Implementing GASB Statement 96 – Subscription-Based Information Technology Arrangements
Understanding GASB 87 & 96: A Step-by-Step Guide to Implementation for Government Entities
In June 2017, the Governmental Accounting Standards Board (GASB) issued Statement No. 87,which went into effect for fiscal years beginning on or after June 15, 2021. GASB 87 fundamentally changes the way state and local governments account for leases in their financial statements. More recently, in 2020, the GASB issued Statement No. 96, Subscription-Based Information Technology Arrangements, which amends GASB 87 to address subscription-based information technology arrangements (SBITAs).
Overview of GASB 87 & GASB 96
This lease standard significantly impacts entities with contracts that are leases or contain leases that support entity operations. If multiple periods are presented on your financial statements, the prior period is required to be restated. Entities with a calendar year-end that present comparative information must implement GASB 87 for Dec. 31, 2022, and Dec. 31, 2021 (comparative year) will also need to reflect this new standard. The purpose of this statement is to enhance government financial statements by making lease accounting uniform across all governmental entities. Users of the financial statements can now see any lease liability or lease asset on the face of the financials.
Governmental entities must now take the guiding principles from GASB 87 and apply them to SBITAs, outlined in GASB 96. Below are recommended steps for implementing GASB 87 and how to apply these steps to GASB 96 for your next audit.
Steps to Implement GASB 87 & 96
- Take inventory of all possible agreements. The first step is to review all contracts to determine if they meet the definition of a lease or SBITA. The GASB defines a lease as “a contract that conveys control of the right to use another entity’s nonfinancial asset (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction.” Similarly, the GASB defines a SBITA as “contract that conveys control of the right to use another party’s (a SBITA vendor’s) information technology (IT) software, alone or in combination with tangible capital assets (the underlying IT assets), as specified in the contract for a period of time in an exchange or exchange-like transaction.” For both GASB 87 and 96, “substance over form” applies; meaning, if it walks, talks and acts like a lease or SBITA, it is one. Even though the contract might not say “lease” on it, if it presents as a lease of a nonfinancial asset from one entity to another, then it must be considered a lease for GASB 87. Examples of a nonfinancial asset are buildings, land, vehicles and equipment.
- Determine if the contract is exempt. Once you have identified all possible contracts, determine if any of them are exempt from Statement 87 or 96. The GASB identifies specific assets that are exempt from implementation, including biological assets, inventory and standalone IT service contracts. Short-term agreements are also exempt from GASB 87 and 96. A short-term lease is any lease with a maximum lease term of 12 months or less. The lease term includes any options to extend, regardless of their possibility of being exercised.
- For agreements falling under GASB 87 or 96, determine the initial asset and liability and the corresponding monthly and annual adjustments. To calculate the initial entry and subsequent monthly or annual adjustments, there are a few things you will have to identify first:
- Lease or subscription term, including options to extend the contract.
- Any payments made to, or incentives received from the vendor before commencement of the lease or subscription term.
- Expenses included in the contract other than subscription payments, such as maintenance costs).
For lessors, you will recognize a receivable and a deferred inflow of resources at the beginning of the contract. The receivable is calculated using the present value of contract payments expected to be received during the contract term. The deferred inflow of resources is measured by adding the receivable plus any payments received at or before the commencement of the contract term that relates to future periods (payment for final month’s rent, for example). As the rent/subscription is paid each month, the lessor will recognize interest revenue and a reduction of the receivable. At the end of the year, the lessor will recognize contract income and a reduction of the deferred inflow of resources.
For lessees, you will recognize a liability and an asset at the beginning of the contract. The liability is calculated using the present value of contract payments expected to be made during the contract term. The asset is measured by adding the liability plus any payments made to the lessor at or before the commencement of the contract term (prepayments, for example) and certain direct costs (insurance, legal, or real estate agent costs, for example). As the rent/subscription is paid each month, the lessee will recognize interest expense and a reduction of the liability. At the end of the year, the lessee will recognize amortization expense and accumulated amortization related to the asset.
If the calculations noted above have your head spinning, we’re here to help. Contact an Adams Brown advisor for additional guidance on calculating contract assets and liabilities or inquire about recommendations for a software package that can calculate the entries for you.