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.
Exposure Draft Approved: May 2019
- Accounting and Financial Reporting Issues
- Project History
- Current Developments
- Work Plan
- Recent Minutes
- Tentative Board Decisions
- Project staff:
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:
- What are IT arrangements and what differentiates SBITAs from other IT arrangements?
- What should be the criteria to classify IT arrangements?
- 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?
- 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?
- 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?
- How should governments account for fees paid for SBITAs?
- 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?
- 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?
- 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?
- 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
|Board Meetings||Topics to Be Considered|
|October 2019:||Redeliberations on scope, definition, subscription term, short-term SBITAs, subscription liability, and subscription asset, including impairment.|
|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.|
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:
- 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.
- 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.
- 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.
- 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).
- 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.
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 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 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.
Minutes of Meetings, November 14−16, 2018
The Board continued its discussion of subscription-based IT arrangements (SBITAs). The first topic addressed was whether SBITAs should be considered a type of executory contract. The Board tentatively decided that SBITAs are not a type of executory contract. The Board then discussed whether the right to use the underlying hardware or software in an SBITA should be recognized as an asset by the government end user. The Board tentatively decided that the proposal should provide that the right to use the underlying hardware or software in an SBITA should be recognized as an asset by the government end user. The Board also discussed whether the obligation to make payments in an SBITA should be recognized as a liability by the government end user. The Board tentatively decided that the proposal should provide that the obligation to make payments in an SBITA should be recognized as a liability by the government end user. The Board discussed whether an exception similar to that provided for short-term leases should be proposed for short-term SBITAs. The Board tentatively decided that an exception similar to leases should be proposed for short-term SBITAs.
Next, the Board discussed whether the guidance in Statement No. 87, Leases, for separating multiple components and allocating contract prices, including the exception to treat the contract as one single unit under certain conditions, should be proposed for SBITAs with multiple components. The Board tentatively decided that the guidance in Statement 87 for separating multiple components and allocating contract prices, including the exception, should be proposed for SBITAs with multiple components. The Board then discussed whether the following guidance for capitalization of multiple components, based on Statement No. 51, Accounting and Financial Reporting for Intangible Assets, and Statement 87, should be provided for SBITAs.
- Capitalize fees charged for the right-to-use the underlying hardware or software, which is to recognize an intangible subscription asset and a liability and recognize amortization expense and interest expense over the length of the contract.
- Recognize an expense for fees charged for vendor’s support services if it is practicable to separate those service components from the subscription component and if it is practicable to allocate contract price to those components, based on the proposed guidance for multiple components in SBITAs.
Finally, the Board discussed whether, for the purposes of developing proposed standards for SBITAs, all relevant guidance in Statement 87 should be considered applicable to SBITAs. The Board tentatively decided that all relevant guidance in Statement 87 should be considered applicable to SBITAs, dependent on additional analysis of certain provisions.
Minutes of Meetings, October 2−4, 2018
The Board discussed potential characteristics to be included in a definition of a subscription-based information technology arrangement. The Board tentatively decided to propose that those defining characteristics include that (a) the arrangement is for information technology hardware, software, or a combination of both, including information technology infrastructure; (b) the arrangement grants governments the right to use information technology hardware or software, or a combination of both; (c) the arrangement is on a subscription basis over a period of time as specified in the contract; and (d) the arrangement is an exchange or exchange-like transaction. The Board also tentatively decided that information technology arrangements that solely provide support services should be excluded from the scope of the project. The Board then discussed a proposed definition of a subscription-based information technology arrangement. The Board tentatively decided to propose that definition to be a contract that conveys control of the right to use hardware, software, or a combination of both, including IT infrastructure, as specified in the contract for a period of time in an exchange or exchange-like transaction.
The Exposure Draft, Subscription-Based Information Technology Arrangements, was approved in May 2019.