GASB 96 Explained: A Guide to New IT Subscription Standards

Established in 1984, the Governmental Accounting Standards Board (GASB) defines accounting and financial reporting standards for state and local governments throughout the United States.

The main goal of GASB is to ensure that financial information from different government bodies is consistent and transparent, helping stakeholders like taxpayers, investors, and policymakers to make informed decisions. 

Through these standards, GASB enhances the accountability of governmental organizations, leading to improved governance and financial management.

Introducing GASB 96

GASB 96, introduced in May 2020, updates how government entities must account for their technology subscriptions, like software. This standard requires that such subscriptions be treated not merely as ongoing expenses but as "right-to-use assets" that governments can use for a certain period. 

Alongside this asset, governments must recognize a "liability" that reflects their commitment to pay for the subscription over its term. This shift aims to enhance the transparency and accuracy of how governments report their technology expenses, from recording these costs only as paid to showing them as ongoing financial obligations. 

This more detailed reporting helps stakeholders, including the public and financial analysts, better understand a government's financial commitments to its technology resources.

Subscription-Based Information Technology Arrangements Defined

GASB 96 defines the concept of Subscription-Based Information Technology Arrangements (SBITAs) as technology that government entities use but do not own.

Instead of buying technology outright, such as software or digital infrastructure, governments pay for the right to use these digital resources over a set period. It's similar to leasing physical assets like office space or equipment but specifically for digital technology. 

By using SBITAs, governments can access the latest technology without the initial expense of full ownership, making advanced tools more accessible and financially manageable. This setup means that while the government benefits from using the technology, it does not hold ownership, aligning financial commitments with usage rather than ownership.

Key Provisions of GASB 96

GASB 96 introduces specific requirements for how governments should manage and report their accounting for IT services that they subscribe to. Here’s a simplified breakdown of those key requirements:

• Recognize a Right-to-Use Asset and Liability: When a government subscribes to IT services like cloud software, GASB 96 mandates recognizing this as a "right-to-use" asset and a corresponding liability. It means the government can use the technology for a certain period as agreed in the subscription, and it must also acknowledge liability for the payment due over the contract's duration.
  
  
• Measure at Present Value: The asset and liability values are calculated based on the present value of future payments, similar to lease accounting under GASB 87.
  
  
• Capitalize Initial Direct Costs: Initial direct costs such as installation or customization are capitalized, meaning they are added to the asset's value and spread over its life rather than expensed immediately.
  
  
• Account for Modifications and Terminations: GASB 96 also requires accounting for any changes in the subscription terms, like modifications or cancellations, to ensure the financial statements are always accurate.
  
  

These measures aim to standardize the accounting of IT subscriptions on balance sheets, ensuring that they accurately reflect the true costs and obligations tied to these digital services.

Implementing GASB 96 involves more than just understanding the rules; it also requires using specialized GASB 96 software to efficiently manage and report IT subscription arrangements in compliance with the standards. 

The right software can help automate complex calculations, accurately maintain records, and easily adjust to changes in subscription terms, reducing the need for manual input and ensuring that government entities can meet new accounting requirements effectively.

Challenges and Considerations for GASB 96

GASB 96 presents various challenges for government entities adjusting to new accounting practices for IT subscriptions. The main challenges include distinguishing between costs considered capital expenses, like IT subscriptions that require capitalization under GASB 96, and regular service contracts that do not. 

Estimating the total cost of these subscriptions, including the present value of future payments, adds complexity and requires careful financial forecasting and discounting. Additionally, maintaining accurate records through the subscription period, particularly when contract terms change or are terminated early, is critical. 

To ensure a smooth transition, governments should conduct thorough reviews of all IT contracts, train finance staff on GASB 96, develop strong internal controls for managing IT subscriptions, conduct regular audits, and foster collaboration between financial and IT departments.

Leveraging specialized software, educational resources, and consulting services can also help manage these changes effectively.

Closing Thoughts

Implementing GASB 96 poses significant challenges but can be managed with careful preparation, education, and the right tools. It enhances fiscal management and accountability in technology use and ensures that financial statements reflect a government entity's true financial conditions.