GASB Subscription Accounting Standard

Governmental Accounting Standards Board (GASB) Statement No. 96, Subscription Based Information Technology Arrangements, applies to entities following government accounting rules, including AAFCPAs’ clients in the Charter School industry, as well as other quasi-governmental organizations.  This guidance applies to subscription-based technology arrangements (SBITAs), defined as a contract that conveys control of the right to use another party’s information technology (software or in combination with IT assets) for the subscription term. These subscription arrangements will now be recognized on an organization’s statement of net position as a right-to-use subscription asset and a corresponding liability over the subscription term. The subscription term includes the period of time that the Organization has a noncancellable right to use the underlying IT assets as well as any periods covered by an option to extend (if it is reasonably certain that the option will be exercised). For SBITAs with a term of 12 months or less, subscription payments will continue to be recorded as expenses.

AAFCPAs has summarized some of the most significant changes resulting from the new statement for your convenience:

• In accordance with this statement, an organization is required to recognize an intangible right-to-use subscription asset. The intangible asset is measured as the sum of (1) the initial subscription liability amount as described below, (2) payments made to the SBITA vendor before the commencement of the subscription term, and (3) capitalizable implementation costs, less any incentives received from the SBITA vendor at or before the commencement of the subscription term.
• A subscription liability is initially measured based on the present value of subscription payments expected to be made during the subscription term. Future subscription payments should be discounted using the SBITA vendor’s interest rate or the Organization’s incremental borrowing rate.
• The subscription liability decreases as subscription payments are made, and the lessee also recognizes interest expense. The right-to-use subscription asset is amortized over the subscription term.
• Activities associated with a SBITA other than making subscription payments should be classified as follows:
  • Preliminary Project Stage – Costs including evaluating alternatives determining required technology and selecting a vendor should be expensed as incurred.
  • Initial Implementation Stage – Costs including charges to place the subscription asset into service should generally be capitalized as an addition to the subscription asset.
  • Operation and Additional Implementation – Costs including subsequent implementation activities, training costs, maintenance, and ongoing operating activities should be expensed as incurred.

This change takes effect for fiscal years beginning after June 15, 2022.

What does AAFCPAs advise?

To estimate how this change will affect your Organization, AAFCPAs advises clients to summarize all of your subscriptions and consider the impact that the new standard will have on your financial statements. If the impact on your statement of net position is potentially significant, you may want to:

• Calculate your loan covenant ratios using your statement of net position as adjusted for these accounting changes to make sure you are still in compliance.
• Amend existing loan agreements so the loan covenants exclude any impact from subscription accounting rule changes.
• Modify or change existing loan covenant definitions and calculations to specifically exclude these subscriptions.
• Look at the impact of these changes to your revenues and expenses and the subsequent impact on any contracts, compensation agreements, etc.
• Estimate the effect of this change on the timing of your revenues and expenses and re-forecast your financial results to see the full impact of the change.

If you have any additional questions about how the new Subscription Accountant Standard will impact you, contact David J.  Kelleher, CPA, CGMA at dkelleher@aafcpa.com, 774.512.4042; or your AAFCPAs partner.