On June 5 of this year, the Governmental Accounting Standards Board (GASB) acknowledged the growing popularity of cloud subscription-based IT arrangements (SBITA). In its latest statement, Statement No. 96, GASB issued new accounting and financial reporting guidance for government SBITAs, which will encourage the move away from purchasing on-prem hardware and software and pave the way for increased cloud adoption.
This new GASB statement is important, because it encourages government agencies to make an important shift. Nearly every local and state government agency is facing budget challenges and the shift to cloud-based solutions will help with both the reduction of operating costs and predictability of IT-related expenses. It will also help them connect more seamlessly with the citizens and businesses they serve. As people do more of their banking, shopping and learning online, they will expect the same connected experiences from their state and local governments.
Another reason this new statement is important revolves around clarity. While existing GASB literature (see Statement No. 87, Leases) addresses computer software that’s internally developed or commercially purchased through licensing agreements, cloud-based software—including its unique data storage conditions—is not clearly defined in existing regulations. Statement No. 96 directly addresses the lingering accounting and financial reporting challenges associated with these subscription-based agreements.
Here are a few key takeaways from the new guidelines:
1. Clearly defines SBITAs. Unlike earlier GASB statements, Statement No. 96 defines an SBITA as a contract that “conveys control of the right to use an SBITA vendor’s IT software as specified in the contract for a period of time in an exchange or exchange-like transaction.”
2. Classifies SBITAs as a right-to-use subscription asset for reporting purposes. Statement No. 96 requires governments with SBITAs to list them as an intangible assets and assign them corresponding subscription liabilities upon contract commencement.
3. Addresses how to measure the subscription asset. The subscription asset should be measured as the sum of the initial liability amount, payments made to the SBITA vendor before the initial subscription term, and capitalizable implementation costs.
Additionally, the statement defines three key stages for SBITA activities and their costs including the (1) preliminary project stage, (2) initial implementation stage and (3) operating stage.
By establishing consistent reporting requirements for governments using SBITAs, Statement No. 96 will improve transparency around the implementation and operation of cloud-based software. It will also promote more accurate comparative assessments between potential service providers.
For government lessors, the GASB’s announcement creates a valuable opportunity to achieve a more agile, more cost effective, easily scalable leasing operation. Software-as-a-service solutions can be deployed to connected devices faster than on-premises or hosted models. Additionally, working with a proven SBITA vendor can simplify solution management, as the vendor will monitor and execute ongoing application needs and software upgrades.
Statement No. 96 will not go into effect until June 2022. However, the GASB has encouraged government entities to adopt the new regulations as soon as they are able to provide ample time to establish compliant reporting protocols before the new regulations go into full effect.
So what does this mean for lessors with government clients? It’s clearly time to move to the cloud. This new GASB announcement along with the gravitational pull of SaaS, cloud and other modern solutions will expedite digital transformations for state and local governments. If lessors or any other providers want to do business with these government agencies, working in the cloud will almost certainly be a requirement.
Kristie Kosobuski, CLFP Sr. Director Product Management and Product Marketing
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