GASB 96 (SBITA) Implementation Guide

DANNY MARTINEZ: Welcome back to Cherry Bekaert's Government and Public Sector Podcast Series. This episode will focus on GASB Statement No. 96, subscription-based IT arrangements, what we've seen so far, and what governments should be doing now to implement.

DANNY MARTINEZ: I'm Danny Martinez. I'm the Government and Public Sector Accounting Advisory Lead for Cherry Bekaert. Our group assists with financial reporting, audit preparation, and implementation of new standards like GASB 87 and 96. With me today is Scott Anderson. Scott, introduce yourself.

SCOTT ANDERSON: My name is Scott Anderson. I have been with the firm since college and recently spent two years with the GASB as a practice fellow. As a practice fellow, I worked as a project manager on some of the latest GASBs and responded to technical inquiries. Glad to be here.

DANNY MARTINEZ: GASB 96 — what is it and when is it effective?

SCOTT ANDERSON: It is a year behind GASB 87. Right now you are in your implementation year for GASB 96. If you have a June 30 year-end, it's effective for this upcoming fiscal year. For December 31 year-ends, it will be effective January 1. It is around the corner and something to pay attention to.

SCOTT ANDERSON: GASB 96 addresses subscription-based information technology arrangements. If you like acronyms, SPIDA is what we've been referring to it as. The definition of a SPIDA in the guidance is long and it's very similar to licenses. You can read it many times and still not quite understand what a SPIDA is, which is the complicated part.

SCOTT ANDERSON: I taught a class recently and we spent 30 to 40 minutes just discussing what falls within the scope of the standard before moving on to the accounting. GASB referred to this project as cloud computing arrangements. When you think about SPIDAs, that's what GASB had in mind: cloud computing arrangements.

SCOTT ANDERSON: The trend has been for governments to move their IT infrastructure to the cloud. The practical question was how to account for these arrangements that can be millions of dollars and span several years. That was the genesis of GASB 96.

DANNY MARTINEZ: When you look at the definition, IT software alone or in combination with tangible capital assets can be included. Some people don't think of other items that meet the definition. An example I give is vehicle security systems on buses. You're buying the equipment, but often there's a subscription attached for monitoring.

DANNY MARTINEZ: Utility metering readers and similar electronic readers could meet the definition of a SPIDA, even if people aren't currently thinking about them. Some aspects won't be as hard as GASB 87. For example, exchange or exchange-like considerations are usually straightforward when buying from a software vendor, whereas GASB 87 had other complications.

DANNY MARTINEZ: Determining the period of time for some arrangements may be challenging, and we'll touch on that later with an exposure draft question. So we covered what it is and when you need to be caring about it, which is now. What about the accounting? If you've attended trainings on GASB 87, you've heard the accounting is similar to leases. How is it like leases, and what is different?

SCOTT ANDERSON: You can take a lot from GASB 87 and apply it to GASB 96. When I say copy and paste, that doesn't mean no thought was put into it; there was a lot of work. The board decided it was preferable to make the provisions consistent so preparers wouldn't reinvent the wheel. You'll see a lot of the same terminology and similar wording.

SCOTT ANDERSON: When we issued GASB 99, which amended 87, some amendments were to make 87 more consistent with the wording in 96. The goal was to make it easier.

SCOTT ANDERSON: One thing that is easier about 96 is it only considers one perspective. GASB 87 addresses both lessee and lessor perspectives, but 96 is only from the government's perspective as a subscriber. Governments generally don't rent out their own IT software, which makes it easier.

DANNY MARTINEZ: I also cover the different cost stages and the lifecycle. You have costs prior to selecting a vendor, which you typically expense, initial implementation costs, and ongoing costs. In determining your subscription asset, you need to decide whether related costs should be expensed or capitalized as part of the subscription asset. That's a nuance different from 87.

SCOTT ANDERSON: That approach is consistent with GASB 51, which had three stages described slightly differently: a beginning stage where you expense costs, a middle stage where you capitalize, and a later maintenance stage where you expense.

DANNY MARTINEZ: We have an implementation guide exposure draft that addresses subscription-based IT arrangements. It covers areas where we're getting initial questions from clients, such as implementation-stage costs crossing periods and perpetual licenses. Can you share what GASB says about SPIDAs in the implementation guide?

SCOTT ANDERSON: In this exposure draft, there are only two questions specifically related to SPIDAs. You might wonder why there's so little specific guidance. Because of the similarities between 96 and 87, much of the guidance for implementing 87 can be analogized to 96. There are multiple implementation guides with questions and answers you can apply, and those resources are helpful for determining control of a SPIDA and bifurcating a contract.

SCOTT ANDERSON: One implementation guide question concerns contracts that automatically renew, which is common with SPIDAs. The GASB's view is that automatic renewal is essentially a termination option. If you can opt out at any point on the renewal, you would treat it like an agreement with a regularly scheduled termination option.

DANNY MARTINEZ: We're seeing many contracts with 12-month terms and automatic renewal that continue indefinitely. You might think that's a 12-month lease and scope it out, but GASB is saying no—you must treat automatic renewal as a termination option. You need to consider how far down the road you're reasonably certain to terminate.

DANNY MARTINEZ: In practice, entities will consider factors like how often they replace the ERP system or software modules. I expect some convergence over time on how governments estimate periods, similar in concept to how capital assets are depreciated, although it will be subjective and vary by government. I hope GASB, when finalizing this question, adds a sentence or two reminding people that because automatic renewal is a termination option, this is what you must do with it.

SCOTT ANDERSON: That additional sentence might be added in section 4.7 if the board receives substantial feedback. Anyone listening has until January 20 to submit feedback on this exposure draft.

DANNY MARTINEZ: On implementation, some governments may think they just finished their fiscal year and are not ready. I go through four phases of implementation. Many governments we work with are in phases one and two, which include training, listening to podcasts, attending webinars, and capturing information. They are creating templates and looking across departments to identify SPIDA exposure and assess completeness.

DANNY MARTINEZ: I expect a big pickup in the number of entities addressing this in the first quarter of 2023. It will be a volume challenge for some entities and may even create more exposure than GASB 87, considering schools and healthcare.

SCOTT ANDERSON: In the training I did last week where I introduced examples of SPIDAs, we discussed software as a service, platform as a service, and infrastructure as a service. I polled the attendees—about 400 people—and roughly half said they have a lot of work to do. Recognizing examples will help individuals know what to look for. IT departments must be part of this process because they are most involved in these arrangements.

DANNY MARTINEZ: A lot of work ahead. Now let's knock out GASB 96. Thank you, Scott, for joining today. We will have an article with three tips for GASB 96 implementation on our website shortly.

DANNY MARTINEZ: You can reach Scott at sanderson@cbh.com and me at danny.martinez@cbh.com. You can also find both of us on LinkedIn. Please subscribe to our podcast.

SCOTT ANDERSON: Thanks for hosting, Danny, and thanks to the audience for listening.