GASB 96: SBITA frequently asked questions

A: Any agreements would have to be evaluated to determine if they meet the definition of a SBITA under GASB 96 paragraphs 6-8. If there is any hardware involved, consideration should be given to the applicability of GASB 87.

A: As with GASB 87 – Leases, a contract under GASB 96 can be written or verbal if it is legally enforceable. To meet the definition of a SBITA, the arrangement has to convey control of the right to use another party’s IT software as specified in the contract for a period of time in an exchange or exchange-like transaction. The “period of time” criteria has to be met in order for the agreement to meet the definition of a SBITA. If there is no definite term or it is a perpetual license/agreement, it would not be considered a SBITA.

A: To determine whether a contract conveys control of the right to use the underlying IT assets, GASB 96 states a government should assess whether it has both:

• The right to obtain the present service capacity from use of the underlying IT assets as specified in the contract
• The right to determine the nature and manner of use of the underlying IT assets as specified in the contract. 

Determining whether there is a right to obtain the present service capacity is an easier assessment than determining if there is a right to determine the nature and manner of use of the underlying IT assets. When assessing whether there is a right to determine the nature and manner of use of the IT asset, consider if modifications can be made to the programming to better fit your needs or if you can determine the data collected or how it is displayed. Control could be conveyed by being able to control who, how and when the software is used, such as who has access to the software or what devices it is downloaded on, etc. These are just a few scenarios of how control may be conveyed over the nature and manner of use of an IT asset. Each contract has to evaluated based on the rights conveyed as specified in the contract and there may some professional judgment involved.

A: GASB 96 has changed the nature of these payments. Generally, governments would now only report a prepaid for payments made before the commencement of the subscription term if the contract meets the definition of a SBITA. In conversion to the full accrual statements, the prepaid would be removed, the subscription liability for future periods would be established and the sum would be the subscription asset. In most cases, payments in subsequent years would be booked as an expenditure and reduction of the subscription liability in the year paid. In the case where all of the payments were made upfront, at the beginning of the subscription term the upfront payments would be reported as a capital expenditure in the modified accrual statements and converted to a subscription (capital) asset in the full accrual statements. There would not be a subscription liability.

A: If software is purchased versus contracted for the right to use, GASB 96 isn’t applicable. The right to use agreements (SBITAs) are for the use and control over IT software for a period of time. Once that time is over, you no longer have a right to use the IT software. A maintenance agreement doesn’t convey the right to use or purchase IT software; it usually is providing technical support or update installation on the software.

A: Usually this type of software comes with the purchase/leasing of computers/laptops. In this case, you would evaluate for what you are primarily paying for, which would be the computer/laptop. If you have separate arrangements/contracts for additional software, you would need to evaluate those arrangements/contracts to see if they meet the definition of a SBITA in GASB 96.

A: Per Implementation Guide 2023, question 4.7, a provision under which a licensing agreement automatically renews until cancelled is considered an option to terminate the agreement at each renewal date. An agreement that includes an option to terminate is not a purchase, whereas a perpetual license is a purchase in which a government is granted a permanent right to use the vendor’s computer software. Therefore, a licensing agreement for a vendor’s computer software that automatically renews until cancelled does not provide a perpetual license. The government would need to assess the likelihood of exercising the option to terminate in determining the subscription term.

A: If at the point of implementing GASB 96, a SBITA contract has a maximum possible term of 12 months (or less) left in the subscription term, including any options to extend, regardless of their probability of being exercised, it would be considered a short-term SBITA. Any future contracts would need to be evaluated separately.

A: Per GASB 96, paragraph 13, a short-term SBITA is a SBITA that, at the commencement of the subscription term, has 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. As discussed in paragraph 9, periods for which both the government and the SBITA vendor have an option to terminate the SBITA without permission from the other party (or if both parties have to agree to extend) are cancellable periods and should be excluded from the maximum possible term. For a SBITA that has cancellable periods, such as a rolling month-to-month SBITA or a year-to- year SBITA, the maximum possible term of that SBITA is the non-cancellable period, including any notice periods. Per Implementation Guide 2023, question 4.7, a provision under which a licensing agreement automatically renews until cancelled is considered an option to terminate the agreement at each renewal date. If both parties can terminate at any time or with notice of 12 months or less, then it would be considered a short-term SBITA and excluded from the requirements of GASB 96. 

A: Per GASB 96, paragraph 13, a short-term SBITA has 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. This is similar to GASB 87. Under Implementation Guide 2020-1, question 4.10, it addresses a situation in which a lessee has a 12-month contract with options to renew, but the renewal would be under a new contract. The guidance provided that although the lease contract allows for the lessee to renew, the lessee does not have a unilateral right to extend the existing contract because the renewal would be under a new contract. Therefore, only the maximum possible term should be considered under the existing contract and would be considered a short-term lease. The guidance for GASB 96 would be the same in this situation.

A: Per GASB 96, paragraph 13, a short-term SBITA has 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. This is similar to GASB 87. Under Implementation Guide 2019-3, Leases, question 4.17, it addresses a situation in which a lessee has options to renew a lease for 12 months at a time for a period of time. The guidance provided that with the presence of lessee renewal options, regardless of their probability of being exercised, means that the lease does not meet the definition of a short-term lease. The guidance for GASB 96 would be the same in this situation.

A: If the contract is on a month-to-month basis in which each party has the right to terminate/cancel, there would not be a non-cancelable period and would not meet the definition of a SBITA and subject to GASB 96.

A: Per GASB 96, paragraph 25, capitalized initial implementation costs (as described in paragraph 29b) are included in the measurement of the subscription asset.

A: Governments are permitted, but are not required, to include in the measurement of the subscription asset capitalizable outlays associated with the initial implementation stage and the operation and additional implementation stage incurred prior to the implementation of GASB 96.

A: The IBR (discount rate) would not necessarily be a one size fits all. Consideration should be given to the facts and circumstances of the subscription (payment amounts, payment structure, length of subscription, etc.) when determining an appropriate discount rate.

A: If the SBITA does not explicitly state the SBITA’s vendor rate then the governments will need to use their incremental borrowing rate. The IBR would not be a one size fits all. The IBR should be based on the facts and circumstances of the subscription (payment amounts, payment structure, length of subscription, etc.) and that existed at the beginning of the fiscal year in which GASB 96 is implemented.

A: The evaluation of any threshold should consider your existing capitalization policy, any similar lease policy, and what would be material both individually and in the aggregate to the financial statements as a whole. Consideration should be given to both the right to use asset and the subscription liability in this evaluation. You may need to discuss this with your auditor.