The GASB has issued an Exposure Draft entitled Subscription-Based Information Technology Arrangements. The purpose of the Exposure Draft is to provide guidance on the accounting and financial reporting for subscription-based information technology arrangements (SBITA’s).
The GASB had observed significant diversity in practice in this area. Many of the accounting provisions set forth in this Exposure Draft for SBITA’s are very similar to the provisions set forth in GASB Statement No. 87 for leases, including the determination of the length of the contract, the initial and subsequent recording of an intangible asset and liability, and the bifurcation of contracts containing multiple components.
The Exposure Draft accomplishes the following: (1) defining a SBITA; (2) establishing that a SBITA would result in a right-to-use subscription asset—an intangible asset—and a corresponding subscription liability; (3) providing the capitalization criteria for outlays other than subscription payments, including implementation costs of a SBITA; and (4) requiring note disclosures of essential information regarding a SBITA.
A SBITA would be defined as a contract that conveys control of the right to use another party’s (a SBITA vendor) hardware, software, or both, including information technology infrastructure (the underlying hardware or software), as specified in the contract for a period of time in an exchange or exchange-like transaction.
The subscription term would include the period during which a government has a noncancellable right to use the underlying hardware or software. The term also would include 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).
Under the Exposure Draft, a government would recognize a right-to-use subscription asset—an intangible asset—and a corresponding subscription liability. However, the Exposure Draft would provide an exception for short-term SBITAs, which have a maximum possible term under the SBITA contract of 12 months (including any options to extend, regardless of their probability of being exercised). Subscription payments for short-term SBITAs would be recognized as outflows of resources (i.e. as an expense).
For SBITAs other than short-term SBITAs, a government would recognize the subscription liability at the commencement of the subscription term. The subscription liability would be measured at the present value of subscription payments expected to be made during the subscription term. Future subscription payments would be discounted using the interest rate the SBITA vendor charges the government, or the government’s incremental borrowing rate if the interest rate is not readily determinable. In subsequent financial reporting periods, as payments are made under the SBITA, a portion of the payment would be treated as a reduction of principal balance of the subscription liability, and the remainder would be treated as interest expense.
The subscription asset would be recognized and 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. A government would recognize amortization of the subscription asset as an outflow of resources over the subscription term.
Activities associated with a SBITA, other than making subscription payments, would be grouped into the following three stages, and their costs would be accounted for accordingly:
Preliminary Project Stage, including activities such as evaluating alternatives, determining needed technology, and selecting a SBITA vendor. Outlays in this stage would be expensed as incurred.
Initial Implementation Stage, including all ancillary charges necessary to place the subscription asset into service. Outlays in this stage generally would be capitalized as an addition to the subscription asset.
Post-Implementation/Operation Stage, including activities such as maintenance and other activities for a government’s ongoing operations related to a SBITA. Outlays in this stage would be expensed as incurred.
In classifying certain outlays into the appropriate stage, the nature of the activity would be the determining factor. Training costs, regardless of which stage they are in, would be expensed as incurred.
If a SBITA contract contains multiple components—such as both a subscription component and a nonsubscription component, or multiple underlying hardware or software components—a government would account for each component as a separate SBITA 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 would account for those components as a single SBITA unit.
This Exposure Draft would require a government to disclose descriptive information about its SBITAs other than short-term SBITAs, such as the amount of the subscription asset, accumulated amortization, other payments not included in the measurement of a subscription liability, principal and interest requirements for the subscription liability, and other essential information.
The provisions of the Exposure Draft would be effective for fiscal years beginning after June 15, 2021. Earlier application would be permitted. The comment deadline for the Exposure Draft is August 23, 2019.
The full text of the Exposure Draft is available here.
Readers should not act upon information presented without individual professional consultation.