GASB 96: The Complete Guide to Subscription-based IT Arrangement Accounting

Every government entity today relies on cloud software, from financial management systems to productivity suites like Microsoft 365. Before GASB 96, subscription payments for these services were simply expensed, offering limited visibility into the obligations governments actually carried.

GASB issued Statement No. 96, Subscription-Based Information Technology Arrangements, in May 2020 to change that. 

Prior to GASB 96, no specific accounting or financial reporting guidance existed for these arrangements, which led to inconsistent treatment across governments. The standard requires government end users to recognize a subscription asset and corresponding subscription liability on their balance sheets for qualifying IT subscription contracts, along with detailed note disclosures. It’s modeled closely on GASB 87, Leases, and applies many of the same recognition, measurement, and reporting principles.

The standard applies to state and local governmental entities, including general purpose governments, public benefit corporations and authorities, public employee retirement systems, public utilities, hospitals and other healthcare providers, colleges and universities. Internal finance professionals and external auditors both play a significant role in GASB 96 implementation.

This guide covers everything government finance professionals and auditors need to know, from scope and exemptions to a fully worked example with calculations and journal entries.

GASB 96 Effective Date

GASB 96 is effective for fiscal years beginning after 15 June 2022, and all reporting periods thereafter. For entities with a 30 June fiscal year-end, the standard first applies to the year ending 30 June 2023. For calendar-year entities, GASB 96 applies starting 1 January 2023.

The original effective date was one year earlier, but GASB Statement No. 95 postponed it to provide relief during the COVID-19 pandemic.

What is a SBITA?

A SBITA (subscription-based information technology arrangement) is the central concept in GASB 96. As defined in paragraph 6:

A contract that conveys control of the right to use another party’s (a SBITA vendor’s) information technology 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.

The definition hinges on control. A government has control when it has both of the following:

1. The right to obtain the present service capacity from use of the underlying IT assets as specified in the contract
2. The right to determine the nature and manner of use of the underlying IT assets as specified in the contract

Both conditions must be met. The standard also clarifies that a contract doesn’t need to be explicitly labeled a “subscription” to qualify. Common examples of SBITAs include cloud-based ERP systems, SaaS permitting platforms, HR and payroll subscriptions, cloud storage services, and cybersecurity platforms.

Scope and Exemptions

What is excluded from GASB 96

Not every IT-related contract falls under GASB 96. The standard explicitly excludes (per paragraph 4):

• Contracts that meet the definition of a lease under GASB 87, where the software component is insignificant compared to the cost of the tangible capital asset (for example, leasing a computer with its operating system pre-installed)
• Governments acting as SBITA vendors. GASB 96 applies only to governments as end users
• Contracts meeting the definition of a public-private or public-public partnership under GASB Statement No. 94
• Perpetual licensing arrangements under GASB Statement No. 51, Accounting and Financial Reporting for Intangible Assets. The key distinction: a perpetual license conveys an indefinite right to use software (the government effectively owns the license), whereas a SBITA conveys a time-limited right. Once the subscription term ends, the government no longer has access
• Contracts that solely provide IT support services, such as standalone help desk or maintenance agreements that don’t convey the right to use software. However, contracts that bundle IT support with the right to use an IT asset do fall within scope

Short-term SBITAs

A SBITA is considered short-term if the maximum possible term is 12 months or less, including any options to extend, regardless of the probability those options will be exercised.

For short-term SBITAs, governments aren’t required to recognize a subscription asset and liability. Subscription payments are simply recognized as expenses based on the payment provisions of the contract. If a payment is made in advance, an asset is recognized. If a payment is owed at year-end, a liability is recorded. Short-term SBITAs are also exempt from the note disclosure requirements.

Contracts with multiple components

When a contract contains both subscription and non-subscription components (for example, a software subscription bundled with IT support services), the government should account for each component separately. The contract price should be allocated using observable information, such as standalone prices, combined with professional judgment.

If it isn’t practicable to allocate, the government should account for the entire contract as a single SBITA based on the primary subscription component.

Determining the Subscription Term

The subscription term is one of the most significant judgments in GASB 96, and a focal point for auditors. It begins when the government obtains control of the underlying IT assets and includes:

• The noncancellable period of the contract, plus
• Periods covered by a government’s option to extend, if it’s reasonably certain the government will exercise that option
• Periods covered by a government’s option to terminate, if it’s reasonably certain the government will not exercise that option
• Periods covered by a SBITA vendor’s option to extend or terminate, applying the same “reasonably certain” logic

Governments should consider all relevant factors, including economic incentives to exercise or not exercise an option. For example, significant customization costs or data migration investments might make it reasonably certain that a government will renew. The term isn’t reassessed unless a significant event or change in circumstances occurs within the government’s control.

Recognition and Measurement

At commencement, a government recognizes two items on its balance sheet (unless the SBITA qualifies as short-term): a subscription liability and a subscription asset (an intangible right-to-use asset).

Subscription liability

The subscription liability is initially measured at the present value of subscription payments expected during the subscription term. Payments included in the calculation are: fixed payments, variable payments based on an index or rate (measured at commencement), variable payments fixed in substance, termination penalties (if the term reflects exercising a termination option), vendor incentives receivable, and any other payments reasonably certain to be required.

Variable payments based on future performance, usage of the underlying IT assets, or number of user seats are not included in the liability measurement. These are expensed in the period the obligation is incurred. However, any component of those variable payments that is fixed in substance should be included.

Discount rate: Payments are discounted using the interest rate the SBITA vendor charges the government, which may be implicit. If that rate isn’t readily determinable (which is common), the government uses its estimated incremental borrowing rate.

Subsequent measurement: The government accrues interest on the outstanding balance at the applicable discount rate. Subscription payments are applied first to accrued interest, then to reduce the liability. The liability isn’t required to be remeasured solely for a change in an index or rate used to calculate variable payments.

Subscription asset

The subscription asset is initially measured as: the initial subscription liability amount, plus payments made to the vendor at or before commencement, plus capitalizable initial implementation costs (see below), less any vendor incentives received at commencement.

The asset is amortized (typically straight-line) over the shorter of the subscription term or the useful life of the underlying IT assets, beginning at commencement. On the statement of net position, the subscription asset is reported as a noncurrent intangible asset on a separate line item from other capital assets.

The Three Stages of Implementation Costs

Beyond subscription payments, governments often incur additional costs associated with a SBITA. GASB 96 requires these outlays to be grouped into three stages:

1. Preliminary project stage

Activities related to the government’s decision-making process before selecting a vendor: evaluating alternatives, determining technology requirements, issuing RFPs, selecting a SBITA vendor, and hiring consultants to support the evaluation. All outlays are expensed as incurred.

2. Initial implementation stage

Work required to get the subscription asset into service: data migration from legacy systems, system configuration and customization, testing, and installation. These are ancillary charges necessary to place the asset into service. Outlays are generally capitalized as part of the subscription asset. This stage is complete once the asset is placed into service.

3. Operation and additional implementation stage

Ongoing activities throughout the subscription term: technical support, maintenance, troubleshooting, and subsequent implementation work. Outlays are expensed as incurred, unless the activity increases efficiency or adds functionality that didn’t previously exist. In that limited case, the costs are capitalized as an addition to the subscription asset.

Training costs are expensed as incurred regardless of stage.

Example: SBITA Accounting with Calculations

To illustrate how GASB 96 works in practice, here’s a step-by-step scenario covering liability measurement, asset calculation, amortization, and journal entries.

Scenario

The (fictional) City of Riverside enters into a three-year subscription for a cloud-based financial management platform:

• Commencement: 1 July, Year 1
• Term: three years (no renewal options reasonably certain to be exercised)
• Annual payment: $10,000, paid in advance
• Discount rate: 4% (incremental borrowing rate)

Additional costs: $1,500 for vendor evaluation (preliminary stage, expensed), $3,000 for data migration (implementation stage, capitalized), and $500 for ongoing support (operation stage, expensed).

Calculate the subscription liability

Since payments are in advance, this is an annuity due:

Calculate the subscription asset

Amortization

Subscription asset: $31,860.94 ÷ 36 months = $885.03 per month (straight-line).

Subscription liability: On 1 July, Year 1, the first $10,000 payment reduces the liability to $18,860.94.

Monthly interest, Year 1: $18,860.94 × (4% ÷ 12) = $62.87 per month. Total accrued interest: $754.44.

On 1 July, Year 2, the $10,000 payment is applied: $754.44 to accrued interest, $9,245.56 to the liability. Remaining liability: $9,615.38.

Monthly interest, Year 2: $9,615.38 × (4% ÷ 12) = $32.05 per month. Total accrued interest: $384.60.

On 1 July, Year 3, the final $10,000 payment is applied: $384.60 to accrued interest, $9,615.40 to the liability, reducing it to $0 (minor rounding difference).

Verification: Total interest of $754.44 + $384.60 = $1,139.04, which matches total payments ($30,000) minus initial liability ($28,860.94) within $0.02 of rounding.

Journal entries

1 July, Year 1 – Commencement

Record the subscription asset and liability:

Record the first subscription payment:

Record capitalizable implementation costs:

Record preliminary project stage costs:

Monthly (for example, July Year 1):

Record monthly amortization and interest:

1 July, Year 2 – Second annual payment:

Similar entries follow for Year 3. If a government reports within a governmental fund, a conversion entry is required at year-end to convert from the modified accrual basis to the full accrual basis for government-wide statements.

Disclosure Requirements

Per paragraph 60, governments must disclose the following for all SBITAs other than short-term SBITAs (disclosures may be grouped):

1. General description of SBITAs, including the basis for variable payments not included in the liability
2. Total subscription assets and accumulated amortization, reported separately from other capital assets
3. Outflows of resources for variable payments not included in the liability
4. Outflows of resources for other payments not included in the liability (such as termination penalties)
5. Principal and interest requirements to maturity, presented separately, for each of the five subsequent fiscal years and in five-year increments thereafter
6. Commitments under SBITAs not yet commenced as of the reporting date
7. Components of any impairment loss, including related changes in the subscription liability

Subscription liabilities are reported as long-term liabilities (with the current portion shown separately), but they’re not considered debt subject to GASB Statement No. 88, Certain Disclosures Related to Debt, including Direct Borrowings and Direct Placements. This distinction matters for governments that track debt capacity and debt-related metrics, as subscription liabilities don’t count toward those thresholds.

Transition Guidance

Per paragraph 63, changes adopted to conform with GASB 96 should be applied retroactively by restating financial statements for all prior fiscal years presented, if practicable. If restating isn’t practicable, the cumulative effect should be reported as a restatement of beginning net position for the earliest fiscal year restated.

In the first year of application, governments must disclose the nature and effect of the restatement, and the reason for not restating prior years if applicable. The standard permits, but doesn’t require, inclusion of capitalizable implementation outlays incurred before transition in the subscription asset.

For new SBITAs that commence on or after the transition date, no special transition provisions apply. The standard is simply followed as written.

Modification Accounting

SBITA contracts are sometimes amended during the subscription term. A government should remeasure its subscription liability when changes are expected to significantly affect the liability amount: a change in subscription term, estimated payment amounts, the vendor-charged interest rate, or resolution of a contingency that makes previously variable payments fixed. If the term changes significantly, the discount rate should also be updated. Importantly, a liability isn’t required to be remeasured solely for a change in an index or rate used to determine variable payments.

A modification is treated as a separate contract (per paragraph 54) only when it gives the government access to additional IT assets not in the original contract, and the payment increase doesn’t appear unreasonable based on the amended terms. Otherwise, the existing liability and asset are remeasured.

GASB 96 vs. GASB 87

GASB 96 is explicitly modeled on GASB 87. Governments that have implemented GASB 87 will find the framework familiar: both require a right-to-use asset and liability at commencement, use present value of expected payments, follow the same discount rate hierarchy, and apply similar term determination and disclosure frameworks.

The key differences: GASB 87 covers tangible capital assets (real estate, equipment) while GASB 96 covers IT software. GASB 87 includes vendor/lessor-side guidance and sublease provisions, while GASB 96 applies only to government end users. Experience from GASB 87 adoption, particularly around contract identification, term determination, and discount rate selection, can be directly leveraged for GASB 96 implementation.

How Trullion Simplifies GASB 96 Compliance

GASB 96 adds real complexity, from identifying qualifying contracts to managing amortization schedules and preparing disclosures. For governments with dozens or hundreds of IT subscriptions, handling this manually creates risk and eats into staff time.

Trullion’s AI-powered accounting platform automates present value calculations, generates amortization schedules, produces journal entries, and streamlines disclosure preparation, all with a complete audit trail.

Book a demo to see how Trullion can support your GASB 96 compliance.