Subscription Supposition: A Look at Practical SBITA Examples.

• Author: Levine, Michele Mark
• Position: ACCOUNTING - Subscription-based information technology arrangement

The authoritative accounting guidance in Governmental Accounting Standards Board [GASB] Statement No. 96, Subscription-Based Information Technology Arrangements [GASB 96], is effective for fiscal years beginning after June 15, 2022, and all reporting periods thereafter. This implementation is challenging governments in many of the same ways we were challenged by GASB Statement No. 87, Leases [GASB 87], (1) and in some different ways as well. Like leases, subscription-based information technology arrangements [SBITAs] are often not centrally managed, so just gathering information about contractual arrangements that might be--or contain--SBITAs from multiple departments can be a time consuming first step. Like for leases, the information necessary to properly classify contracts as being SBITAs or containing SBITA components, to determine the subscription term, and to recognize and measure subscription liabilities and assets, may require legal expertise for interpretation. But for SBITAs, there is arguably more complexity to measurement of subscription assets than there is for lease assets, as certain development costs are included. The good news is that GASB has already issued a substantial amount of implementation guidance for lessees, much of which canbe applied by analogy to governments in SBITAs, and that identifying the additional capitalizable costs has considerable precedent in preexisting generally accepted accounting principles [GAAP] applicable to internally generated computer software, so it will be familiar to some. (2)

GFOA has prepared two examples of SBITAs [available online atgfoa.org/ gasb-resource-center], each based on a different subscription model. In each case, incurred costs are identified and categorized in accordance with the three stages of development and the capital-eligibility rules identified in GASB 96. The calculations used to measure the subscription liabilities and subscription assets are shown, along with their amortization schedules. Finally, journal entries for each event are provided, linked back to the calculations from which the amounts are derived. Entries for the SBITAs are illustrated both [1] on the current financial resources measurement focus and the modified accrual basis of accounting used for governmental funds and [2] on the economic resources measurement focus and accrual basis of accounting used for all other reporting. The entries to convert between the two are also shown. While this article will point out some key aspects of these examples, their full benefit can only be derived by reading the complete assumptions and reviewing the workbook, which links amounts from assumptions [right arrow] categorizations [right arrow] summarizations [right arrow] liability and asset measurements and amortization schedules [right arrow] journal entries. This article cannot cover or describe all the important details. (3) Before delving further into the examples, though, let's do a quick review of the basics of accounting for SBITAs.

Highlights of GASB 96 and similarities to GASB 87

GASB 96 defines a SBITA as "a contract that conveys control of the right to use another party's [a SBITA vendor's] IT software, alone or in combination with tangible capital assets [the underlying IT assets], as specified in the contract for a period of time in an exchange or exchange-like transaction." (4) The only difference between this definition and the definition of a lease is the phrase "IT software, alone or in combination with tangible capital assets [the underlying IT assets]" in place of "nonfinancial assets" in the lease definition. This reflects the broad similarity in the accounting and financial reporting by governmental lessees and governments in SBITAs. The apparent overlap of the definitions [IT assets are nonfinancial assets] is resolved by the statement in GASB 96 that it does not apply to arrangements "in which the software component is insignificant when compared to the cost of the underlying tangible capital assets." (5)

A subscription term is determined in essentially the same manner as a lease term, and it begins as soon as the first independently functional module is--or the first set of interdependent modules are--placed into service. (6) That is the point at which the subscription liability and the subscription asset [which are discussed further below] are first recognized, and amortization of the asset begins. It is also the point after which payments to the SBITA vendor for the right to use the underlying IT assets should be treated as subscription payments. Any payments made to the vendor for that purpose at or before the SBITA inception date are prepayments. In many cases, the subscription term will begin after the term of the contract that contains the SBITA began, as it is quite common for license payments to be required before any configuration--let alone usage--can begin. While there is a parallel requirement that a lease term and lease payments not begin until the lessee has access to the underlying capital asset, (7) this has nonetheless caused some confusion for many governments implementing GASB 96.

The present value [PV] of future...