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.
Statement No. 96, Subscription-Based Information Technology Arrangements, issued May 2020
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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
- Redeliberations began: October 2019
- Final Statement issued: May 2020
- Implementation issue discussed: August 2022
Minutes of Meetings, October 11−12, 2022
The Board discussed alternatives for clarifying authoritative guidance with respect to cloud storage. The Board tentatively decided to amend the definition of a subscription-based information technology arrangement by replacing “IT software, alone or in combination with tangible capital assets” with “IT assets.”
Minutes of Meetings, August 24−26, 2022
The Board discussed potential diversity in practice related to whether to apply Statement No. 87, Leases, or Statement No. 96, Subscription-Based Information Technology Arrangements, to certain cloud computing arrangements. The Board tentatively decided that the authoritative guidance should be clarified. The Board then discussed various interpretations on the application of the existing guidance.