What Does SBITA Stand For in Governmental Accounting?

The landscape of governmental accounting evolves. One such development is the guidance provided by Governmental Accounting Standards Board (GASB) Statement No. 96, focusing on Subscription-Based Information Technology Arrangements, or SBITAs. This statement addresses how governmental entities should account for their increasing reliance on cloud-based software and other IT services. It aims to ensure that financial statements accurately reflect the obligations and assets arising from these arrangements, promoting a clearer picture of a government’s financial position.

Defining SBITA

A Subscription-Based Information Technology Arrangement (SBITA) is a contract that conveys control of the right to use another party’s information technology (IT) software, either alone or combined with tangible capital assets, for a specified period in an exchange or exchange-like transaction. This means the governmental entity gains the ability to obtain the present service capacity from the IT assets and determine how and for what purpose those assets are used. The core of a SBITA lies in the “right to use” the IT asset without necessarily owning it.

Common examples of SBITAs include various cloud computing services, such as Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS), and Infrastructure-as-a-Service (IaaS). This can encompass widely used applications like Microsoft Office 365, Adobe Creative Cloud, Zoom, enterprise resource planning (ERP) software, and cybersecurity tools. These arrangements typically involve recurring payments for access and use, rather than a one-time purchase of software or hardware.

A key distinction exists between a SBITA and a pure service contract. If an arrangement solely provides IT support services without conveying control over the right to use an underlying IT asset, it is not considered a SBITA. However, if a contract includes both the right to use an IT asset and associated support services, it can still qualify as a SBITA. Short-term SBITAs, defined as arrangements with a maximum possible term of 12 months or less, are exempt from full recognition requirements, with payments generally expensed as incurred.

Applying SBITA Accounting Standards

Under GASB Statement No. 96, governmental entities are required to recognize a right-to-use subscription asset and a corresponding subscription liability on their financial statements for most SBITAs. This recognition occurs at the commencement of the subscription term, when the government obtains control of the right to use the underlying IT assets and the asset is placed into service. This approach aligns SBITA accounting with the principles established for leases under GASB Statement No. 87.

The initial measurement of the subscription liability is the present value of the subscription payments expected to be made over the subscription term. This includes fixed payments and any variable payments that are fixed in substance, but generally excludes variable payments based on future performance or usage. The discount rate used for this calculation is typically the interest rate charged by the SBITA vendor; if not readily determinable, the government’s estimated incremental borrowing rate can be used.

The subscription asset is initially measured as the sum of the initial subscription liability, any payments made to the vendor before the subscription term begins, and capitalizable implementation costs. These costs relate to activities necessary to place the subscription asset into service, such as designing, configuring, or testing. Any incentives received from the SBITA vendor at or before commencement reduce the asset’s initial measurement.

After initial recognition, the subscription asset is amortized over the shorter of the subscription term or the useful life of the underlying IT assets, with amortization expense recognized as an outflow of resources. The subscription liability is subsequently measured by reducing the outstanding balance for payments made and recognizing interest expense over the subscription term. Significant changes to the subscription term, payment amounts, or discount rates require remeasurement of the subscription liability and asset.

Financial Statement Presentation and Disclosures

SBITA-related assets and liabilities are presented on the governmental entity’s statement of financial position. The right-to-use subscription asset, an intangible asset, is typically reported separately from other capital assets. The corresponding subscription liability is reported on the liability section of the statement.

Required disclosures in the notes to the financial statements provide additional context and detail about a government’s SBITAs. These include a general description of the arrangements, detailing the basis, terms, and conditions of variable payments not included in the liability measurement. Governments must also disclose the amount of the subscription asset, its accumulated amortization, and a maturity analysis of the subscription liability. The maturity analysis presents the principal and interest requirements of the subscription liability for each of the five subsequent fiscal years, and then in five-year increments thereafter, until maturity. Disclosures also cover any significant commitments for SBITAs not yet commenced.