A version of this article first appeared on CCH Wolters Kluwer.
June 30 marks the fiscal year-end for many governments. In addition to the implementation of Governmental Accounting Standards Board (GASB) Statement No. 87, Leases last June 30, this year, the biggest priority is the implementation of GASB Statement No. 96, Subscription-Based Information Technology Arrangements (GASB-96 or SBITAs). GASB-96 is based on the framework of GASB-87, but with significant differences.
Here are other standards governments need to be aware of as fiscal year-end approaches.
GASB-96 and SBITAs
For many, this spring has been extremely busy with the implementation of GASB-96. For many governments, there are more SBITA contracts than lease contracts. Gathering the inventory of contracts that might be in scope for GASB-96 is a major step toward implementing the standard.
Contracts that may be in scope involve hardware, software, or a combination of both. In some cases, the software is insignificant, such as the operating system on a smart copier. At the other extreme are complex enterprise resource planning (ERP) systems.
Once potentially in-scope contracts are gathered, the recognition and measurement process occurs.
A challenge is realizing that GASB-96 is different than GASB-87, particularly when it comes to calculating the term. Both GASB standards require measuring the noncancelable period, but there’s a key distinction for SBITAs.
Many SBITA contracts may be canceled daily or within periods shorter than a year. Additionally, SBITAs may include options within the contracts. However, when calculating the term for SBITAs, only include an option to extend if it’s reasonably certain that either the government or the vendor will exercise the option to extend.
The same is true for termination clauses in SBITAs. Such provisions are included if either the government or the vendor has the option to terminate if it is reasonably certain that the clause would not be exercised.
For leases, the measurement of the contract length is determined by calculating the maximum possible term. SBITA contracts are measured by the length of the noncancelable right to use the underlying IT assets, adjusted by periods covered by a government’s option to extend if it is reasonably certain that the government (or the vendor) will exercise that option, or to terminate (if it is reasonably certain that neither party will exercise that option). Finally, the underlying asset in a lease will typically have a longer useful life than a SBITA due to the almost continuous change in technology. Buildings, vehicles, and other equipment involve longer contracts.
Once the term is measured, if SBITAs are less than 12 months, like leases, they are expensed. Even if longer than 12 months, the discount rate on a SBITA may be less than a lease signed at the same time with the same incremental borrowing rate due to the required amortization of a SBITA liability. The liability must be amortized using the shorter of the contract term or the useful life of the underlying asset.
For many governments, implementing the SBITA standards will be a challenge. To begin, create a plan to:
- Inventory the contracts
- Separate the contracts between in-scope and not in-scope
- Document your reasoning for categorization
- Review applicable policies and procedures
- Recognize and measure the contracts
- Draft and present disclosure
Other GASB Standards to Consider at Year-End
Three other GASB standards may have an impact on your government.
- GASB Statement No. 91, Conduit Debt Obligations
- GASB Statement No. 94, Public-Private and Public-Public Partnerships and Availability Payment Arrangements
- GASB Statement No. 99, Omnibus 2022 (which has some impact next year)
GASB Statement No. 91 was issued prior to COVID in 2019. This statement has implications for governments that rely on the borrowing capacity or tax-exempt status of separate debt issuers that are considered separate entities for reporting purposes. If such governments start reporting this debt for the first time, it represents a significant change for them because they are now accounting for debt that was previously not included in their financial records.
GASB Statement No. 94 (or PPPs) follows the framework of GASB-87, but typically involves infrastructure and other longer-lived underlying assets and lengthier contracts than SBITAs. Fewer governments may have PPPs than SBITAs or leases, but that may be changing in the future. The Federal Infrastructure Investment and Jobs Act as well as the Federal Inflation Reduction Act have elements that encourage PPPs, especially in the form of tax credits.
In addition to elements supposed to be implemented last year, the Omnibus standard tweaks elements of GASB-87, 94, and 96 this year.
Next Steps for Governments at Fiscal Year-End
There are many items to consider as your government approaches June 30 year-end. As numerous standards take effect, it’s important to have a plan to move forward to ensure you are proactively in compliance.
A trusted advisor, like Eide Bailly, can help.