How To Handle IT Subscriptions Under GASB’s Lease Accounting Rules

By now, most school district business staff are painfully familiar with the requirements of Statement No. 87 (Leases) of the Governmental Accounting Standards Board (GASB). Complying with the new standard has required a great deal of effort to collect lease contracts, review terms and conditions, and calculate interest rates on a wide range of lease types.

One big area of confusion that seems to come up often is the right method of accounting for ongoing IT subscription services, such as learning management systems. These can be tricky because there is no defined asset.

The answers to many of the questions you may have can be found in GASB Statement No. 96: Subscription-Based Information Technology Arrangements (SBITA) which addresses the new guidance that will require districts to recognize arrangements that meet the criteria as a right-to-use subscription based asset and a corresponding subscription liability.

Here are some of the key points to keep in mind for implementation:

1. First things, first. Aggregate all agreements you are aware of, review the general ledger where subscriptions are expended to identify additional agreements, and review board minutes for the approval of SBITAs.
2. Don’t forget to get your Information Technology Department involved in the discovery phase. They may have insight into subscription-based IT arrangements that you may not be aware of.
3. The standard applies to cloud computing arrangements such as software as a service, platform as a service, and infrastructure as a service. The arrangement can include hardware but it should not be key component of the arrangement.
4. When evaluating your contracts don’t be fooled by the use of the term “lease” or the lack of the use of “subscription.” Instead, evaluate each agreement based on the definitions disclosed in GASB Statement No. 96.
5. Remember the exception for short-term SBITAs. Short-term SBITAs have a maximum possible term under the SBITA contract of 12 months (or less), including any options to extend, regardless of their probability of being exercised. Subscription payments for short-term SBITAs should be recognized as outflows of resources.
6. Perpetual licenses to use a vendor’s software are excluded from this Statement. These arrangements are accounted for using GASB Statement No. 51.
7. Recall that activities associated with a SBITA, other than making subscription payments, should be grouped into the following three stages, and their costs should be accounted for accordingly:
   1. Preliminary Project Stage, including activities such as evaluating alternatives, determining needed technology, and selecting a SBITA vendor. Outlays in this stage should be expensed as incurred.
   2. Initial Implementation Stage, including all ancillary charges necessary to place the subscription asset into service. Outlays in this stage generally should be capitalized as an addition to the subscription asset.
   3. Operation and Additional Implementation Stage, including activities such as subsequent implementation activities, maintenance, and other activities for a government’s ongoing operations related to a SBITA. Outlays in this stage should be expensed as incurred unless they meet specific capitalization criteria.
8. In classifying certain outlays into the appropriate stage, the nature of the activity should be the determining factor. Training costs should be expensed as incurred, regardless of the stage in which they are incurred.
9. If a SBITA contract contains multiple components, a government should account for each component as a separate SBITA or non-subscription component and allocate the contract price to the different components. If it is not practicable to determine a best estimate for price allocation for some or all components in the contract, a government should account for those components as a single SBITA.
10. A contract amendment may change the SBITA provisions. This might include: changes to the contract price or term, the addition or deletion of assets, or the change in index rate for variable payments. If the right to use the underlying asset decreases, the government will account for a termination/impairment. Any other amendments to the contract will need to be accounted for as a modification.
11. On a go forward basis, make things easier: ensure future SBITAs explicitly include the discount rates and component prices..

Statement 96 will need to be implemented in fiscal year 2023, so the time to start is now. As with the overall implementation of accounting standards related to leases, the sooner you get started with gathering the necessary information, the better prepared you will be to meet the new requirements.