How to Navigate SBITA Prepayments in Alignment with GASB-96

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Key Takeaways

  • Prepaying for SBITAs becomes complex when dealing with two different bases of accounting.
  • Ambiguous language within GASB-96 could potentially lead to incorrect accounting paths.
  • It's essential to recognize that SBITAs constitute prepayments for a capital asset.

GASB-96 highlights instances where a governmental entity might engage in 'prepaying' for Subscription-Based Information Technology Arrangements (SBITAs).

Initially, the process may seem straightforward — simply debit prepaids and credit cash. However, complexity arises when dealing with two different bases of accounting:

  1. Modified accrual at the governmental fund level
  2. Full accrual at the government-wide level

The resulting transaction may be contingent upon the fund that holds the SBITA. The standard appears to be ambiguous specifically when addressing the prepayment for a SBITA asset.

Understanding SBITA Prepayments

A client with a June 30 year-end opts to prepay a SBITA contract on June 25th. The government disburses $300,000 to a SBITA vendor for a noncancelable 3-year period starting July 1, 2023. What entries would be appropriate at both the fund level and the government-wide level?

While the standard might lead some to consider debiting 'prepaids' at both the fund and government-wide levels, it's essential to recognize that SBITAs constitute prepayments for a capital asset. Hence, a more consistent approach would involve debiting these items as 'Development in Progress' at the government-wide level.

The entries could be structured as follows:

Governmental Fund:

  • Dr. Expenditure – Capital Outlay: $300,000
  • Cr. Cash: $300,000 (To record prepayment before the SBITA/Subscription)

Governmental Activities:

  • Dr. Development in Progress: $300,000
  • Cr. Cash: $300,000 (To record prepayment before the SBITA/Subscription)

This treatment would be like debiting 'Construction in Progress.' However, since the government isn't constructing or acquiring an owned capital asset, 'Construction in Progress' isn't appropriate.

Conversely, at the fund level, the accounting treatment would involve debiting an expenditure (likely a capital outlay account) and crediting cash. Discrepancies between full and modified accrual will result in a reconciling item since all expenses will have been recognized at the modified accrual fund level and no expenses will be recognized at the government-wide full accrual basis.

On July 1, 2023, entries might resemble the following:

Governmental Fund:

  • No entries are required if the entire SBITA was prepaid.
  • Governmental Activities:

    • Dr. Right to Use SBITA: $300,000
    • Cr. Development in Progress: $300,000 (To record the inception of SBITA)

    Next Steps for Governmental Entities

    Exercising caution in interpreting GASB-96 is crucial due to its ambiguous language on prepayments, potentially leading to incorrect accounting paths. It's important to note that there would be no liability as the SBITA is prepaid. For further guidance, consult with your Eide Bailly professional about SBITAs.

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    About the Author(s)

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    Brad Theisen

    Senior Manager
    Brad helps our clients through the day-to-day reporting process. He leads the audit team during fieldwork and provides insightful advice on financial reporting. When you work with Brad, you can expect he will provide excellent client service in a timely fashion.