THE CHANGES IN THIS STATEMENT IMPROVE FINANCIAL REPORTING?

GASB 96 provides governments with uniform guidance for accounting and financial reporting for SBITAs. This Statement will improve the relevance and reliability of financial statements by requiring governments to recognize subscription assets and liabilities and to disclose important information about their SBITAs. Overall, the changes in this Statement are designed to provide a more accurate view of a government’s financial position, which allows for better decision-making.  

If you need assistance preparing for your audit or need assistance with the implementation of this pronouncement, CFLG is here to help. Contact us at (305) 662-7272 or email us at info@cflgcpa.com