Organizations subscribe to a number of software vendors.
As technology evolves and cloud-based software becomes the norm, licenses and agreements have increasingly become available online. With such agreements, organizations can enter subscription-based contracts that provide governments access to a vendors’ IT software over a specified period of time. These new types of licenses have created the need for governments to track and report their subscription-based IT arrangements (SBITAs). Essentially, SBITAs grant governments a license or title to the IT software and associated tangible capital assets.
The Governmental Accounting Standards Board released GASB 96 as a follow-up to GASB 87,
which provided guidance on how governmental bodies should account for leases. The objective of GASB 96 is to support the goal of accurate financial reporting by creating a uniform definition and treatment of SBITAs, leading to consistency and comparability across governmental bodies.
What makes a subscription a SBITA?
Not every IT subscription falls into the category of SBITA. Per GASB 96 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 (the underlying IT assets), as specified in the contract for a period of time in an exchange or exchange-like transaction. In this section, we will break down each of these parts.
The right to use
The first part of the above definition states “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 (the underlying IT assets)”. To determine whether a contract conveys control of the right to use the underlying IT assets, a government should assess whether or not it has both of the following:
- The right to obtain the present service capacity from use of the underlying IT assets as specified in the contract.
- The right to determine the nature and manner of use of the underlying IT assets in the contract
Alone or in combination with a tangible capital asset
Within this statement, it is important to evaluate if the contract has a tangible capital asset component. If a contract includes both a software component and a capital asset component, the cost of each will need to be evaluated. If the capital asset’s cost significantly exceeds the software’s cost, it would not qualify as a GASB 96 SBITA.
Controlled for a period of time in an exchange or exchange like transaction
To understand what “a period of time” means, refer to the calculation per the GASB 96 standard.
In Paragraph 9, the term is defined as the period during which a government has noncancellable right to use the underlying IT assets (referred to as the noncancellable period), plus the following periods, if applicable:
- Governments option to extend the SBITA (Reasonably certain to exercise)
- Governments option to terminate the SBITA (Reasonably certain not to exercise)
- Vendor’s option to extend the SBITA (Reasonably certain to exercise)
- Vendor’s option to terminate the SBITA (Reasonably certain not to exercise)
Example:
A City signs a SBITA-based contract with DebtBook. The agreement commences on February 15th, 2022. The initial term is 48 months, with two renewal options for 12 months each. The city is reasonably certain that it will exercise one renewal option.
To calculate the lease term, we will add the initial term of 48 months and one 12-month extension option. Although there were 2 12-month extension options, only of those was reasonably certain to be exercised. Making this term a total of 60 months.
Additionally, GASB 96 provides an exemption for short-term SBITAs. Per the standard, a short-term SBITA has a maximum possible term of 12 months or less, and any renewal or extension options are included, regardless of the probability of being exercised.
What’s important here?
Assessing each subscription's eligibility under GASB 96 is crucial. Establishing a systematic record of qualifying subscriptions and decision-making processes is essential. Preparing for GASB 96 compliance is a time-intensive endeavor, and governments should proactively evaluate its impact on their financial teams. The duration of preparation varies depending on the number of SBITAs and team size, often taking 12 weeks or longer for smaller teams.
Subscription management software, like DebtBook, caters to the specific needs of governments and public entities, alleviating the compliance burden and enhancing operational efficiency.
