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The 5 major challenges with GASB 96

May 21, 2023

For tribal governments, casinos and other tribal entities, the Government Accounting Standards Board (GASB) 87, leases, is nearing its implementation date. The last significant year-end to implement is December 31, 2022.

Now is the time to plan for the next significant governmental accounting standard, GASB 96, subscription-based information technology arrangements (SBITAs), which is effective for reporting periods beginning after June 15, 2022. Earlier application is encouraged.

While there are some helpful similarities between the accounting treatment for GASB 87 and GASB 96, GASB 96 isn’t as simple as GASB 87. Your organization will have new terminology to become familiar with and additional accounting considerations.

Here are five challenges your tribal entity may face with the GASB 96 implementation, and how you can better manage them:

1. Identifying subscription-based information technology arrangements

The first challenge in implementing GASB 96 is identifying SBITAs.

These arrangements can be complex and may not be immediately apparent. They may include cloud-based software, hosting services or other IT services that are accessed via a subscription.

To overcome this challenge, it’s important to work closely with your IT department and procurement team. They will have the best understanding of the IT services you’re using and whether they are subscription based. In addition, the finance department should review recurring payments to determine if there are other contracts that have not been identified.

Once the potential contracts have been identified, having a thorough knowledge of GASB 96 is necessary to correctly determine if the contract qualifies for GASB 96 accounting treatment.

Just like some contracts may not have been identified as leases, but qualified as such under GASB 87, some arrangements may not be explicitly labeled as "subscriptions." A good, thorough reading of the contracts is necessary.

2. Determining the nature of the arrangement

Once a subscription-based IT arrangement has been identified, the next challenge is determining its nature. GASB 96 requires government entities to classify SBITAs as either "leases" or "service agreements."

Leases are arrangements that you have control over the underlying IT asset, while service agreements are arrangements that you do not have control over the asset.

Determining the nature of the arrangement can be challenging, especially for complex IT services that involve multiple components. Accountants will need to carefully review the terms of the arrangement and assess the level of control the tribal entity has over the underlying asset.

3. Identification, segregation and valuating implementation costs

Once SBITAs have been identified, there is good and bad news about the accounting treatment.

The good news is that if you are familiar with how GASB 87 lease entries work, those repetitive periodic payments will result in a similar entry being made. But with GASB 96, you’ll have to dive into the nature of the payments being made. 

While most leases don’t typically include upfront costs, there can be substantial upfront costs before implementing an IT system. Costs in the hundreds of thousands to even millions of dollars will likely be seen from some of these system implementations.

Many of these upfront costs will need to be capitalized, but not all the implementation costs. The distinction on which costs qualify depends on the activity that is being performed. Therefore, it is important to communicate and request a breakout of activities on invoices whenever possible.

One important consideration is that not all the costs are likely to come from external payments to the IT vendor. Instead, some will come from internal payroll and other costs.

The most significant portion would be time spent by governmental entity employees to communicate and prepare data for the new system. While it may not be very significant on smaller IT projects, larger accounting system packages and other enterprise resources may result in sufficient time to be worth tracking.

4. Disclosure requirements

GASB 96 introduces new disclosure requirements for SBITAs. Government entities will need to disclose information, such as the terms of the arrangement, the nature of the arrangement and the amount of assets and liabilities recognized.

To comply with these disclosure requirements, staff responsible for financial reporting will need to ensure that your financial statements provide sufficient information about SBITAs. If you have SBITAs, this will require additional disclosures beyond what was previously required.

5. Expensing vs. capitalizing new charges

Another significant difference from GASB 87 that will have to be evaluated with GASB 96 is whether new additional costs will qualify as an additional capitalization amount.

In general, activities that deal with maintenance and correcting issues are expensed. Costs that involve activities meant to improve the functionality of the subscription asset or increase its efficiency should be capitalized as an addition to an existing subscription asset.

Therefore, communication with your IT department on new charges and activities from an IT vendor is vital to ensure that new capitalized costs are not missed.

How Wipfli can help

Wherever you are in your implementation process, Wipfli is here to help. Our team can assist you in determining which IT subscription contracts qualify under GASB 96, calculating the asset values and creating the necessary journal entries.

For more clarification on the analysis and calculation processes of GASB 96, register for our upcoming webinar, June 22, 2023, at noon CST.

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Phil Collins, CPA, CFE
Senior Manager
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