A subscription liability is the obligation a government or nonprofit records on the statement of net position for the future payments it owes under a SBITA. It represents the discounted value of those payments, similar to how lease liabilities are reported under GASB 87.
The liability is recorded when the subscription term begins which is typically when the software is implemented and ready for use.
What's Included in a Subscription Liability?
When calculating the liability, organizations should include:
- Fixed payments stated in the contract
- Variable payments that are fixed in substance (e.g., predictable escalations)
- Termination penalties if early termination is reasonably certain
- Amounts probable of being paid under renewal or extension options, if the organization is reasonably certain to exercise them
Costs such as implementation services or optional features not considered reasonably certain are excluded from the liability.
How is the Subscription Liability Measured?
The liability is measured at the present value of future subscription payments over the non-cancellable portion of the term (plus any reasonably certain extensions).
Entities must use:
- The interest rate the SBITA implicitly charges, if known
- Or, more commonly, the organization’s incremental borrowing rate—the rate it would pay to borrow over a similar term
This discounting aligns the liability with the economic value of future payments.
Subscription Liability vs. Subscription Asset
Under GASB 96, SBITAs give rise to two separate entries:
- A subscription liability for the future payments
- A subscription asset representing the right to use the software over the subscription term
The asset is amortized over the useful life of the subscription, while the liability is reduced as payments are made, with interest expense recognized over time.
What's Important Here
A subscription liability under GASB 96 represents the present value of payments a government or nonprofit is obligated to make under a software subscription contract. It’s recognized at the start of the subscription term and must include all payments that are fixed or reasonably certain. Accurate calculation and disclosure of this liability are essential for compliance, transparency, and sound financial management.