The Governmental Accounting Standards Board’s (GASB) new rule for recording and capitalizing specific software subscriptions—GASB 96 Subscription-based Information Technology Arrangements (SBITA)—establishes terminology and accounting treatment for Tribal Nations, tribal entities, and other government bodies to use when reporting financial transactions for software contracts.
What is GASB 96?
GASB defines a SBITA as “a contract that conveys control of the right to use another party’s (a SBITA vendor’s) information technology (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.”
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Implementation Dates
GASB 96 has an effective adoption date of July 1, 2022. All financial statements dated June 30, 2023, and forward need to follow the new regulation. Contracts that existed at the adoption date and remain in force would use the facts and circumstances on July 1, 2022, to record the initial transaction. Those entered into after that date will use the commencement date of the subscription term.
What software contracts would qualify as SBITAs?
Examples of software contracts that may meet the SBITA definition are cloud-based accounting and other software, remote data storage, enterprise use software, and cybersecurity software. Those that would likely qualify as SBITAs under GASB 96 are:
- Cloud-based accounting software like QuickBooks Online or Sage Intacct that is licensed on a subscription basis.
- Microsoft Office 365 or G Suite subscriptions that provide hosted office productivity software.
- Cybersecurity software like antivirus, firewalls, or endpoint protection that is provided as a cloud service subscription.
- Cloud storage services like Dropbox, Box, or Google Drive for hosted document storage and collaboration.
- CRM software like Salesforce that is licensed on a monthly or annual subscription basis.
- Online payroll processing and HR software like Paycom, Paylocity, or BambooHR that is subscription-based.
- ERP or other back-office software like NetSuite, Workday, or Oracle that is delivered as a cloud service.
- Any other hosted or cloud-based software that provides the government entity with the right to use the software for a specified term in an exchange transaction.
Parallels with GASB 87
Much of the guidance within GASB 96 is in lockstep with the lease accounting standard—GASB 87. This helps promote continuity while also easing the understanding and adoption of the new software subscription standard.
Experience and lessons learned from implementing the 2022 Lease Accounting Standard are a tremendous help in understanding the new GASB 96 requirement and how to inventory and analyze contracts to determine whether each is considered a SBITA or not. Rather than leasing another entity’s asset—such as a building or land—the contracts provide the right to use another party’s IT software.
Similar to the situation before the lease accounting standard was published, software subscriptions were all directly expensed rather than recorded as assets that the entity owned. Subscriptions that meet the SBITA criteria should now be recorded as right-to-use intangible assets with an associated SBITA liability.
GASB 96: Scope considerations & exclusions
Evaluating software subscription contracts to determine whether they fall under the purview of GASB 96 means understanding each element of the contract and what components are included in the contract before determining if capitalizing the contract cost is appropriate.
Term Length and Termination
The duration of software subscription contracts and how and when they can be terminated are intertwining elements that alter which accounting treatment is used.
With a SBITA, the term is the period in which the Tribe has a noncancellable right to use the underlying IT asset. Many scenarios can complicate what appears to be a simple situation.
- Short-term contracts – When the contract duration is 12 months or less, no asset or liability is recorded. This is true whether the contract is noncancellable or may be cancelled by either party.
- A one-year contract that a Tribe can extend or cancel – Regardless of the probability of whether the extension is exercised, a contract that meets the other criteria is a SBITA.
- Perpetual agreement – Although rare, a perpetual software agreement is effectively purchasing the right-to-use the software indefinitely, making it an intangible asset of the Tribe.
- Cancel with convenience clause – If either party may cancel the agreement at any time or with notice, the contract is not considered a SBITA.
Exclusions
In addition to the situations noted above, the following would not be considered SBITA or require capitalizing the agreement under GASB 96.
- Service-only agreements
- Interagency software agreements
- Contracts that qualify as a lease under GASB 87 that have an insignificant software portion
- Software subscription contracts that result in variable payments based on performance, usage, or other metrics
Valuation & Transaction Recording
After identifying software subscription contracts that qualify as SBITAs, each contract needs to be converted to present value using an acceptable valuation method.
Once each contract is valued, the cost may need to be allocated to various components of the contract or be allocated among different locations or departments that utilize the software. All of this would be done before each result would then be allocated over the term of each contract.
After the initial recording of the right-of-use asset and its liability, payments will be booked to reduce the value of the asset. Be certain to include explanatory footnotes for your SBITA activity and balances.
Documentation
In addition to financial statement documentation, write and update your policy and procedures manual to include descriptions of your software contract evaluation process. Include the present value method used and its source, and detailed guidance for readers so that subsequent users and auditors will understand the judgements and thresholds used.
Listen to our follow-up podcast on this topic, Implementing GASB 96: Q&A
Implementing GASB 96
Expect GASB 96 implementation to be a multi-step process that occurs over several weeks or months. Involve finance and IT team members throughout the process as well as legal specialists, departmental leaders, and vendors when appropriate.
Establish a project plan, set dates and dependencies, and identify the individuals who need to be available at each stage of the GASB 96 implementation. When time is at a premium, ensure you have the buy-in from Tribal Leaders to make the implementation a priority to encourage everyone to be the same page.
Concerned about properly implementing GASB 96? Look to REDW for support.
The audit and assurance experts in REDW’s National Tribal Practice can assist with evaluating your organization’s readiness for GASB 96 and developing an implementation strategy tailored to your needs.
