What Is GASB 96 and How Does It Affect Accounting?

The Governmental Accounting Standards Board (GASB) is the authoritative body responsible for establishing accounting and financial reporting standards for state and local governments in the United States. In May 2020, GASB issued Statement No. 96, addressing how governments account for subscription-based information technology (IT) arrangements. This standard, effective for fiscal years beginning after June 15, 2022, aims to improve financial reporting by providing a consistent framework for these arrangements.

The purpose of GASB 96 is to enhance transparency and comparability in government financial statements regarding these increasingly common IT arrangements. Before this guidance, there was no specific accounting standard for such arrangements, leading to varied reporting practices. The standard ensures that the financial implications of these agreements are clearly presented, offering users a more complete picture of a government’s financial position and obligations.

Defining Subscription-Based IT Arrangements

Under GASB 96, a Subscription-Based Information Technology Arrangement (SBITA) is defined as a contract that conveys control of the right to use another party’s IT software, either alone or combined with tangible capital assets, for a specified period in an exchange or exchange-like transaction. This definition applies to common services such as Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS), and Infrastructure-as-a-Service (IaaS), as well as certain software licenses that operate on a subscription model. Examples include governmental use of platforms like Microsoft 365, Adobe Creative Cloud, or Zoom services.

A key characteristic determining if an arrangement qualifies as a SBITA is whether the government has “control of the right to use” the underlying IT asset. This means the government must have both the ability to obtain present service capacity from the IT asset and the power to determine the nature and manner of its use. Without this element of control, the arrangement would not be considered a SBITA under GASB 96.

The “subscription term” is the non-cancelable period during which the government has the right to use the underlying IT assets. This includes periods covered by extension options if exercising them is reasonably certain, or termination options if not exercising them is reasonably certain.

Core Accounting Changes Under GASB 96

GASB 96 introduces a fundamental shift in how governments account for SBITAs by requiring the recognition of a “right-to-use” subscription asset and a corresponding “subscription liability” on the government’s financial statements. This approach aligns SBITA accounting with principles for leases. For the first time, these IT subscription agreements are brought onto the balance sheet.

The subscription liability is initially measured at the commencement of the subscription term, which is when the IT asset is available for use. This measurement involves calculating the present value of the future subscription payments expected to be made over the subscription term. Governments should use the interest rate charged by the SBITA vendor or their incremental borrowing rate to discount these payments.

The right-to-use subscription asset is initially measured as the sum of the initial subscription liability amount, any payments made to the SBITA vendor before the subscription term begins, and capitalizable implementation costs. This amount is then reduced by any incentives received from the vendor at or before the commencement of the term. After initial recognition, the subscription asset is amortized, meaning its cost is expensed over the shorter of its useful life or the subscription term, similar to how a capital asset is depreciated.

Short-term SBITAs, defined as those with a maximum possible term of 12 months or less at the commencement of the subscription term, including any options to extend, are an exception to this recognition. For these short-term arrangements, a subscription asset and liability are not recognized on the balance sheet; instead, subscription payments are recognized as outflows of resources when incurred.

Certain arrangements are explicitly excluded from the scope of GASB 96. These exclusions include contracts for services that do not convey control of an underlying IT asset, such as standalone IT support or maintenance agreements. Traditional software licenses that provide a perpetual right to use the software are also excluded, as they are accounted for under GASB Statement No. 51. Contracts that primarily convey control of tangible capital assets with an insignificant software component are also excluded and fall under GASB Statement No. 87.

Financial Reporting and Disclosure

The recognition of subscription assets and liabilities impacts a government’s financial statements. On the Statement of Net Position, the right-to-use subscription asset will appear as an intangible capital asset, typically presented separately from other capital assets. The corresponding subscription liability will be reported as a liability, reflecting the government’s obligation for future payments. This provides a more comprehensive view of the government’s assets and obligations related to IT use.

On the Statement of Activities, the accounting treatment shifts from simply expensing subscription payments. Instead, the statement will reflect amortization expense for the subscription asset, which is recognized as an outflow of resources over the subscription term. Additionally, interest expense related to the subscription liability will be recognized, similar to how interest on debt is reported. This separation of principal and interest components provides a clearer picture of the true cost of these arrangements over time.

GASB 96 also mandates specific disclosures in the notes to the financial statements to provide users with essential information. Governments must provide a general description of their SBITAs, detailing the basis, terms, and conditions, especially concerning any variable payments not included in the initial subscription liability measurement. This qualitative disclosure helps users understand the nature of these agreements.

Quantitative disclosures are also required. These include the total amount of subscription assets and related accumulated amortization, presented separately from other capital assets. A schedule of future principal and interest payments for subscription liabilities must be provided, typically broken down annually for the first five fiscal years and then in five-year increments thereafter, until maturity. Governments must also disclose the amount of outflows of resources recognized in the current period for variable payments and other payments, such as termination penalties, that were not included in the initial measurement of the subscription liability.