GASB 96

GASB 96 establishes accounting and financial reporting requirements for subscription-based information technology arrangements (SBITAs), shaping how governmental entities recognize and manage these agreements. With the increasing reliance on IT systems and software, organizations must assess the financial implications of these arrangements, including subscription liabilities, amortization of the subscription asset, and related disclosures. The standard influences financial statements by addressing key elements such as the commencement of the subscription term, interest expense, and variable payments, ensuring a structured approach to reporting periods and financial outflows.

What is GASB 96?

GASB 96, issued by the Governmental Accounting Standards Board (GASB) in May 2020, establishes accounting and financial reporting requirements for subscription-based information technology arrangements (SBITAs). Under this standard, governmental entities must recognize a right-to-use subscription asset and a corresponding subscription liability when entering into a SBITA contract. The guidance ensures that subscription-based IT arrangements, including IT software and systems, are properly measured and disclosed within financial statements, aligning with other long-term financial commitments such as leases under GASB 87.

The standard applies to noncancellable rights associated with SBITAs and requires entities to determine the present value of future subscription payments using an appropriate discount rate, such as the incremental borrowing rate. Factors such as the useful life of the underlying IT assets, implementation costs, and variable payments must be considered when accounting for these arrangements. Additionally, GASB 96 distinguishes short-term SBITAs from those requiring long-term recognition and outlines how subscription assets should be amortized over the period of time they provide economic benefit.

Why is GASB 96 Important?

GASB 96 provides a standardized approach for accounting and financial reporting of subscription-based information technology arrangements (SBITAs), ensuring transparency and consistency in governmental financial statements. By requiring entities to recognize a subscription asset and subscription liability, the standard improves visibility into long-term financial commitments associated with IT software and systems. This allows stakeholders to better assess the fiscal impact of these arrangements, particularly regarding outflows of resources, amortization of the subscription asset, and interest expense over the contract period.

The standard also aligns with GASB 87, which governs leases, by applying a similar framework to SBITAs. This alignment ensures that government entities properly account for IT agreements that function like leases, preventing misclassification of expenses and improving comparability across reporting periods. By addressing key elements such as the measurement of the subscription liability, disclosures, and the control of the right to use IT systems, GASB 96 enhances financial decision-making and compliance.

Why the GASB 96 Standard Was Introduced

As cloud-based data management, storage, and computing have grown, more organizations are using subscription-based and time-bound IT contracts known as SBITAs, which have similar traits to traditional leases. Previously, these arrangements were often treated as operational expenses, lacking clear guidance on recognition and measurement. GASB 96 was introduced to establish a consistent method for reporting SBITAs, ensuring that governmental entities account for these contracts as assets and liabilities rather than simple service agreements.

The introduction of GASB 96 also addresses financial reporting inconsistencies by requiring organizations to assess the maximum possible term of a SBITA, consider variable payments, and determine an appropriate discount rate. By formalizing the accounting treatment of subscription-based IT arrangements, GASB 96 improves accountability and ensures that financial statements reflect the true cost and commitment of IT-related expenditures.

Key Components of GASB 96

GASB 96 outlines specific requirements for recognizing, measuring, and reporting subscription-based information technology arrangements (SBITAs) in financial statements. Governmental entities must identify key aspects of a SBITA contract, including the subscription term, subscription payments, and the control of the right to use IT systems. The subscription term includes the noncancellable right to use the underlying IT asset, along with any options to extend (if it is reasonably certain they will be exercised) or options to terminate (if it is reasonably certain they will not be exercised). These factors determine how the subscription asset and subscription liability are recorded and subsequently amortized over the useful life of the underlying IT assets.

One critical component of GASB 96 is the measurement of the subscription liability, which is initially calculated as the present value of future subscription payments using an appropriate discount rate. If the implicit rate of the contract is determinable, it should be used; otherwise, the government’s incremental borrowing rate must be applied. The subscription asset is recorded based on the contract price, accumulated amortization, and any impairment considerations over the reporting periods. Additionally, assets and liabilities should be measured using facts and circumstances at the beginning of the fiscal year in which the standard is implemented. The standard also requires disclosures related to implementation costs, incentives, and any nonsubscription components included in the agreement. By standardizing these elements, GASB 96 ensures a structured accounting treatment for subscription-based IT arrangements, enhancing financial transparency and comparability across governmental entities.

Benefits of GASB 96

GASB 96 enhances financial transparency by requiring governmental entities to recognize subscription-based information technology arrangements (SBITAs) as both a subscription asset and a subscription liability. This structured approach ensures that financial statements accurately reflect long-term IT commitments, reducing the risk of understating financial obligations. By applying a framework similar to GASB Statement No. 87, GASB 96 aligns SBITAs with lease accounting, improving consistency in financial reporting. The inclusion of multiple components, such as software components and tangible capital assets, ensures that organizations account for the full scope of their IT contracts.

Another key benefit of GASB 96 is the ability to better manage financial planning and decision-making by considering factors such as the present value of future subscription payments, interest rate implications, and initial implementation costs. The standard also differentiates between various implementation stages, including the preliminary project stage and the operation and additional implementation stage, providing clarity on how costs should be recognized. With enhanced disclosures and structured reporting, GASB 96 allows governmental entities to assess the cost-effectiveness of IT expenditures while maintaining compliance with accounting standards.

Examples of GASB 96

GASB 96 applies to various subscription-based information technology arrangements (SBITAs) that government entities engage in to support operations, enhance efficiency, and modernize IT infrastructure. These arrangements often involve contracts where an entity gains a noncancellable right to use IT software or services for a specified period of time. By applying the accounting treatment outlined in GASB Statement No. 96, organizations recognize these agreements as subscription assets and liabilities, ensuring accurate financial reporting.

For example, a government agency may enter into a cloud-based data management system contract that includes multiple components, such as a software component and additional IT services. Under GASB 96, the agency must determine the present value of future subscription payments using an appropriate interest rate, such as the incremental borrowing rate, and record the subscription asset and liability accordingly. Similarly, a municipality adopting a perpetual license for financial reporting software must differentiate the subscription-based IT arrangements from any tangible capital assets included in the agreement. In cases where the contract involves availability payment arrangements or exchange-like transactions, organizations must evaluate how these financial commitments impact their fiscal year reporting.

Key Challenges of GASB 96

Implementing GASB 96 presents several challenges for governmental entities, particularly in identifying and properly classifying subscription-based information technology arrangements (SBITAs). One of the primary difficulties is determining whether an arrangement qualifies as a SBITA under the definition of a SBITA, especially when contracts contain multiple components such as a software component, tangible capital assets, or nonsubscription components. Entities must assess whether an agreement should be accounted for as a single SBITA or broken down into separate elements, which can significantly impact financial reporting.

Another challenge is the measurement of the subscription asset, which requires organizations to determine the present value of future subscription payments using an appropriate interest rate. Selecting the correct discount rate, such as the incremental borrowing rate, can influence financial statements. Additionally, classifying costs accurately across the initial implementation stage, preliminary project stage, and operation and additional implementation stage is crucial to ensure compliance. Some contracts also include licensing arrangements that may complicate accounting treatment if they contain both subscription-based and perpetual license elements. Entities must carefully evaluate these complexities to ensure proper recognition, amortization, and disclosure of subscription-based IT arrangements.

GASB 96 Best Practices

To effectively implement GASB 96, governmental entities should establish a structured approach for identifying, measuring, and reporting subscription-based information technology arrangements (SBITAs). A key best practice is ensuring a thorough review of SBITA contracts to determine whether they meet the definition of a SBITA and whether they should be accounted for as a single SBITA or as multiple components. Proper classification of licensing arrangements, software components, and nonsubscription components within these agreements is essential to maintaining compliance with financial reporting standards.

Entities should also focus on the measurement of the subscription asset and subscription liability, using an appropriate interest rate or incremental borrowing rate to determine the present value of future payments. Accurately categorizing costs across the initial implementation stage, preliminary project stage, and operation and additional implementation stage is critical for ensuring financial statements reflect the true cost of IT investments. Additionally, maintaining detailed documentation of contract terms, subscription payments, and variable payments will support transparency and facilitate compliance with disclosure requirements. Regularly reviewing and updating policies to align with GASB 96 guidance will help entities manage SBITAs effectively while minimizing accounting complexities.

When is GASB 96 effective?

GASB 96 is effective for fiscal years beginning after June 15, 2022, applying to all reporting periods thereafter. The standard is mandatory for state and governmental entities that enter into subscription-based information technology arrangements (SBITAs), ensuring consistent financial reporting across organizations managing subscription assets and subscription liabilities.

Entities must apply the changes retroactively, restating prior financial statements when practicable. If restatement is not feasible, the cumulative effect should be recorded as an adjustment to the beginning net position for the earliest fiscal year presented. The measurement of the subscription asset and subscription liability should reflect the facts and circumstances at the start of the fiscal year in which GASB 96 is adopted, ensuring accurate recognition of financial obligations.

What’s new for SBITAs?

Prior to GASB 96, there was no specific accounting guidance for subscription-based information technology arrangements (SBITAs), leading to inconsistencies in how governmental entities recognized and reported these agreements. Many organizations treated SBITAs as operational expenses rather than recognizing them as financial commitments, making it difficult to assess the long-term impact of IT-related expenditures. With the adoption of GASB 96, governmental entities must now follow a structured framework similar to GASB 87 (which governs leases), ensuring that subscription assets and subscription liabilities are properly accounted for in financial statements.

GASB 96 enhances financial reporting by requiring organizations to determine the measurement of the subscription asset, assess the useful life of the underlying IT assets, and differentiate between initial implementation stage, preliminary project stage, and operation and additional implementation stage costs. Additionally, entities must evaluate the present value of subscription payments, apply an appropriate interest rate, and account for any variable payments or incentives associated with a SBITA contract. These changes improve transparency, comparability, and the accuracy of reported outflows of resources related to IT investments.

GASB 96 provides guidance for the following areas:

• Defines a SBITA

• Establishes that a SBITA results in a right-to-use subscription asset (an intangible asset) and a corresponding subscription liability

• Provides the capitalization criteria for outlays other than subscription payments, including implementation costs of a SBITA

• Disclosures required for SBITAs

Disclosure requirements under GASB 96

Governmental entities must provide transparent and comprehensive disclosures related to their subscription-based information technology arrangements (SBITAs) in their financial statements. These disclosures ensure that stakeholders understand the financial impact of SBITAs on an organization’s operations, liabilities, and future obligations. GASB 96 requires entities to present detailed information on subscription assets, subscription liabilities, and any financial commitments associated with these contracts. Proper disclosure allows for greater comparability across organizations, enhances financial transparency, and helps decision-makers assess the long-term impact of IT-related expenditures.

Entities must also differentiate between payments included in the measurement of the subscription liability and those that fall outside of it, such as variable payments, termination penalties, or commitments made before the commencement of the subscription term. Additionally, any financial impact resulting from impairment must be clearly identified, providing insight into adjustments that affect an entity’s financial position.

A governmental organization should disclose the following in notes to financial statements about its SBITAs:

• A general description of its SBITAs

• The total amount of subscription assets and the related accumulated amortization

• Any payments not included in the measurement of the subscription liability

• Variable payments not previously included in the measurement of the subscription liability

• Other payments, such as termination penalties, not previously included in the measurement of the subscription liability

• Principal and interest requirements to maturity for the subscription liability for five subsequent fiscal years and in five-year increments thereafter

• Commitments under SBITAs before the commencement of the subscription term

• The components of any loss associated with an impairment

By adhering to these disclosure requirements, governmental organizations ensure compliance with GASB 96, improve financial reporting accuracy, and provide stakeholders with a clearer understanding of their IT-related financial obligations.

Use these questions to determine if GASB 96 applies to your contract

Determine if the contract is within the scope of GASB 96 by answering these questions.

Does the contract meet the definition of SBITA and need to be accounted under GASB 96?

(Note: If you answered Yes then the contract is within the scope of GASB 96 and meets the definition of SBITA)

GASB 96 FAQ

What is the deadline to adopt GASB 96?

GASB 96 is effective for fiscal years beginning after June 15, 2022, and all reporting periods thereafter. Earlier application is encouraged.

What is the accounting impact of GASB 96?

Assets and liabilities resulting from SBITAs should be recognized and measured using the facts and circumstances that existed at the beginning of the fiscal year in which this Statement is implemented. Governments are permitted, but are not required, to include in the measurement of the subscription asset capitalizable outlays associated with the initial implementation stage and the operation and additional implementation stage incurred prior to the implementation of this Statement. The subscription asset should be initially measured as the sum of (1) the initial subscription liability amount, (2) payments made to the SBITA vendor before commencement of the subscription term, and (3) capitalizable implementation costs, less any incentives received from the SBITA vendor at or before the commencement of the subscription term. A government should recognize amortization of the subscription asset as an outflow of resources over the subscription term.

What kind of contracts fall within GASB 96?

GASB 96 applies to subscription-based information technology arrangements (SBITAs) for government end users (governments). A SBITA is defined as a contract that conveys control of the right to use another party’s (a SBITA vendor’s) information technology (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. The subscription term includes the period during which a government has a noncancellable right to use the underlying IT assets. The subscription term also includes periods covered by an option to extend (if it is reasonably certain that the government or SBITA vendor will exercise that option) or to terminate (if it is reasonably certain that the government or SBITA vendor will not exercise that option).

Where can I find a GASB 96 implementation guide?

We understand the intricacies of GASB standards. While the official GASB 96 implementation guide can be sourced from the Governmental Accounting Standards Board (GASB) website, we also offer comprehensive resources and tools tailored to assist with GASB 96 implementation. Get started with our GASB 96 handbook.