To account for a SBITA under GASB 96, organizations must recognize two key elements on the balance sheet at the beginning of the subscription term: a subscription asset and a subscription liability.
The subscription liability is initially measured as the present value of future subscription payments expected to be made during the noncancelable portion of the agreement (plus any reasonably certain renewal periods). The discount rate used is generally the entity’s incremental borrowing rate.
The subscription asset is based on the initial subscription liability, plus certain upfront costs like implementation fees or payments made before the subscription term begins. This asset is then amortized over the subscription term. Throughout the term, the organization will reduce the liability as payments are made and recognize interest expense on the liability, as well as amortization expense on the subscription asset.
GASB 96 only applies to arrangements where the organization controls the right to use the software and where the term is noncancelable or includes reasonably certain renewal periods.
What's Important Here?
Accounting for a SBITA under GASB 96 involves recognizing a subscription liability and a subscription asset at the start of the subscription term. The liability reflects the present value of expected payments, while the asset includes that amount plus certain upfront costs.
Over time, the liability is reduced as payments are made, and both interest and amortization expenses are recorded.
Accurately identifying the subscription term, based on the noncancelable period and any likely renewal options, is essential to properly accounting for the arrangement. This approach brings SBITAs in line with the lease-style model introduced in GASB 87, improving transparency and consistency in financial reporting.
