Understanding GASB 96, Subscription-Based Information Technology Arrangements
This standard applies the same philosophy as GASB 87, Leases, in that it will require a right-to-use asset and a corresponding liability to be recorded for certain IT arrangements.
Consider this common situation: a government is shifting to new cloud-based ERP/general ledger systems. The government enters into a contract that requires a per-user subscription to access the software and, typically, a separate agreement to implement the software. This usually includes designing, tailoring, and training to the government’s needs. The question is: how should governments account for this activity?
We’ll start with a couple key reminders:
- The subscription liability is measured as the present value of subscription payments expected to be made during the subscription term, which begins when the initial implementation stage is completed.
- Note: This is not necessarily when the subscription payments begin.
- The subscription asset comprises the subscription liability plus payments to the vendor at the commencement of the subscription term and capitalizable initial implementation costs.
Accounting for the implementation stage
It's important to understand the stages related to software implementation, specifically the initial implementation stage. Payments on a subscription agreement often begin before the initial implementation stage is complete. Some companies will charge for access to the cloud software while they tailor the software to your needs. In that situation, you’ll record a prepaid asset to capture these subscription payments until it’s time to record the subscription liability. At the same time, you’ll incur capitalizable implementation costs, which will also accumulate in a prepaid asset account until the initial implementation stage is complete.
It's important to understand the stages related to software implementation, specifically the initial implementation stage.
As stated in the GASB 96 guidance, initial implementation stage activities include “ancillary charges related to designing the chosen path, such as configuration, coding, testing, and installation associated with the government’s access to the underlying IT assets.” You’ll also need to include any other ancillary charges relating to placing the subscription asset into service. Once it’s in service, the implementation stage is considered complete. Prepayments on the subscription agreement and capitalizable costs of implementation will become part of the subscription asset, along with the present value of future subscription payments (the subscription liability).
Accounting for multiple modules
Another common situation with SBITAs is cloud system implementation with more than one module — for instance, if a general ledger system is implemented first and then a grants module or student system module is developed and added later. If there are multiple modules in one SBITA agreement, the commencement of the subscription term, as well as the beginning of the amortization period, is the point at which the initial implementation is completed for the first independently functional module (in this example, the general ledger system), regardless of whether implementation of the entire SBITA has been completed.
The additional activity for the second module would be considered additional outlays that increase functionality or efficiency of the general ledger system and therefore would be capitalized as an addition to the original subscription asset once placed into service.
Note that certain costs shouldn’t be part of the subscription asset, such as preliminary project stage costs and certain operational costs. Preliminary project costs include:
- Conceptual formulation and evaluation of alternatives
- The determination of the existence of needed technology
- The final selection of alternatives for the SBITA
Operational activities include maintenance, troubleshooting, and other activities associated with the government’s ongoing access to the underlying IT assets. Training costs should be expensed as incurred, regardless of the stage in which they are incurred.
The new guidance also includes information on contract modifications, terminations, and requirements for disclosures in the notes to the financial statements.
GASB 96’s impact
Some entities may find that GASB 96 is going to be much more impactful to their organization than the lease standard was, particularly given the increase in popularity of cloud computing and the use of IT services. Regardless, similar to leases, it will be critical for organizations to assess the various contracts and agreements for applicability under this standard.
It will be critical for organizations to assess the various contracts and agreements for applicability under this standard.