GASB 96: A Comprehensive Guide to Subscription-Based IT Arrangement Accounting
The adoption of GASB Statement No. 96, Subscription-Based Information Technology Arrangements, effective for fiscal years beginning after June 15, 2022, marked a fundamental shift in how state and local governments account for cloud computing and software-as-a-service (SaaS) arrangements. This comprehensive guide walks practitioners through recognition criteria, measurement methodologies, implementation strategies, and real-world applications that distinguish SBITAs from traditional software licenses and capital leases.
Understanding GASB 96 and the SBITA Framework
GASB 96 was born from a practical necessity. As governments increasingly transitioned from owning enterprise software to subscribing to cloud services, the existing accounting framework failed to capture the economic reality of these arrangements. Unlike traditional capital purchases where the government owns perpetual rights to software, SBITAs grant time-limited access to hosted IT infrastructure and applications—often with automatic renewal provisions, flexibility to scale, and minimal implementation burden on the subscribing entity.
The core innovation of GASB 96 lies in its application of a lease-like model to IT subscriptions. While GASB 87, Leases, addresses physical assets such as vehicles, equipment, and real estate, GASB 96 extends this framework to the intangible world of information technology. The standard defines a subscription-based IT arrangement as "a contract that conveys control of the right to use another entity's IT resources as specified in the contract for a period in exchange for consideration."
This definition contains critical boundaries. A SBITA must involve:
Control of the right to use IT resources — The government directs the use of specific computing capacity, software features, or data processing services. Control is assessed under GASB 96's specific criteria, not the broader economic resource definition used in GASB 87.
Defined IT resources — The arrangement specifies identifiable IT infrastructure: a particular cloud platform (AWS, Azure), SaaS application (Salesforce, Microsoft 365), or combination thereof.
A subscription period — The arrangement includes a contractually defined term, which may be multiple years or month-to-month with termination options.
Consideration — The government provides fees, either fixed, variable, or tiered, in exchange for the subscription rights.
Distinguishing SBITAs from Traditional Software Licenses
The line between a SBITA and a traditional software license—neither of which creates a recognized asset under legacy GASB frameworks—represents a critical accounting decision.
Traditional software licenses under previous accounting models were expensed as acquired, with the cost recognized in the year of purchase. GASB 87 and 96 do not address the accounting for the perpetual ownership of software, which remains governed by legacy guidance. A government purchasing a perpetual license to use Microsoft Office on a server it owns and controls (such as on-premises installations) would typically capitalize the cost as an intangible asset under existing GASB guidance, or expense it if the government's threshold policy permits.
SBITAs, by contrast, grant time-limited access to externally controlled resources. The vendor maintains the infrastructure, applies patches, manages data centers, and implements security controls. The government pays a subscription fee—often monthly or annually—for the right to use the resource during the subscription period.
The accounting distinction is profound:
| Aspect | Traditional License | SBITA |
|---|---|---|
| Control of IT asset | Government controls software; vendor provides license | Vendor controls resource; government controls right to use |
| Maintenance/Support | Government responsible for infrastructure | Vendor responsible for infrastructure |
| Duration | Perpetual or indefinite | Fixed term with renewal options |
| Payment pattern | Typically lump sum upfront or minimal future obligations | Recurring subscription payments |
| Asset recognition | May be capitalized as intangible asset | Recognized as right-of-use subscription asset under GASB 96 |
| Lease treatment | Not addressed by GASB 87 | Addressed by GASB 96 |
Recognition Criteria and the Subscription Asset Decision Tree
GASB 96 requires governments to recognize a subscription-based IT arrangement in the financial statements if the arrangement meets all of the following criteria:
Execution of a contract — A written agreement exists between the government and the vendor establishing binding obligations.
Control of IT resources — The government obtains the right to control the IT resources under five specific criteria:
- The government has the right to obtain substantially all economic benefits from the IT resources
- The government can direct the use of the IT resources to achieve its objectives (operational autonomy)
- No other party can simultaneously obtain benefits from the same IT resources
- The government obtained the right at contract commencement
- The resource is not contingent on the occurrence of uncertain future events
IT resources are specified or identifiable — The contract identifies particular IT resources (servers, applications, databases) or sufficiently describes them that they are identifiable.
Contractual term for consideration — The contract specifies a period and corresponding consideration, establishing a measurable obligation.
A practical filter: If a government signs a multi-year SaaS contract for Salesforce customer relationship management, with defined access to Salesforce's cloud infrastructure and quarterly subscription payments, all criteria are likely met. If, however, a vendor offers flexible month-to-month access with no minimum term and no commitment to provide specific resources, the arrangement may fall outside GASB 96's scope—though GASB 96 itself does not prohibit recognition of short-term or month-to-month SBITAs.
Measurement: The Right-of-Use Subscription Asset and Subscription Liability
Upon initial recognition, governments measure both the subscription-based IT arrangement right-of-use asset and the subscription liability at the present value of subscription payments over the subscription period, discounted at the discount rate specified in the contract or, if not specified, at the government's incremental borrowing rate.
Identifying the Subscription Period
The subscription period includes:
- The stated contract term
- Any renewal or extension periods where the government has a compelling economic incentive to renew (e.g., renewal prices are locked in below market, significant transition costs exist, or the contract is implicitly cancellable only with substantial penalty)
For example, if a city enters a three-year subscription to Microsoft 365 with an automatic renewal clause at then-current market rates and no penalties for non-renewal, the initial subscription period is three years. If the contract instead includes a fourth-year renewal at a fixed rate 20% below expected market rates, with documented transition costs of $100,000, the compelling economic incentive test suggests the subscription period extends to four years.
Computing the Discount Rate and Present Value
The initial measurement of the subscription asset and liability uses the discount rate explicitly stated in the SBITA contract. If the contract does not specify a discount rate, the government uses its incremental borrowing rate—the rate the government would incur to borrow funds for a term and loan profile similar to the SBITA.
Example: Microsoft 365 Subscription
A county government enters a three-year subscription to Microsoft 365 enterprise applications at $50,000 per quarter (paid in advance at the start of each quarter). The contract specifies no discount rate. The county's incremental borrowing rate for a three-year obligation is 3.5% annually.
Payment schedule:
- Q1 (beginning of Year 1): $50,000
- Q2 (Year 1): $50,000
- Q3 (Year 1): $50,000
- Q4 (Year 1): $50,000
- Q5 (Year 2): $50,000
- ... continuing through Q12 (Year 3): $50,000
- Total: 12 payments of $50,000 = $600,000
Present value calculation (assuming payments made at the start of each quarter; discount rate = 3.5% annually = 0.875% quarterly):
- Q1 payment: $50,000 × (1/(1.00875)^0) = $50,000.00
- Q2 payment: $50,000 × (1/(1.00875)^1) = $49,563.41
- Q3 payment: $50,000 × (1/(1.00875)^2) = $49,130.93
- Q4 payment: $50,000 × (1/(1.00875)^3) = $48,702.49
- ... (continuing through Q12)
- Total present value: approximately $588,900
The county records an initial right-of-use subscription asset of $588,900 and a subscription liability of $588,900.
Implementation and Related Costs
GASB 96 addresses three categories of costs associated with subscription-based IT arrangements:
1. Preliminary Costs
Preliminary costs are expenditures incurred during the negotiation and finalization phase of the SBITA, before the commencement of the subscription period. These include:
- Legal fees for contract review
- Consultant fees for technology assessment and vendor evaluation
- Due diligence costs
- Internal staff time allocated to procurement
Accounting treatment: Preliminary costs are expensed in the period incurred. They do not increase the value of the right-of-use subscription asset or the subscription liability.
Practical example: A city government engages an IT consultant for $25,000 to evaluate three cloud HR systems and negotiate terms with the finalist vendor. The consultant completes the assessment, and the city selects a vendor. The city recognizes the $25,000 as an expense in the fiscal year of incurrence, even though the subscription will commence in the following fiscal year.
2. Initial Implementation Costs
Initial implementation costs are those incurred after the contract is executed but before the subscription period commences, or during the subscription period as direct and incremental costs necessary to place the IT resource in service. These include:
- Data migration services
- Integration with existing systems
- User training (if the vendor is contractually obligated to provide it and the cost is passed to the government)
- Testing and quality assurance
- Customization or configuration specific to the government's environment (if the vendor is obligated to perform it)
Accounting treatment: Initial implementation costs that the government incurs directly are capitalized as part of the right-of-use subscription asset. Conversely, implementation costs embedded in the subscription fee and paid through subscription payments are already reflected in the present value calculation and should not be double-counted.
Practical example: A county government subscribes to Salesforce CRM. The Salesforce subscription fee is $30,000 annually, but the county engages a Salesforce implementation consultant to migrate data from its legacy system, configure custom objects, and train end-users. The consultant charges $75,000 over three months. The county capitalizes the $75,000 as part of the initial subscription asset, increasing the asset beyond the present value of subscription payments.
3. Operation and Maintenance Costs
Costs incurred during the subscription period to maintain, operate, or enhance the IT resource are distinguished from the base subscription liability:
- Vendor support and maintenance fees above the standard subscription
- Vendor professional services to optimize the application
- Software updates, patches, and version upgrades (if billed separately and optional)
- Expanded user licenses or increased computing capacity
Accounting treatment: Operation and maintenance costs paid to third parties (e.g., vendor support contracts) are generally expensed as incurred. However, if the cost is a separable component of the subscription arrangement or a lease of additional IT resources, it may be accounted for separately as another SBITA or expensed depending on the nature.
Amortization of the Right-of-Use Subscription Asset
After initial recognition, the right-of-use subscription asset is amortized over the subscription period using the straight-line method, unless the contract terms explicitly call for an accelerated pattern (which is rare in SBITAs).
The amortization expense is recorded as:
Subscription Expense (or IT Service Expense) XXX
Accumulated Amortization—RUSA XXX
Example: Three-Year Microsoft 365 Subscription
Initial right-of-use subscription asset: $588,900 (from the earlier calculation) Subscription period: 3 years = 36 months
Straight-line monthly amortization: $588,900 / 36 = $16,358.33
Year 1 amortization expense: $16,358.33 × 12 = $196,300 Year 2 amortization expense: $16,358.33 × 12 = $196,300 Year 3 amortization expense: $16,358.33 × 12 = $196,300
Measurement of the Subscription Liability and Interest Expense
The subscription liability represents the government's obligation to make subscription payments. After initial recognition, the liability is reduced as payments are made and is adjusted for interest expense accrued on the outstanding balance.
Interest expense on the subscription liability is computed using the effective interest method:
Interest Expense XXX
Subscription Liability XXX
The effective interest method ensures that interest is accrued on the declining balance of the liability, creating a pattern where early payments consist primarily of interest, while later payments reduce the principal balance.
Example: Year 1 Subscription Liability Activity
Initial subscription liability: $588,900 Quarterly interest rate: 0.875% Quarterly subscription payment: $50,000 (paid in advance)
| Period | Beginning Balance | Interest (0.875%) | Payment | Ending Balance |
|---|---|---|---|---|
| Q1 | $588,900 | — | $50,000 | $538,900 |
| Q2 | $538,900 | $4,715 | $50,000 | $493,615 |
| Q3 | $493,615 | $4,319 | $50,000 | $447,934 |
| Q4 | $447,934 | $3,920 | $50,000 | $401,854 |
| Year 1 Total | — | $12,954 | $200,000 | $401,854 |
Year 1 interest expense is approximately $12,954. This amount is recognized as subscription interest expense in the government's statement of revenues, expenses, and changes in fund balance (or the equivalent in governmental accounting models).
Journal Entry Examples
To consolidate the accounting mechanics, here are complete journal entries for a representative SBITA:
Initial Recognition (January 1, 20X1)
A county government signs a contract to subscribe to Microsoft 365 for three years, with quarterly payments of $50,000 in advance. The incremental borrowing rate is 3.5%.
Dr. Right-of-Use Subscription Asset 588,900
Cr. Subscription Liability 588,900
To record the initial recognition of the SBITA and related right-of-use asset.
Payment of First Quarterly Fee (January 1, 20X1)
Dr. Subscription Liability 50,000
Cr. Cash 50,000
To record the first quarterly subscription payment.
Accrual of Q2 Interest (April 1, 20X1)
Before the Q2 payment:
Dr. Interest Expense—Subscription 4,715
Cr. Subscription Liability 4,715
To accrue interest on the subscription liability at 0.875% quarterly.
Payment of Q2 Fee (April 1, 20X1)
Dr. Subscription Liability 50,000
Cr. Cash 50,000
To record the second quarterly subscription payment.
Monthly Amortization (January 31, 20X1 and each month thereafter)
Dr. Subscription Expense 16,358
Cr. Accumulated Amortization—RUSA 16,358
To record monthly straight-line amortization of the right-of-use subscription asset.
End of Year 1 (December 31, 20X1)
The right-of-use subscription asset would appear on the balance sheet as:
Right-of-Use Subscription Asset 588,900
Less: Accumulated Amortization (196,300)
Net RUS Asset $392,600
The subscription liability would appear as:
Subscription Liability (current portion) 200,000
Subscription Liability (noncurrent) 201,854
Total Subscription Liability $401,854
Practical Application: Salesforce CRM Implementation
Consider a city government implementing Salesforce to manage citizen service requests and permit tracking. The city enters a five-year SaaS subscription with annual payments of $120,000 (paid upfront each January 1). The contract specifies a 2.5% annual discount rate.
Step 1: Determine the subscription period. The contract term is five years with no renewal options. The subscription period is 5 years.
Step 2: Calculate present value.
- Year 1: $120,000 / (1.025)^0 = $120,000
- Year 2: $120,000 / (1.025)^1 = $117,073
- Year 3: $120,000 / (1.025)^2 = $114,216
- Year 4: $120,000 / (1.025)^3 = $111,432
- Year 5: $120,000 / (1.025)^4 = $108,714
- Total: $571,435
Step 3: Initial recognition.
Dr. Right-of-Use Subscription Asset 571,435
Cr. Subscription Liability 571,435
Step 4: Initial implementation costs. The city incurs $80,000 in data migration and user training services performed by a third-party Salesforce consulting firm. These costs are capitalized:
Dr. Right-of-Use Subscription Asset 80,000
Cr. Cash 80,000
Adjusted RUS asset: $651,435
Step 5: Annual amortization. Annual straight-line amortization over 5 years: $651,435 / 5 = $130,287 per year
Dr. Subscription Expense 130,287
Cr. Accumulated Amortization—RUSA 130,287
Step 6: Payment and interest. On January 1 of Year 2, the city makes the annual $120,000 payment and accrues interest on the remaining liability:
Liability at end of Year 1: $571,435 − $120,000 = $451,435
Interest for Year 2: $451,435 × 2.5% = $11,286
Dr. Subscription Liability 120,000
Cr. Cash 120,000
Dr. Interest Expense 11,286
Cr. Subscription Liability 11,286
Comparison with GASB 87 Lease Accounting
The frameworks are similar, but important distinctions exist:
| Aspect | GASB 87 (Leases) | GASB 96 (SBITAs) |
|---|---|---|
| Asset type | Lease right-of-use asset | Subscription right-of-use asset |
| Liability | Lease liability | Subscription liability |
| Discount rate | Lesser of rate in lease or incremental borrowing rate | Rate in contract or incremental borrowing rate |
| Initial costs | Capitalized as part of ROU asset | Capitalized (initial implementation) or expensed (preliminary) |
| Amortization | Over lease term; may differ from liability payment schedule if escalating payments | Typically straight-line over subscription period |
| Measurement updates | Limited; ROU asset subject to impairment testing | Remeasured if subscription term changes or payments are modified |
Common Implementation Pitfalls and Mitigation Strategies
Pitfall 1: Including preliminary costs in the initial asset. Some finance teams incorrectly capitalize legal and procurement fees incurred before the contract is finalized. Preliminary costs are always expensed.
Mitigation: Segregate pre-contract and post-contract costs in procurement accounting records. Tag preliminary costs separately for proper treatment.
Pitfall 2: Double-counting implementation costs. If the vendor embeds implementation (data migration, training) in the subscription fee, capitalizing a separate implementation cost inflates the asset.
Mitigation: Require vendors to itemize subscription fees separately from implementation fees. Allocate costs accordingly.
Pitfall 3: Incorrect discount rate selection. Using the vendor's stated discount rate (which may be arbitrary) instead of the contract rate or incremental borrowing rate.
Mitigation: Establish a clear incremental borrowing rate policy. Document the source of all discount rates used.
Pitfall 4: Ignoring renewal provisions and compelling economic incentives. Failing to extend the subscription period for renewal options with favorable terms, understating the initial asset.
Mitigation: Conduct a renewal analysis at contract execution and annually. Document compelling economic incentive assessments.
Pitfall 5: Misclassifying operation and maintenance fees. Treating vendor support contracts or version upgrades as components of the subscription liability rather than separate expenses.
Mitigation: Use separate cost centers for SBITA payments vs. ancillary vendor services. Review invoices for unbundled charges.
Conclusion and Best Practices
GASB 96 has fundamentally reshaped how governments account for cloud computing and SaaS arrangements, moving away from a simple expense model to a sophisticated lease-like framework that captures the economic substance of these commitments. Success requires clear policies on:
- Recognition decisions based on control criteria and binding contractual obligations
- Measurement methodologies using appropriate discount rates and subscription periods
- Implementation cost segregation between preliminary (expensed), initial (capitalized), and ongoing (expense) categories
- Amortization and interest tracking using systematic methods that reflect the subscription pattern
- Vendor contract management ensuring clear identification of IT resources, payment schedules, and renewal terms
Governments that establish robust processes for SBITA identification, measurement, and reporting will benefit from more transparent financial statements and stronger controls over increasingly mission-critical cloud IT infrastructure.
AI Disclosure: This article was prepared with AI-assisted research by DWU Consulting. It is provided for informational purposes only and does not constitute legal, financial, or investment advice. All data should be independently verified before use in any official capacity.