GASB 96 SBITA Accounting: Subscription-Based IT Arrangements for Governments

GASB 96: Subscription-Based Information Technology Arrangements

GASB Statement No. 96 established accounting and financial reporting guidance for subscription-based information technology arrangements (SBITAs) for state and local governments, effective for fiscal years beginning after June 15, 2022. SBITAs are essentially cloud computing contracts -- agreements that convey control of the right to use another party's IT software for a period of time. The standard was modeled after GASB 87 and uses a similar framework, making it a natural extension of lease accounting concepts on the CPA FAR exam.

What Qualifies as a SBITA?

A SBITA is a contract that conveys control of the right to use another party's IT 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. Key characteristics include: the government customer does not own the software, the software is hosted by the vendor or a third party, and the government accesses the software remotely over the internet or a dedicated connection.

The standard excludes contracts that solely provide IT support services without conveying access to software, perpetual software licenses (which are covered by existing capital asset guidance), and short-term SBITAs with a maximum possible term of 12 months or less, including any options to extend.

SBITA Term Determination

The SBITA term includes the noncancelable period plus any periods covered by the government's option to extend if reasonably certain to be exercised, plus any periods covered by the vendor's option to extend if reasonably certain to be exercised, plus any periods covered by either party's option to terminate if reasonably certain not to be exercised. Options to extend are assessed using the same factors as GASB 87: the presence of a significant economic incentive to extend, historical practice, and the nature and cost of any termination penalties.

Government Customer (User) Accounting

Initial Recognition

At the commencement of the SBITA term, the government customer recognizes a subscription liability and an intangible right-to-use subscription asset. The structure mirrors GASB 87 lessee accounting.

Subscription Liability

The subscription liability is measured at the present value of subscription payments expected to be made during the SBITA term. Payments include fixed payments, variable payments based on an index or rate, fixed in-substance payments, payments for termination penalties if reasonably certain to terminate early, and purchase option prices if reasonably certain to exercise. The discount rate should be the rate implicit in the SBITA if readily determinable; otherwise, the government's estimated incremental borrowing rate.

Right-to-Use Subscription Asset

The subscription asset is initially measured at the amount of the subscription liability, plus payments made to the vendor at or before commencement, minus any incentives received at or before commencement, plus capitalizable implementation costs. Implementation costs are categorized into three stages:

1. Preliminary project stage: Costs incurred during this stage (conceptual formulation, evaluation of alternatives) are expensed as incurred.
2. Initial implementation stage: Costs such as software configuration, customization, testing, and data migration that are directly associated with the design and implementation of the SBITA are capitalized as part of the subscription asset.
3. Operation and additional implementation stage: Costs incurred after the SBITA is placed in service (training, maintenance) are generally expensed as incurred. However, additional implementation costs that provide additional functionality may be capitalized.

Subsequent Measurement

The subscription liability is reduced by principal payments and increased by interest accrued using the effective interest method. The subscription asset is amortized on a straight-line basis over the shorter of the SBITA term or the useful life of the underlying software. Amortization and interest are reported separately.

Vendor Accounting

GASB 96 does not provide specific guidance for vendors (the IT software providers). However, if a government is the vendor, it would apply the general revenue recognition principles of GASB for the subscription revenue and continue to report the software as a capital asset on its books.

Comparison to GASB 87

• Both use a single-model, right-of-use approach with a liability and an intangible asset.
• GASB 96 adds implementation cost capitalization, which has no direct parallel in GASB 87.
• GASB 96 does not include detailed lessor (vendor) guidance, whereas GASB 87 includes comprehensive lessor accounting.
• Both use the same discount rate hierarchy and short-term exception.

Exam Preparation Tips

• Understand the three stages of implementation costs and which costs are capitalized vs. expensed.
• Know the initial measurement of both the subscription liability and the subscription asset, including all adjustments.
• Practice computing amortization schedules and recognize that the framework is nearly identical to GASB 87 lessee accounting.
• Remember the short-term SBITA exception and how the maximum possible term is assessed.
• Be ready to compare GASB 96 SBITAs with GASB 87 leases, as the exam may test both in a single simulation.