The Governmental Accounting Standards Board (GASB) issued on June 25, 2020, Statement No. 96, “Subscription-Based Information Technology Arrangements (SBITA).” On June 15, 2022, the guidance became effective which means current accounting has to be in line with GASB 96. This is right on the heels of GASB 87, so there will be some familiar ground here. GASB 96 applies to all public sector entities that follow Generally Accepted Accounting Principles (GAAP) in filing their annual financial statements which, of course, includes school districts. Because everyone now uses IT software such as Office 365, Adobe, and Zoom, the impact of GASB 96 is great.
What and When:
A SBITA is a contract that conveys control of the right to use IT software alone or in combination with tangible underlying IT assets for a period of time in an exchange or exchange-like transaction. A SBITA encompasses a wide variety of products and services that can largely be categorized into three broad types:
- Software as a Service (SaaS) – a software license that allows the user to access an application over the internet instead of downloading software or maintaining hardware to run the application.
- Platform as a Service (PaaS) – allows a customer to use a SBITA vendor’s tools or coding language (software) to create applications that will run on the SBITA vendor’s cloud infrastructure.
- Infrastructure as a Service (IaaS) – allows a customer to remotely access the SBITA vendor’s network, server, and other fundamental computing tools to process, store, and operate the customer’s data.
GASB 96 provides guidance and addresses how the costs and investments for subscription-based information technology arrangements (SBITAs) are accounted for and disclosed by governmental entities. These changes are effective for fiscal years beginning after June 15, 2022. As more entities like public schools are using cloud-hosted software, GASB 96 will require schools to recognize a subscription liability for the amount owed on these contracts offset by a capitalized asset, and to recognize a liability and an intangible asset related to subscription-based IT arrangements. The liability should be recognized when the subscription is entered into, and the intangible asset should be recognized when the entity obtains control of the right to use the IT arrangements.
The liability recognized should be measured at fair value and should be amortized over the subscription period. The amortization expense should be recognized as an outflow of resources. The intangible assets recognized should be measured at cost or fair value, whichever is more readily determinable. The asset should be amortized over the period of expected benefit.
Why:
Prior to GASB 96, there was no specific guidance available for government entities for the accounting and financial reporting of subscription-based IT arrangements. As a result, there were varied accounting treatments being used for these arrangements. It resulted in inconsistencies in financial reporting and made it harder for the reader to better understand the entity’s net position as the assets were previously not recognized or recognized incorrectly. This resulted in understated assets and overstatement of expenses. GASB 96 is intended to make the financial reporting more accurate as it requires organizations to track their obligations and resources related to IT subscriptions.
How:
There are, of course, some challenges that governmental organizations will face. First, the organization has to determine what is considered IT software as this is not clearly defined. Second, the organization has to get its arms around all the software that is being used and to determine if it qualifies under GASB 96. Schools most likely will need to create a team of staff from the IT and purchasing departments to obtain the inventory and usage statistics, and then examine the contract terms that are in place. Some questions to consider are:
- Does SBITA create a subscription liability?
- Do you have a fixed or fixed-in substance payment that is not dependent on future performance or usage?
- Is the subscription based on the number of users?
- What is the subscription term? One year? Auto renewal?
- Do you know what you will pay in the future?
- Do you have a termination option?
- Is the subscription cost material? The current threshold is set at $50,000 Annual Exchange of Values (AEV) and the AEV represents the dollar value anticipated to be exchanged between NYS and SBITA vendor during a 12-month period.
The NYS OSC has posted an “Agency Guide to GASB Statement 96, Subscription-Based Information Technology Arrangements” on their website which includes definitions and implementation stages. There are some exceptions where GASB 96 does not apply such as short-term SBITA’s.
For more information and helpful resources, click here to refer to the OSC’s GASB web page.
Shari Diamond, CIA
Partner
Shari has been with Cerini & Associates, LLP since 2008 where she works primarily with the firm’s school district clients providing internal audit and claims audit services. She has over twenty years’ experience performing internal audits, risk assessments, and compliance reviews, as well as recommending processes to strengthen the internal controls environment while increasing efficiencies. Her prior experience at PWC and Northrop Grumman included performing Information Technology audits.