Initial Recognition Journal Entries
When the subscription term begins (i.e., the software is implemented and ready for use), the organization must recognize both a subscription asset and a subscription liability.
At commencement of the subscription term:
- Debit: Subscription Asset (total present value of expected payments)
- Credit: Subscription Liability (same amount)
You may also need to reclassify any implementation costs (if capitalizable) to the subscription asset at this point.
Amortization of the Subscription Asset
Over the subscription term, the asset must be amortized on a straight-line basis (unless another method is more appropriate).
Each period:
- Debit: Amortization Expense
- Credit: Accumulated Amortization – Subscription Asset
This reduces the value of the subscription asset over time, reflecting usage of the software.
Interest on the Subscription Liability
The subscription liability is reduced as payments are made, but interest must also be recognized based on the discount rate used to calculate the present value.
Each period:
- Debit: Interest Expense
- Credit: Subscription Liability
This reflects the cost of financing the software over the life of the agreement.
Payment of Subscription Fees
When subscription payments are made (based on the contract’s schedule), record the reduction of the liability.
Each payment:
- Debit: Subscription Liability
- Credit: Cash
This entry reduces the liability as payments are fulfilled.
Example Journal Entry Sequence
Assume a three-year SBITA with $120,000 in fixed payments and a present value of $110,000. The organization uses an annual discount rate and straight-line amortization.
At commencement:
- Debit: Subscription Asset $110,000
- Credit: Subscription Liability $110,000
Each year:
- Debit: Amortization Expense $36,667
- Credit: Accumulated Amortization – Subscription Asset $36,667
- Debit: Interest Expense (based on amortization schedule)
- Credit: Subscription Liability
- Debit: Subscription Liability (portion due)
- Credit: Cash
What's Important Here
SBITAs must be recorded with specific journal entries under GASB 96, starting with the initial recognition of the subscription asset and liability. Throughout the subscription term, organizations must record amortization of the asset, interest on the liability, and payments as they occur. Consistent and accurate journal entries help maintain compliance, support audits, and give a clear picture of software-related financial activity.
