- Procuring public safety equipment may fall into multiple GASB standards, including GASB-87 and GASB-96.
- Essential to the discussion is the identification of whether the subscribed software is significant in comparison to the related equipment.
Public safety continues to be top of mind. With numerous standards affecting the procurement of items like tasers and other police purchases, how can your government apply GAAP to these contracts?
Here’s how to apply GASB-96, Subscription-Based Information Technology Arrangements, as amended, (or SBITAs), to public safety procurements.
Significance of the Software
GASB-96 includes an important provision to consider contracts that convey control of the right to use another party’s combination of information technology (IT) software and tangible capital assets that meets the definition of a lease. In many situations, the software component is insignificant when compared to the cost of the underlying tangible capital asset (for example, a computer with operating software or a smart copier that is connected to an IT system). In the situations where the software is insignificant, the contract may result in a lease, or if title to the capital asset or assets transfer, the contract is a purchase.
Much of modern technology is a combination of equipment and software together. Just in public safety, potential contracts may involve:
- Body cameras,
- GPS locators, and other equipment.
Some of these may include subscribed software elements. The situation is similar for local public safety vehicles, as well as other common assets of government such as transit busses, golf carts, and parking meters.
Part of these purchases could be in scope within the lease standards from GASB-87 and part could be in scope under GASB-96 SBITA standards. For parking meters, if the operation of the meters is outsourced to an application-based entity, the government may even have a public-private partnership in accordance with GASB-94.
Both GASB-87 and GASB-96 contain references about contracts with multiple components. For example, your city contracts for 25 police body cameras from a vendor and the contractual arrangement is over five years. Invoicing can be ambiguous and vague and often does not differentiate between the equipment and the software. You may need to enlist the help of your local police chief to determine how much of the contract, in their opinion, relates to software (videos, cloud storage, etc.) versus how much relates to the physical equipment (cameras, batteries, and wires).
To illustrate, assume the local police chief discussed the contract components with the vendor, who estimated that 90% of the value of the contact relates to software, with the remaining 10% to the value of the hardware. Your government may have to calculate your SBITA payable based on 90% of the contractual value and the remaining 10% could be considered a lease payable if the amounts are significant. Unfortunately, there is no consistent definition of the word ‘significant’ in governmental GAAP. Within the Basis for Conclusions for GASB-96, in paragraph B12, the GASB wants practitioners to focus on the software element to choose whether the contract for the body cameras should be a SBITA, or if the software is insignificant, resulting in treating the body cameras as a lease.
Reporting – Purchase, Lease or SBITA?
If indeed the contract results in a purchase, where title transfers to the government, then a capital asset results. The capital asset is then depreciated over the useful life of the capital asset. If a lease results, a right-to-use leased asset is reported and amortized over the shorter of the leased asset or the related contract. Similarly, if a SBITA results from the contract, reporting is like a lease, over the shorter of the SBITA asset life or the subscription contract, but should be in a separate classification from leased assets. In the case of public safety, if the software is separable from the hardware and significant, an allocation may be needed with documentation of how the allocation was calculated.
Enhancing Internal Controls Over the Contracts
Many governments have robust contracting processes, some of which align to state provisions or federal provisions. Recognizing which GASB standard (or standards) align to the contract being signed may require a team effort. Some contracts have multiple accounting events and may involve multiple standards.