Subscription-Based Information Technology Arrangements

Subscription-Based Information Technology Arrangements

Project Description: This project addresses accounting and financial reporting for subscription-based information technology arrangements (SBITAs), a type of information technology (IT) arrangement. The project will consider (1) potential accounting and financial reporting guidance for cloud computing arrangements that are not addressed in current guidance and (2) potential amendments to Statement No. 51, Accounting and Financial Reporting for Intangible Assets, and related questions and answers in the Comprehensive Implementation Guide.

Status:
Exposure Draft Redeliberations

Subscription-Based Information Technology Arrangements—Project Plan

 

Background: Cloud computing refers to the use of a network of remote servers hosted on the Internet to deliver on-demand storage, management, processing, and other applications. Through the most commonly known service models—Software as a Service (SaaS), Platform as a Service (PaaS), and Infrastructure as a Service (IaaS)—providers of CCAs typically allow end users to access software or hardware remotely from any location and to store data with the providers for a length of time typically longer than a year. The migration from on-premise IT systems to CCAs has been taking place across all sectors in recent years, including state and local governments.

CCAs often involve contracts with a term that is longer than one year. Depending on the features of individual CCAs, it often is difficult to determine whether a CCA results in (1) an asset and a related liability or (2) a period expense. In addition, the nature of costs associated with initial implementation of CCAs often make it difficult to determine whether those costs should be capitalized or expensed.

Based on the pre-agenda research activities, it is evident that diverse opinions exist regarding the differences and similarities between CCAs and on-premise software licensing arrangements (on-premise arrangements). Diverse opinions also exist regarding the accounting treatments for CCAs. Some IT experts, preparers, and auditors who participated in the research believe CCAs and on-premise arrangements are fundamentally different transactions. They view CCAs as strictly subscription-based service arrangements between the vendor to the customer; whereas, on-premise arrangements provide customers with a perpetual software license. Consequently, those stakeholders believe the accounting treatments for the two transactions should be different.

Other IT experts, preparers, and auditors who participated in the research believe CCAs and on-premise arrangements are similar transactions. They believe that both arrangements (1) provide customers with access to use the software, regardless of the ownership, and (2) can provide similar functionality and services through the use of the software, regardless of where that software resides. Therefore, those stakeholders believe the accounting treatment for these transactions also should be similar.

In the absence of specific guidance on CCAs, preparers and auditors rely on their own professional judgement to determine which guidance to analogize. Some use Statement 51. Some look to Statement No. 87, Leases, even though it explicitly excludes contracts for intangible assets such as computer software from its scope. Some apply Concepts Statement No. 4, Elements of Financial Statements, to determine whether an individual cost item in their CCAs meets the definition of an asset, and then apply Statement 51 to determine if that cost belongs to the application development stage, assuming that cost is similar to costs associated with internally generated computer software. Additionally, some preparers and auditors who are familiar with FASB ASU No. 2015-05 analogize to that guidance to determine whether a CCA includes a software license and, therefore, should be accounted for in a manner consistent with the acquisition of other software licenses.

Another difficulty resulting from the lack of specific guidance on CCAs relates to the classification and accounting for the initial implementation costs associated with CCAs. The research indicates that, because initial implementation services generally are not included in the subscription fees for cloud computing services, initial implementation often are separately contracted. The research also suggests that stakeholders apply different methods to account for initial implementation costs, including (1) as assets other than capital assets (for example, a prepaid asset), (2) capitalized as part of an intangible asset resulting from a CCA, or (3) as period expenses.

Accounting and Financial Reporting Issues: The project is considering the following SBITAs:

  1. What are IT arrangements and what differentiates SBITAs from other IT arrangements?
  2. What should be the criteria to classify IT arrangements?
  3. Do SBITAs or a particular stage(s) of SBITAs meet the definition of an asset in Concepts Statement 4? If so, do SBITAs meet the Statement 51 definition of an intangible asset? How should SBITAs be defined for financial reporting purposes?
  4. What are the common characteristics of SBITAs that differentiate them from on-premise software arrangements? What are the similarities between the two types of transactions that may suggest they are economically similar transactions for financial reporting purposes?
  5. Given the differences and similarities between SBITAs and on-premise arrangements, should there be classification of different types of SBITAs? If so, should governments apply similar guidance to certain types of SBITAs and on-premise arrangements, but account for other types of SBITAs differently? If so, what should be the classifications and the accounting treatments?
  6. How should governments account for fees paid for SBITAs?
  7. If the contract for a SBITA is separate from the contract for the initial implementation of that SBITA, how should governments account for outlays incurred during the initial implementation of a SBITA?
  8. Should outlays associated with SBITAs be grouped into three stages, similar to the three stages described for developing and installing internally generated computer software in Statement 51? Further, should governments account for the outlays according to the stages and/or based on the nature of the outlay?
  9. Some SBITAs have multiple components that may go into service at different times. Should governments account for these components separately? If so, should they capitalize or expense each separate component, and why?
Project History:
  • Pre-agenda research approved: April 2017
  • Added to current technical agenda: April 2018
  • Task force established? No
  • Deliberations began: August 2018
  • Exposure Draft approved: May 2019
  • Comment period: May–August 2019
Current Developments: The Board approved an Exposure Draft on May 13, 2019. The comment period will conclude on August 23, 2019.

Work Plan:
 
Board Meetings Topics to Be Considered
November 2019: Redeliberations on implementation costs, vendor incentives, multiple components, contract combinations, modifications and terminations, and notes to financial statements.
January 2020: Redeliberations on all remaining issues.
May 2020: Review preballot draft of a final Statement.
May T/C 2020: Review ballot draft of a final Statement and consider for approval.


Subscription-Based Information Technology Arrangements—RECENT MINUTES


Minutes of Teleconference, November 4, 2019
 
The Board continued redeliberations based on stakeholder feedback received on the Exposure Draft, Subscription-Based Information Technology Arrangements, and discussed the topics of scope and applicability, definition, subscription term, and the subscription liability.
 
The Board first discussed scope and applicability of the proposed guidance. The Board tentatively decided that the scope of the final Statement should not be amended to include certain types of perpetual licensing arrangements and also that the scope exclusion for perpetual licenses in paragraph 4c should not be modified in the final Statement. The Board also tentatively agreed that explanations of the scope exclusions in the Basis for Conclusions should not be added as a footnote to paragraph 4 in the final Statement.
 
The Board then discussed topics related to the definition of a SBITA. The Board tentatively decided that the final Statement should not provide additional guidance or examples related to the application of the SBITA definition. In addition, the Board tentatively agreed that the final Statement should not be modified to address arrangements that do not meet the definition of a SBITA and that the definition of a SBITA should not be modified to address arrangements in which the government does not obtain control of the right to the underlying IT hardware or software directly from a SBITA vendor. The Board also tentatively decided that additional guidance regarding the “nature and manner of use” as a factor to determine whether a government has control in a SBITA should not be provided in the final Statement.
 
Next, the Board redeliberated guidance related to the subscription term. The Board tentatively decided that paragraph 10 of the Exposure Draft should be carried forward without modification to further clarify when and how often evaluation of a fiscal funding or cancellation clause should be performed. The Board also tentatively agreed not to modify the guidance to address determination of the subscription term in specific types of arrangements. Additionally, the Board tentatively decided that the guidance in paragraph 13 related to short-term SBITAs should be modified in the final Statement as follows:
 
      A short-term SBITA is a SBITA that, at the commencement of the subscription term, has a maximum possible term under the SBITA contract of 12 months (or less), including any options to extend, regardless of their probability of being exercised. As discussed in paragraph 9, periods for which both the government and the SBITA vendor have an option to terminate the SBITA without permission from the other party (or if both parties have to agree to extend) are cancellable periods and consequently should be excluded from the maximum possible term. For a SBITA that has cancellable periods, such as a rolling month-to-month SBITA or year to year SBITA, the maximum possible term of that SBITA is the noncancellable period, including any notice periods.
   
Finally, the Board discussed topics related to the subscription liability. The Board tentatively agreed that the guidance regarding the discount rate to be used in initial measurement of a subscription liability should be carried forward to the final Statement, without providing additional guidance or modification to include the option to use other uniform discount rates. In addition, the Board tentatively decided to carry forward the requirement to measure the subscription liability at the present value of future subscription payments in the final Statement. The Board also tentatively agreed that modifications should not be made to the subscription liability measurement guidance to address maintenance costs. To provide further clarification on variable payments in the initial measurement of a subscription liability, the Board also tentatively agreed to modify the provisions in paragraph 16 of the Exposure Draft for the final Statement as follows:
 
      Variable payments, such as those based on future performance of a government or usage of the underlying IT hardware or software, number of user seats, or other variable factors, should not be included in the measurement of the subscription liability. Rather, those variable payments should be recognized as outflows of resources (for example, expense) in the period in which the obligation for those payments is incurred. However, any component of those variable payments that is fixed in substance should be included in the measurement of the subscription liability.

Minutes of Meetings, October 15−17, 2019
 
The Board began redeliberations based on stakeholder feedback received on the Exposure Draft, Subscription-Based Information Technology Arrangements, and discussed the topics of scope and applicability and the subscription asset.
 
The Board first redeliberated the scope and applicability of the proposed Statement. The Board tentatively decided not to set a threshold to exclude “small ticket” SBITAs from the scope of the final Statement. In addition, the Board tentatively reaffirmed that separate standards for SBITAs should be provided in the final Statement, rather than as an amendment to existing leases guidance.
 
The Board then addressed comments related to an overlap of scope with Statement
No. 87, Leases. To clarify that overlap, the Board tentatively decided to clarify the definition of a SBITA in the final Statement to specify “IT hardware, software, or a combination of both (the underlying IT hardware or software).” The Board also tentatively decided to modify the effective date paragraph to eliminate the overlap in the final Statement as follows:
 
The requirements of this Statement are effective for fiscal years beginning after December 15, 2019, and all reporting periods thereafter, for the following:
  1. A SBITA contract that has right-to-use IT hardware only
  2. A right-to-use IT hardware component that is accounted for as a separate subscription component in a SBITA contract with multiple components
  3. A SBITA contract that involves multiple components but is accounted for as a single SBITA in accordance with paragraphs 46 and 47, and the primary subscription component is determined to be an IT hardware component
  4. The provision in paragraph 5 to amend Statement 87, paragraph 8.
For all other contracts, the requirements of this Statement are effective for fiscal years beginning after June 15, 2021, and all reporting periods thereafter. Earlier application is encouraged. [Exposure Draft, paragraph 59]
 
The subscription asset, including measurement and impairment, was then discussed by the Board. The Board tentatively decided to carry forward the requirement to recognize a subscription asset for a SBITA in the final Statement. The Board also tentatively agreed that clarifying edits should be made to the guidance to specify that the commencement of the subscription term is the point when the subscription asset is considered to have been placed into service, at which time the government has obtained control of the right to use the underlying IT hardware or software. In addition, the Board tentatively agreed that clarifying edits should be made to the guidance for the initial measurement of the subscription asset to clarify the treatment of payments made before the commencement of the subscription term and to clarify when amortization should begin for a government whose system has multiple modules. The Board tentatively decided not to modify the guidance for amortization of the subscription asset to address the difference between the useful life of a subscription asset in the SBITA guidance and the useful life of computer software described in Statement No. 51, Accounting and Financial Reporting for Intangible Assets. Finally, the Board tentatively decided that additional guidance should not be provided in the final Statement for impairment of the subscription asset.

Minutes of Teleconference, May 13, 2019
 
The Board reviewed a ballot draft of an Exposure Draft of a proposed Statement, Subscription-Based Information Technology Arrangements, and discussed clarifying edits. The Board then voted unanimously to approve the issuance of the Exposure Draft.

Minutes of Meetings, April 22−24, 2019

The first topic of discussion by the Board related to the capitalization of training costs in the context of subscription-based information technology arrangements (SBITAs). The Board tentatively decided to be consistent with current guidance in Statement No. 51, Accounting and Financial Reporting for Intangible Assets, and expense training costs in the context of SBITAs, regardless of which implementation stage they are incurred.  However, the Board also decided that the topic of training should be added to the potential projects list for future consideration.
 
The Board then reviewed a preballot draft of an Exposure Draft of a proposed Statement, Subscription-Based Information Technology Arrangements, and discussed clarifying edits. The Board agreed to move forward with a ballot draft of an Exposure Draft of a proposed Statement that will be discussed at the May 2019 Teleconference.

Minutes of Meetings, March 13, 2019
 
The Board continued discussion of subscription-based information technology arrangements (SBITAs) for the purpose of developing an Exposure Draft, including the discussion of potential transition guidance, a proposed effective date, and the length of the comment period. The Board tentatively decided to propose that (1) the transition provisions provided in the Exposure Draft be similar to those provided in Statement 87, (2) the effective date be for fiscal years beginning after June 15, 2021, (3) early implementation be encouraged, and (4) the comment period for the Exposure Draft of the proposed Statement be 90 days. 

The Board also reviewed a draft of the Standards section of a proposed Exposure Draft and discussed clarifying edits. The Board agreed that the project staff should prepare a preballot draft of an Exposure Draft for discussion at the April 2019 meeting.

The Board also discussed whether the intended benefits resulting from the proposed SBITA guidance justify the anticipated costs to preparers and other stakeholders. The Board tentatively decided that the intended benefits associated with the proposed SBITA guidance justify the perceived costs of implementation and ongoing compliance.

Finally, the Board discussed the characteristics of the financial information that would be included in a SBITA Exposure Draft. The Board tentatively agreed that the proposed accounting and financial reporting requirements in the Exposure Draft would meet all of the characteristics in Group 1 and, therefore, are within the scope of the GASB’s authority.

Minutes of Teleconference, February 19, 2019
 
The Board discussed the impairment of subscription-based information technology arrangements (SBITAs) and tentatively decided that the following impairment guidance should be included in the text of a proposed SBITA standard:
  1. Provide a general reference to paragraph 9 of Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries, with respect to potential indicators of impairment and note that if one or more of the indicators is met (focusing specifically on paragraphs 9c–9e), it may signal that the service utility of that subscription asset is impaired.
  2. Provide specific examples of impairment indicators (paragraphs 9c–9e), as described in paragraph 9 of Statement 42, that could be found in a SBITA, as well as an additional indicator: when the vendor of the SBITA contract goes out of business before the contract expires.
  3. The length of time during which the end user cannot use the underlying hardware or software, or is limited to using the hardware or software in a different manner, should be compared to its previously expected manner and duration of use to determine whether there is a significant decline in service utility of the subscription asset.
  4. When evidence demonstrates that the impairment will be temporary, a subscription asset should not be written down (except to the extent that the corresponding liability is reduced).
  5. If a subscription asset is determined to be permanently impaired, the amount reported for the subscription asset should be reduced first for any change in the corresponding subscription liability. Any remaining amount should be recognized as an impairment.
Minutes of Meetings, January 29−31, 2019
 
The Board discussed the overall approach for requiring note disclosures for Subscription-Based Information Technology Arrangements (SBITAs). The Board tentatively decided that, in general, the lessee disclosures in paragraph 37 of Statement No. 87, Leases, should be proposed to be required for SBITAs. The Board also discussed whether the lessee disclosures in paragraphs 38 and 39 of Statement 87 should be required for SBITAs. The Board tentatively decided that the disclosures in paragraphs 38 and 39 of Statement 87 should not be proposed for SBITAs.
 
The Board then discussed whether to include certain provisions in paragraph 37 of Statement 87 in the proposal of required disclosures for SBITAs. The Board tentatively decided that the two provisions related to residual value guarantees in paragraph 37 of Statement 87 should not be proposed in the required disclosures for SBITAs. The Board also tentatively decided that the disclosure in paragraph 37c of Statement 87, which requires governments to disclose the amount of the lease asset by major classes of underlying assets, should not be proposed for SBITAs.

Minutes of Meetings, December 17−19, 2018

In addressing implementation costs related to subscription-based information technology arrangements (SBITAs), the Board discussed the stages that activities associated with SBITAs should be grouped into and tentatively decided to propose that activities associated with SBITAs be grouped into the following three stages, subject to potential changes to the title of the stages:
  • Preliminary Project Stage. Activities in this stage include the conceptual formulation and evaluation of alternatives, the determination of the existence of needed technology, and the final selection of alternatives for the SBITA.
  • Application Development Stage. Activities in this stage include the design of the chosen path, including SBITA configuration and SBITA interfaces, coding, installation, and testing, including the parallel processing phase.
  • Subscription/Operation Stage. Activities in this stage include the subscription for the right-to-use underlying hardware or software and include SBITA maintenance.
The Board also tentatively decided to propose the below clarification paragraph regarding data conversion.
 
Data conversion should be considered an activity of the application development stage only to the extent it is determined to be necessary to make the SBITA operational; that is, in condition for use. Otherwise, data conversion should be considered an activity of the subscription/operation stage.

The Board tentatively decided to propose that the nature of the activity determine its stage, rather than the timing of its occurrence, and that the outlays after the SBITA is in operation that increase the existing service capacity that the government presently controls, for example, functionality, efficiency, and useful life of the SBITA, be considered based on the three stages as proposed earlier. The Board then discussed whether the proposed standard should include a definition or description of implementation costs. The Board tentatively decided that the proposed standard should not include a definition or description of implementation costs.

Next, the Board discussed the accounting for activities in the first two stages, as the Board had already addressed how to account for the activities in the third stage at its November meeting and had tentatively decided at that meeting the accounting for the third stage should be to separate multiple components of SBITAs and capitalize and expense those outlays based on relevant guidance in Statements No. 51, Accounting and Financial Reporting for Intangible Assets, and No. 87, Leases. The Board tentatively decided that the accounting for outlays associated with the first two stages should be the following:
  • Outlays associated with the preliminary project stage of an SBITA should be expensed as incurred
  • Activities in the application development stage should be capitalized and added to the value of the right-to-use subscription asset
  • In cases in which there is no underlying right-to-use hardware or software intangible asset, activities in the application development stage should be expensed as incurred.
The Board then tentatively decided that guidance similar to that contained in paragraphs 8, 11, and 12 of Statement 51 should be included in the proposed guidance of SBITAs to determine when capitalization of costs in the application development stage should begin or end.

The Board discussed how to provide guidance for the accounting for training costs in the proposed standard to make it clearer than existing literature and tentatively decided to propose that regardless of the stage in which training costs are incurred, they be expensed as incurred. The Board also tentatively decided that training costs should not be specifically included in any of the stage description proposals; rather, it should be addressed separately, similar to the way data conversion costs are addressed in Statement 51.

Finally, the Board discussed the applicability of provisions in Statement 87 to SBITAs. The Board tentatively decided that the disposition of the four groups of topics covered in Statement 87 should be as follows:
  • Topics that are relevant to SBITAs, prevalent in practice, and key issues to this project should be incorporated into the proposed standards for SBITAs.
  • Topics that are relevant to SBITAs and prevalent in practice and therefore warrant guidance but that are not key issues or unique to SBITAs should be directly incorporated into the proposed standards for SBITAs with conforming edits.
  • Topics that are relevant to SBITAs but not prevalent in practice should not be covered in the proposed standards.
  • Topics that are not relevant to SBITAs should not be covered in the proposed standards.
The Board also tentatively decided that the items in paragraphs 21d and 21e of Statement 87 should not be included in the calculation of a liability resulting from an SBITA.

Minutes Archive
 

Subscription-Based Information Technology Arrangements—TENTATIVE BOARD DECISIONS TO DATE


The Exposure Draft, Subscription-Based Information Technology Arrangements, was approved in May 2019.
 
The Board tentatively decided the following for a final Statement:
  • A threshold should not be set to exclude “small ticket SBITAs” from the scope.
  • Separate standards for SBITAs should be provided in a final Statement rather than as an amendment to existing leases guidance.
  • The definition of a SBITA should be amended to specify “IT hardware, software, or a combination of both (the underlying IT hardware or software).”
  • The effective date of the SBITA guidance should be modified as follows:
The requirements of this Statement are effective for fiscal years beginning after December 15, 2019, and all reporting periods thereafter, for the following:
  1. A SBITA contract that has right-to-use IT hardware only
  2. A right-to-use IT hardware component that is accounted for as a separate subscription component in a SBITA contract with multiple components
  3. A SBITA contract that involves multiple components but is accounted for as a single SBITA in accordance with paragraphs 46 and 47, and the primary subscription component is determined to be an IT hardware component
  4. The provision in paragraph 5 to amend Statement 87, paragraph 8.
For all other contracts, the requirements of this Statement are effective for fiscal years beginning after June 15, 2021, and all reporting periods thereafter. Earlier application is encouraged. [Exposure Draft, paragraph 59]
  • The requirement to recognize a subscription asset for a SBITA should be carried forward to the final Statement.
  • Clarifying edits should be made in the final Statement to specify that the commencement of the subscription term is the point when the subscription asset is considered to have been placed into service, at which time the government has obtained control of the right to use the underlying IT hardware or software.
  • Clarifying edits should be made in the final Statement to address the treatment of payments made before the commencement of the subscription term as follows:
A government initially should measure the subscription asset as the sum of the following:
  1. The amount of the initial measurement of the subscription liability (see paragraph 16)
  2. Subscription Payments associated with the SBITA contract made to the SBITA vendor at or before the commencement of the subscription term, less any SBITA vendor incentives (as discussed in paragraphs 40 and 41) received from the SBITA vendor at or before the commencement of the subscription term
  3. Capitalizable initial implementation costs as described in paragraph 28–38. [Exposure Draft, paragraph 25]
Payments associated with the SBITA contract made to the SBITA vendor as well as payments made for the capitalizable initial implementation costs before the commencement of the subscription term should be reported as a prepayment (an asset), less any SBITA vendor incentives received from the SBITA vendor before the commencement of the subscription term. This prepayment should be reclassified as an addition to the initial measurement of the subscription asset at the commencement of the subscription term.
  • Clarifying edits should be made in the final Statement to address when amortization should begin for a government whose system has multiple modules, as follows:
A subscription asset should be amortized in a systematic and rational manner over the shorter of the subscription term or the useful life of the underlying IT hardware or software. The amortization of the subscription asset should be reported as an outflow of resources (for example, amortization expense), which may be combined with depreciation expense related to other capital assets for financial reporting purposes. Amortization should begin at the commencement of the subscription term as described in paragraph 15. For a government whose system has multiple modules, amortization should begin when initial implementation is complete for the first independently functional module or for the first set of interdependent modules, regardless of whether the initial implementation for the entire system has been completed. [Exposure draft, paragraph 26]
  • The guidance for amortization of the subscription asset should not be modified to further clarify the useful life of the subscription asset.
  • No additional guidance for impairment of the subscription asset should be provided in the final Statement.
  • The scope should not be amended to include certain types of perpetual licensing arrangements.
  • The scope exclusion for perpetual licenses in paragraph 4c should be carried forward without modification.
  • Explanations of scope exclusions in the Basis for Conclusions should not be added as a footnote to paragraph 4.
  • Additional guidance or examples related to the application of the definition of a SBITA should not be provided.
  • Guidance should not be provided for arrangements that do not meet the definition of a SBITA.
  • The definition of a SBITA should not be modified to address arrangements in which the government does not obtain control of the right to the underlying IT hardware or software directly from a SBITA vendor.
  • Additional guidance on the “nature and manner of use” as a factor to determine whether a government has control in a SBITA should not be provided.
  • Guidance related to the subscription term should not be modified to clarify when and how often evaluation of a fiscal funding or cancellation clause should be performed.
  • Modifications should not be made to address determination of the subscription term for specific types of arrangements.
  • Guidance in paragraph 13 related to short-term SBITAs should be modified.
  • The guidance regarding the discount rate to be used in initial measurement of the lease liability should be carried forward without modification to include the option to use other uniform discount rates.
  • The requirement to measure the subscription liability at the present value of future subscription payments should be carried forward.
  • The guidance for measurement of a subscription liability should not be modified to address maintenance costs.
  • The guidance for variable payments in the initial measurement of a subscription liability should be modified.