- Preliminary project stage costs
- Initial implementation stage costs
- Operation and additional implementation stage costs
- Preliminary project stage
- Initial implementation stage
- Operation and additional implementation stage
GASB Statement No. 96, Subscription-Based Information Technology Arrangements (GASB 96), is effective for fiscal years beginning after June 15, 2022. The standard defines a subscription-based information technology arrangement (SBITA) for government entities. Further, it also explains how to account for SBITAs and what financial statement disclosures are required. This is especially significant considering no previous accounting guidance or disclosure requirements exist for SBITAs under GASB.
The standard outlines how to determine whether you have a SBITA, by defining it 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.” If a SBITA is identified, a subscription liability and a subscription asset are recognized on the statement of financial position at the commencement of the SBITA’s subscription term.
This article will walk through an example of a SBITA and how to account for the subscription liability and asset, including the proper treatment for cash outlays other than subscription payments.
We will use a hypothetical subscription to LeaseQuery to demonstrate the appropriate SBITA accounting for a governmental entity. In our example, the City of Springfield uses LeaseQuery to account for its lease portfolio. Springfield recognizes its contract with LeaseQuery as a SBITA due to the following facts:
- The agreement does not meet the definition of a lease under GASB 87 or scoping criteria for GASB Statement No. 94, Public-Private and Public-Public Partnerships and Availability Payment Arrangements.
- The agreement provides the City of Springfield the use and control of an instance of LeaseQuery’s software in an exchange-like transaction.
- The agreement has a defined, finite, non-cancelable subscription term of three years.
Below are additional details of the SBITA:
- Subscription Start Date: July 1, 2022
- Subscription End Date: June 30, 2025
- First Payment Date: July 1, 2022
- Payments: $5,000 annually, paid in advance (on July 1st)
- Discount Rate: 2%
In addition to the annual subscription payments of $5,000, Springfield also incurs additional costs during the following stages:
The City of Springfield hired an outside consultant to assist with the selection and evaluation of lease accounting software. They incurred fees of $1,000, paid to the consultant during the evaluation process.
During the initial implementation stage, the city needed to migrate data from their existing lease accounting system into LeaseQuery. The data migration cost the government $2,000 and was paid directly to LeaseQuery.
Subsequent to placing LeaseQuery in service, Springfield experienced operational challenges, which required additional support services and cost an additional $300. These services did not add to the functionality of LeaseQuery.
Let’s walk through these different costs to determine whether they are capitalized as part of the subscription asset, or expensed as incurred.
Activities in the preliminary project stage are generally associated with an entity’s decision to procure the technology provided by the SBITA. Per GASB 96, any cash outlays made by the government while in this stage are expensed in the period incurred.
Therefore, the $1,000 cost for the outside consultant will be expensed as incurred and not capitalized as part of the subscription asset.
During the initial implementation stage, the government may spend money implementing the software through system customizations, testing, data migration, installation, etc. GASB 96 allows for cash outlays during this stage to generally be capitalized as part of the subscription asset.
Therefore, the $2,000 of data migration costs will be capitalized as an addition to the subscription asset.
Governments may experience operational challenges throughout the subscription term which require technical support, maintenance, troubleshooting, or other assistance with the SBITA. Per GASB 96, cash outlays during the operation and additional implementation stage are expensed in the period incurred, unless the activity is related to increasing the efficiency of or adding to the functionality of the subscription asset in a way that didn’t exist before.
Because the additional support services did not add to the functionality or efficiency of the software, the $300 cost will be expensed as incurred and not capitalized as part of the subscription asset.
After walking through the additional costs to the City of Springfield (outside of the subscription fees) and determining what to include in the calculation of the subscription asset, let’s calculate the initial subscription liability.
The initial subscription liability is measured as the present value of the subscription payments expected to be made to the vendor during the subscription term.
By utilizing our present value calculator and populating the terms noted above:
- $5,000 annual subscription payments, paid in advance,
- 3 year (36 months) subscription term,
- 2% borrowing rate,
we calculate a present value of $14,708. This is the value of the initial subscription liability.
To calculate the initial subscription asset, take the subscription liability of $14,708 and add the capitalizable initial implementation costs for data migration of $2,000. Therefore, the starting subscription asset value is $16,708 ($14,708 + $2,000).
Below is the amortization schedule for both the subscription liability and subscription asset recognized for this SBITA:
The interest expense in each month is calculated by multiplying the outstanding liability balance at the end of the prior month by the 2% borrowing rate divided by 12 months. In a period when no payment is made, the government accrues interest expense in a separate liability account called “accrued interest liability” and does not increase the balance of the outstanding subscription liability. Any subscription payments that the government makes should be allocated first to the cumulative accrued interest liability balance and then to the outstanding subscription liability.
The opening subscription asset of $16,708 is amortized in a systematic and rational manner, in this case on a straight-line basis over the subscription term. To calculate the $464 monthly amortization of the subscription asset divide the gross subscription asset of $16,708 by the subscription term of 36 months ($16,708 / 36 = $464).
On the date of the last payment (July 1, 2024), the subscription liability is reduced to $0 because all payments have been made and the government has no further obligation to the vendor. The subscription asset, however, is amortized over the entire subscription period because the entity has the right to use the SBITA until the last day of the subscription term (June 30, 2025).
Based on the calculations and the amortization schedule above, the following are the journal entries for both the initial recognition of the subscription asset and liability and the subsequent recognition of payments and expense.
On July 1, 2022, the journal entry is made to record the subscription asset and liability:
Also in July, this entry is made to recognize the activity throughout the month:
The above entries can be netted for July reporting, resulting in the combined entry below:
In the next month, August 2022, the following entry is recorded, despite the government not making a cash payment:
In each of the subsequent months, a similar entry will be made to amortize the asset and liability throughout the subscription term. In addition, any costs not capitalized as part of the subscription asset, such as the consulting expenses and the additional support fees, are expensed in the period incurred.
This comprehensive example of GASB 96 demonstrates how to calculate the initial subscription liability and subscription asset and subsequently account for them over the subscription term. In addition, we provide a full amortization table and examples of related journal entries.
When an entity enters into a technology subscription agreement, it must account for the subscription payments along with any additional costs incurred in the preliminary project, initial implementation, or the operation and additional implementation stages of the project. This article also discusses how to distinguish the costs within each phase and designate them as eligible for capitalization vs. expense in the period incurred.