Governmental Accounting Standards Update: 8/31/20
The Governmental Accounting Standards Board (GASB) regularly issues GASB Statements to set accounting and financial reporting standards for state and local governments that follow generally accepted accounting principles in the United States (U.S. GAAP). Below are select statements that were recently issued.
- GASB Statement No. 96: Subscription-Based Information Technology Arrangements
- GASB Statement No. 97: Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans
GASB has issued Statement No. 96, Subscription-Based Information Technology Arrangements, which provides new guidance for subscription-based information technology arrangements (SBITAs). SBITAs, such as cloud computing arrangements and other subscription-based access to software applications and online data storage arrangements, have become common for government entities. The new guidance is intended to address inconsistencies in accounting and financial reporting for SBITAs.
Statement No. 96 is based on the standards established in GASB Statement No. 87, Leases. The Statement defines a SBITA; requires governments with SBITAs to recognize a right-to-use subscription asset, an intangible asset, and a corresponding subscription liability; provides guidance related to outlays of other than subscription payments; and defines disclosure requirements related to SBITAs.
The Definition of a SBITA
Statement No. 96 defines a SBITA as a 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.
Recognition of the Subscription Asset and Subscription Liability
Statement No. 96 provides an exception for the recognition of the subscription asset and liability for short-term SBITAs, with terms of 12 months or less, including any options to extend, regardless of their probability of being exercised. Payments for short-term SBITAs should be recognized as outflows of resources.
For purposes of recognizing the subscription asset and subscription liability, the subscription term is the period a government has a noncancellable right to use the underlying IT assets, including periods covered by an option to extend (if it is reasonably certain that the government or SBITA vendor will exercise that option) or to terminate (if it is reasonably certain that the government or SBITA vendor will not exercise that option).
For all other SBITAs other than short-term SBITAs, an entity should recognize the subscription liability at the commencement of the term, which is when the subscription asset is placed into service. The subscription liability should be measured at the present value of subscription payments expected to be made during the subscription term. Future subscription payments should be discounted using the interest rate the SBITA vendor charges the government, which may be implicit, or the government’s incremental borrowing rate if the interest rate is not readily determinable. The government should recognize amortization of the discount on the subscription liability as an outflow of resources (e.g., interest expense) in subsequent periods.
The subscription asset should be initially measured as the sum of the following:
- The initial subscription liability amount
- Payments made to the SBITA vendor before commencement of the subscription term
- Capitalizable implementation costs, less any incentives received from the SBITA vendor at or before the commencement of the subscription term
The government should recognize amortization of the subscription asset as an outflow of resources over the subscription term.
Outlays Incurred, Other Than Subscription Payments
Activities associated with SBITAs, other than making subscription payments, should be grouped into the following three stages and accounted for as follows:
- Preliminary Project Stage: This stage includes activities such as evaluating alternatives, determining needed technology, and selecting the SBITA vendor; the related outlays are expensed as incurred.
- Initial Implementation Stage: This stage includes all ancillary charges necessary to place the subscription asset into service; the related outlays generally should be capitalized as an addition to the subscription asset.
- Operation and Additional Implementation Stage: This stage includes activities such as subsequent implementation activities, maintenance, and other activities for a government’s ongoing operations related to a SBITA. Outlays in this stage should be expensed as incurred unless they meet specific capitalization criteria.
For purposes of the classification of the outlays related to the above activities, the nature of the activity is used as the determining factor. Training costs should be expensed as incurred, regardless of the stage in which they were incurred.
With the exception of short-term SBITAs, Statement No. 96 requires a government to disclose the following:
- A general description of SBITAs
- The total amount of subscription assets and the related amortization
- The amounts of variable and other payments not previously included in the measurement of the subscription liability
- The principal and interest requirements to maturity for subscription liabilities for each of the five subsequent fiscal years and in five-year increments thereafter
- Any commitments under SBITAs before the commencement of subscription terms
- The components of any loss associated with an impairment
For disclosure purposes, subscription liabilities are not considered debt that is subject to disclosure requirements in GASB Statement No. 88, Certain Disclosures Related to Debt, including Direct Borrowings and Direct Payments.
Statement No. 96 is effective for fiscal years beginning after June 15, 2022, and all reporting periods thereafter. Early application is encouraged.
GASB Statement No. 97: Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans
The GASB has issued Statement No. 97, Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans.
Statement No. 97 requires that, for purposes of determining whether a primary government is financially accountable for a potential component unit, the absence of a governing board should be treated the same as the appointment of a voting majority of a governing board if the primary government performs the duties that a governing board typically performs. (Note that this excludes potential component units that are defined contribution pension plans, a defined contribution other postemployment benefit (OPEB) plan, or other employee benefit plan.)
Appointment of a voting majority is a criterion in existing standards used to determine whether a legally separate entity should be incorporated into the government’s financial statements. Under certain circumstances, a financial burden on a government also is a criterion in existing standards used to determine whether a legally separate entity should be incorporated into the government’s financial statements. Due to an analysis of perceived costs associated with applying existing standards (specifically, paragraph 7 of Statement No. 84, Fiduciary Activities), the GASB decided to limit the application of the financial burden criterion regarding contributions to postemployment benefit plans to only defined benefit pension plans and defined benefit OPEB plans that are administered through trusts.
Previously, all Internal Revenue Code (IRC) Section 457 plans were not considered to be pension plans and, therefore, were not subject to pension plan reporting requirements; additionally, benefits provided through Section 457 plans were not reported as pension benefits. Under Statement No. 97, Section 457 plans should be classified as either a pension plan or other employee benefit plan, depending on whether the plan meets the definition of a pension plan. Statement No. 97 also clarifies that Statement No. 84, as amended, should be applied to all arrangements organized under IRC Section 457 to determine whether those arrangements should be reported as fiduciary activities.
The following requirements are effective immediately:
- For primary governments that perform the duties that a governing board typically performs, requirements exempting them from treating the absence of a governing board the same as the appointment of a voting majority of a governing board in determining whether they are financially accountable for defined contribution pension plans, defined contribution OPEB plans, or other employee benefit plans
- Requirements limiting the applicability of the financial burden criterion in paragraph 7 of Statement No. 84 to defined benefit pension plans and defined benefit OPEB plans that are administered through trusts that meet the criteria in paragraph 3 of Statement No. 67 or paragraph 3 of Statement No. 74, respectively
The requirements that are related to the accounting and financial reporting for Section 457 plans are effective for fiscal years beginning after June 15, 2021.
All other requirements are effective for reporting periods beginning after June 15, 2021.
Earlier application of the requirements is encouraged and permitted by requirement as specified within Statement No. 97.
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