GASB 104: Rethinking capital asset disclosures

Benchmarking doesn’t need to be time and resource consuming. Read on for four simple steps you can take to improve efficiency and maximize resources.

Stop us if you’ve heard this one before (from your Board of Trustees or Finance Committee): “I wish there was a way we could benchmark ourselves against our competitors.”

Have you ever wrestled with how to benchmark? Or struggled to identify what the Board wants to measure? Organizations can fall short on implementing effective methods to benchmark accurately. The good news? With a planned approach, you can overcome traditional obstacles and create tools to increase efficiency, improve operations and reporting, and maintain and monitor a comfortable risk level. All of this can help create a competitive advantage — and it  isn’t as hard as you might think.

Even with a structured process, remember that benchmarking data has pitfalls, including:

• Peer data can be difficult to find. Some industries are better than others at tracking this information. Some collect too much data that isn’t relevant, making it hard to find the data that is.
   
• The data can be dated. By the time you close your books for the year and data is available, you’re at least six months into the next fiscal year. Knowing this, you can still build year-over-year trending models that you can measure consistently.
   
• The underlying data may be tainted. As much as we’d like to rely on financial data from other organization and industry surveys, there’s no guarantee that all participants have applied accounting principles consistently, or calculated inputs (e.g., full-time equivalents) in the same way, making comparisons inaccurate.

Despite these pitfalls, benchmarking is a useful tool for your organization. Benchmarking lets you take stock of your current financial condition and risk profile, identify areas for improvement and find a realistic and measurable plan to strengthen your organization.

Here are four steps to take to start a successful benchmarking program and overcome these pitfalls:

1. Benchmark against yourself. Use year-over-year and month-to-month data to identify trends, inconsistencies and unexplained changes. Once you have the information, you can see where you want to direct improvement efforts.
2. Look to industry/peer data. We’d love to tell you that all financial statements and survey inputs are created equally, but we can’t. By understanding the source of your information, and the potential strengths and weaknesses in the data (e.g., too few peers, different size organizations and markets, etc.), you will better know how to use it. Understanding the data source allows you to weigh metrics that are more susceptible to inconsistencies.

3. Identify what is important to your organization and focus on it. Remove data points that have little relevance for your organization. Trying to address too many measures is one of the primary reasons benchmarking fails. Identify key metrics you will target, and watch them over time. Remember, keeping it simple allows you to put resources where you need them most.

4. Use the data as a tool to guide decisions. Identify aspects of the organization that lie beyond your risk tolerance and then define specific steps for improvement.

Once you take these steps, you can add other measurement strategies, including stress testing, monthly reporting, and use in budgeting and forecasting. By taking the time to create and use an effective methodology, this competitive advantage can be yours. Want to learn more? Check out our resources for not-for-profit organizations here.

Read this if you are responsible for cybersecurity or are a member of a board of directors for a company or a nonprofit organization.

I recently joined the board of directors of a local nonprofit organization that addresses homelessness and food insecurity in our community. While it is a larger, well-established organization, it still needed cybersecurity support. For me, it is a meaningful way to give back using my expertise while improving the risk posture and security practices of the organization. In my opinion, the most critical area any board of directors should be addressing, along with establishing and mitigating risk, is incident preparedness. The board should require and receive reports on incident management programs, and if they are in place, they should be tested on a frequent basis. 

The board’s role in the oversight of organizational risk is increasingly complicated by cybersecurity concerns. Cybersecurity risk is pervasive and will affect companies and nonprofit organizations in a variety of ways. The responsibility for detailed cyber risk oversight within the board should be well documented and communicated, and may often touch various committees across the board, including but not limited to risk, audit, and compliance. With the increasing complexity surrounding cybersecurity, it is also important for the board to evaluate existing experience and skills, identify gaps, and address those gaps through succession planning or leveraging advisors.

For nonprofit boards, having an expert with cybersecurity skills as a board member may bring in needed guidance and expertise to an organization that may have limited resources, but is impacted by cybersecurity risks. It can be a valuable way to bring in advisory and oversight where it may be needed.

Additionally, all directors need to maintain continual knowledge about evolving cyber issues and management’s plans for allocating resources with respect to preparedness in responding to cyber risks. Such knowledge helps boards assess the priority-driven and investment decisions put forth by management needed in critical areas.

Here are some critical questions that boards and management should be considering with respect to mitigating cybersecurity risks for their organizations. They may be useful as a starting point for boards to use in their discussions and as a guide when looking at their oversight of management’s plans for addressing potential cyber risks.

General

• What is the threat profile and risk tolerance of our organization based on our business model and the type of data our organization holds?
• Is the cyber risk management plan documented, including the identification, protection, and disposal of data?
• Has the cyber risk management plan been tested?
• Does our organization’s cybersecurity strategy align with our threat profile and risk tolerance?
• Is our cybersecurity risk viewed as an enterprise-wide issue and incorporated into our overall risk identification, management, and mitigation process?
• What percentage of our IT budget is dedicated to cybersecurity?
• Does that allocation conform to industry standards?
• Is it adequate based on our threat profile?
• What are the stakeholder demands and priorities for cybersecurity? Data privacy? Data governance? What interactions has the company or board had with shareholders regarding cybersecurity?
• What is the interaction model between senior management and the board for communications regarding cybersecurity?
• Has the regulatory focus on the board’s cybersecurity responsibility been increasing? If so, what is driving that focus?

Board cybersecurity oversight

• How is oversight of cybersecurity structured (committee vs. full board) and why? Is this structure well documented in the appropriate governance charters?
• Is cybersecurity an area considered and reported as a director competency? If so, have skill/experience gaps been identified together with plans to resolve those gaps?
• Is there a cybersecurity expert on the board?

Overall cybersecurity strategy

• Does the board play an active part in determining an organization’s cybersecurity strategy?
• What are the key elements of a good cybersecurity strategy?
• Is the organization’s cybersecurity preparedness receiving the appropriate level of time and attention from management and the board (or appropriate board committee)?
• How do management and the board (or appropriate board committee) make this process part of the organization’s enterprise-wide governance framework?
• How do management and the board (or appropriate board committee) support improvements to the organization’s process for conducting a cybersecurity assessment?

Risk assessment: risk profile

• What are the potential cyber threats to the organization?
• Who is responsible for management oversight of cyber risk?
• Has a formal cyber assessment been performed? Does it need to be updated?
• Do management and the board understand the organization’s vulnerabilities and how it may be targeted for cyber-attacks?
• What do the results of the cybersecurity assessment mean to the organization as it looks at its overall risk profile?
• Is management regularly updating the organization’s inherent risk profile to reflect changes in activities, services, and products?

Risk assessment: cyber maturity oversight

• Who is accountable for assessing, managing, and monitoring the risks posed by changes to the business strategy or technology, and are those individuals empowered to carry out those responsibilities?
• Is there someone dedicated full-time to our cybersecurity mission and function, such as a Chief Information Security Officer (CISO)?
• Is our cybersecurity function properly aligned within the organization? (Aligning the CISO under the CIO may not always be the best model as it may present a conflict. Many organizations align this function under the risk, compliance, audit, or legal functions, while others make it a direct or “dotted line” reporting to the CEO.)
• Do the inherent risk profile and cybersecurity maturity levels meet risk management expectations from management, the board, and shareholders? If there is misalignment, what are the proposed plans to bring them into alignment?

 Cybersecurity controls

• Do the organization’s policies and procedures demonstrate management’s commitment to sustaining appropriate cybersecurity maturity levels?
• What is the ongoing practice for gathering, monitoring, analyzing, and reporting risks?
• How effective are the organization’s risk management activities and controls identified in the assessment?
• Are there more efficient or effective means for achieving or improving the organization’s risk management and control objectives?
• Are there controls in place to ensure adequate, accurate, and timely reporting of cybersecurity-related content?
• How does the company remain apprised of laws and regulations and ensure compliance?
• What cloud services does our organization use and how risky are they?
• How are we protecting sensitive data? Do we know what types of data the organization maintains? 

Threat intelligence and collaboration

• What is the process for gathering and validating inherent risk profile and cybersecurity maturity information?
• Does our organization share threat intelligence with law enforcement?
• What third parties does the organization rely on to support critical activities and does the organization regularly audit their level of access?
• What is the process to oversee third parties and understand their inherent risks and cybersecurity maturity?

Cybersecurity metrics

• Have we defined appropriate cybersecurity metrics, the format, and who should be reporting to the board?
• How regularly should a board obtain IT metric information?
• Is the information meaningful in a way that invokes a reaction and provides a clear understanding of the level of risk willing to be accepted, transferred, or mitigated?
• How is the board actively monitoring progress or lack of progress and holding management accountable?

Cyber incident management and resilience

• How does management validate the type and volume of cyber-attacks?
• Does the organization have a comprehensive cyber incident response and recovery plan? Does it involve all key stakeholders—both internal and external? Does it include a business disaster recovery communication process?
• How does an incident response and recovery plan fit into the overall cybersecurity strategy?
• Is the board’s response role clearly defined?
• Is the cyber incident response reviewed and rehearsed at least annually? Do rehearsals include cyber incident exercises?
• Is there a culture of cyber awareness and reporting at all levels of the company?
• Is the company adequately insured and is coverage reviewed at least annually?

Cybersecurity education

• How does the board remain current on cybersecurity developments in the market and the regulatory environment?
• Currently, how does the board evaluate directors' knowledge of the current cyber environment and cybersecurity issues impacting their organizations?
• Do boards currently have the skill sets necessary to adequately oversee cybersecurity? How is the board identifying and evaluating the necessary director skills and experience in this area?
• Are directors provided with educational opportunities in this area?
• Is regular cybersecurity education provided to the entire organization?

Cybersecurity disclosure

• Has oversight of cybersecurity reporting been defined for management and the board?
• Are company policies and procedures to identify and manage cybersecurity risk, management’s role in implementing cybersecurity policies and procedures, board of directors’ cybersecurity expertise, and its oversight of cybersecurity risk being included within the financial statement and proxy disclosures?
• Does the company have a mechanism for timely reporting of material cybersecurity incidents?
• Have updates about previously reported material cybersecurity threats and incidents been included in the financial statements?

If you have any questions about cybersecurity programs, communicating with your board about cybersecurity, or have a specific question about your company or organization, please contact our IT security experts. We're here to help. 

Read this if you are interested in building a thriving workforce.

As businesses across the country continue to struggle to find and keep employees, it is time to build a workplace that sends a clear message to employees: “We care about you as a person. Your well-being matters.” 

Many leaders will send communications that emphasize the importance of people and the value of well-being. Despite this messaging, many organizations are missing opportunities to make well-being a natural part of the employee experience. The resulting disconnect between messaging and reality can result in frustration, disengagement, and cynicism. We’ve compiled a list of some of the most common workplace factors that can disrupt an organization’s intentions to build a strong well-being culture. 

Are you missing the mark with employee well-being? 

The chart below illustrates common ways that employers may be missing the mark on providing a supportive environment to employees. As you’ll see, they can be both large things like compensation and benefits, but they can also be small, potentially easy-to-fix things such as providing healthy snacks in the office instead of junk food. Look at this chart holistically for ways you may be able to change some negative influences into positive ones.

Overcoming the challenges to your well-being goals takes time. And while it is natural for organizations to think of employee well-being as the responsibility of human resources and leadership, in reality, well-being is a product of every part of the employee experience. In other words, it’s part of everyone’s job.

Well-being program considerations

Understanding the pain points for employees is an essential element of any successful well-being program, even if those pain points exist outside the domain of traditional well-being and wellness programs. Here are some things to consider:

• Find out what matters to your employees, as every organization is different. Use surveys, interviews, and focus groups to understand priorities and do something substantive with what you learn.
• Make a plan to address operational challenges. Put simply, outdated technology and inefficient business processes stress employees out.
• Assess your well-being approach to identify strengths, gaps, and opportunities for improvement.
• Develop, document, and implement a well-being plan that aligns with your organizational culture and goals. 
• In the midst of planning a big system implementation of organizational change? Consider ways to integrate well-being as part of high-stress initiatives. 

How mature is your organization’s well-being program?

Understanding the maturity level of your organization’s well-being program can help you benchmark, assess progress, and gain leadership support by showing a clear path to improvement. This maturity model can help you assess where you are now and how to incrementally improve.

Have questions or need ideas about your specific situation? Contact our well-being consulting team. We’re here to help.

Read this if your CFO has recently departed, or if you're looking for a replacement.

With the post-Covid labor shortage, “the Great Resignation,” an aging workforce, and ongoing staffing concerns, almost every industry is facing challenges in hiring talented staff. To address these challenges, many organizations are hiring temporary or interim help—even for C-suite positions such as Chief Financial Officers (CFOs).

You may be thinking, “The CFO is a key business partner in advising and collaborating with the CEO and developing a long-term strategy for the organization; why would I hire a contractor to fill this most-important role?” Hiring an interim CFO may be a good option to consider in certain circumstances. Here are three situations where temporary help might be the best solution for your organization.

Your organization has grown

If your company has grown since you created your finance department, or your controller isn’t ready or suited for a promotion, bringing on an interim CFO can be a natural next step in your company’s evolution, without having to make a long-term commitment. It can allow you to take the time and fully understand what you need from the role — and what kind of person is the best fit for your company’s future.

BerryDunn's Kathy Parker, leader of the Boston-based Outsourced Accounting group, has worked with many companies to help them through periods of transition. "As companies grow, many need team members at various skill levels, which requires more money to pay for multiple full-time roles," she shared. "Obtaining interim CFO services allows a company to access different skill levels while paying a fraction of the cost. As the company grows, they can always scale its resources; the beauty of this model is the flexibility."

If your company is looking for greater financial skill or advice to expand into a new market, or turn around an underperforming division, you may want to bring on an outsourced CFO with a specific set of objectives and timeline in mind. You can bring someone on board to develop growth strategies, make course corrections, bring in new financing, and update operational processes, without necessarily needing to keep those skills in the organization once they finish their assignment. Your company benefits from this very specific skill set without the expense of having a talented but expensive resource on your permanent payroll.

Your CFO has resigned

The best-laid succession plans often go astray. If that’s the case when your CFO departs, your organization may need to outsource the CFO function to fill the gap. When your company loses the leader of company-wide financial functions, you may need to find someone who can come in with those skills and get right to work. While they may need guidance and support on specifics to your company, they should be able to adapt quickly and keep financial operations running smoothly. Articulating short-term goals and setting deadlines for naming a new CFO can help lay the foundation for a successful engagement.

You don’t have the budget for a full-time CFO

If your company is the right size to have a part-time CFO, outsourcing CFO functions can be less expensive than bringing on a full-time in-house CFO. Depending on your operational and financial rhythms, you may need the CFO role full-time in parts of the year, and not in others. Initially, an interim CFO can bring a new perspective from a professional who is coming in with fresh eyes and experience outside of your company.

After the immediate need or initial crisis passes, you can review your options. Once the temporary CFO’s agreement expires, you can bring someone new in depending on your needs, or keep the contract CFO in place by extending their assignment.

Considerations for hiring an interim CFO

Making the decision between hiring someone full-time or bringing in temporary contract help can be difficult. Although it oversimplifies the decision a bit, a good rule of thumb is: the more strategic the role will be, the more important it is that you have a long-term person in the job. CFOs can have a wide range of duties, including, but not limited to:

• Financial risk management, including planning and record-keeping
• Management of compliance and regulatory requirements
• Creating and monitoring reliable control systems
• Debt and equity financing
• Financial reporting to the Board of Directors

If the focus is primarily overseeing the financial functions of the organization and/or developing a skilled finance department, you can rely — at least initially — on a CFO for hire.

Regardless of what you choose to do, your decision will have an impact on the financial health of your organization — from avoiding finance department dissatisfaction or turnover to capitalizing on new market opportunities. Getting outside advice or a more objective view may be an important part of making the right choice for your company.

BerryDunn can help whether you need extra assistance in your office during peak times or interim leadership support during periods of transition. We offer the expertise of a fully staffed accounting department for short-term assignments or long-term engagements―so you can focus on your business. Meet our interim assistance experts.

Read this if you are interested in GASB updates. 

The Governmental Accounting Standards Board (GASB) issued GASB Statement No. 99, Omnibus 2022 on May 9, 2022. The statement enhances comparability in accounting and financial reporting and improves the consistency of authoritative literature by addressing (1) practice issues that have been identified in previous GASB Statements, and (2) adding guidance on accounting and financial reporting for financial guarantees.

We’ve reviewed the statement in its entirety, and broken down key components for you to know. Here are the highlights.  

Accounting and financial reporting for exchange or exchange-like financial guarantees

Financial guarantees is a guarantee of an obligation of a legally separate entity or individual, including a blended or discretely presented component unit, that requires the guarantor to indemnify a third-part obligation holder under specified conditions, in an exchange or exchange-like transactions. 

An entity that extends an exchange or exchange-like financial guarantee should recognize a liability and expense related to the guarantee when qualitative factors and historical data indicate that is it more than likely not a government will be required to make a payment related to the guarantee.

Statement 99 excludes guarantees related to special assessment debt, financial guarantee contracts within the scope of Statement 53, or guarantees related to conduit debt obligations. 

Certain derivative instruments that are neither hedging derivative instruments nor investment derivative instruments

Derivative instruments that are within the scope of Statement 53, but do not meet the definition of an investment derivative instrument or the definition of a hedging derivative instrument are considered other derivative instruments. These “other derivative instruments” should now be accounted for as follows:

1. Changes in fair value should be reported on the “resource flows statement” separately from the investment revenue classification.
2. Information should be disclosed in the notes to financial statements separately from hedging instruments and investment derivative instruments.
3. Governments should disclose the fair values of derivative instruments that were reclassified from hedging derivative instruments to other derivative instruments. 

Leases

If your entity has leases please review the following as Statement 99 clarifies numerous issues from Statement 87, specifically:

• Lease terms as it relates to options to terminate and option to purchase the underlying assets, in paragraph 12 of Statement 87 has been clarified;
• Short-term leases in paragraph 12 of Statement 87 has been clarified as it relates to an option to terminate the lease;
• Lessee and lessor recognition and measurement for leases other than short-term leases that transfer ownership has been clarified, and
• Lease incentives in paragraph 61 of Statement 87 has been further defined.

Public Private and Public-Public Partnerships (PPPs)

If your entity has PPPs, Statement 99 clarifies the following: 

• PPP terms
• Receivable for installment payments (transferor recognition)
• Receivable for the underlying PP Asset (transferor recognition)
• Liability for installment payments (operator recognition)
• Deferred outflow of resources (operator recognition)

Subscription-Based Information Technology Arrangements (SBITAs)

Subscription terms and definitions have been clarified, specifically as it relates with options to terminate, short-term SBITAs, and measurement of subscription liabilities.

If your entity has SBITAs, review the provisions of each SBITA to ensure compliance with Statement 99 paragraphs 23–25.

Replacement of LIBOR

Check with your banking institutions to confirm when they have phased out of LIBOR. Confirm with your banking institutions what specifically has replaced LIBOR and update Financial Statement disclosures as needed. 

SNAP

State governments should recognize distributions of benefits from Supplemental Nutrition Assistance Program (SNAP) as a nonexchange transaction. Review Financial Statement disclosure and determine if a disclosure is needed. 

Disclosure of Nonmonetary Transactions

If you engage in one or more nonmonetary transactions during the fiscal year, you will need to disclose those transactions in the notes to the financial statements the measurement of attribute(s) applied to the assets transferred, rather than basis of accounting for those assets.

Pledges of future revenues when resources are not received by the pledging government

When blending the financial statement of a debt-issuing component unit into the financial statements of a primary government pledging revenue for the component unit’s debt, the primary government should reclassify an amount due to the component as an interfund payable and an interfund transfer out simultaneously with the recognition of the revenues that are pledged.

Focus of the government-wide financial statement

Statement 99 reiterates that there should be a total overall government-wide column within the MD&A, Statement of Net Position, and Statement of Activities. This column should exclude all fiduciary activities, including custodial funds. 

Terminology updates

No action is needed. Terminology has been updated in previous pronouncements, for terminology as it relates to Statements 63 and 53. 

Effective dates

The requirements related to the extension of the use of LIBOR, accounting for SNAP distributions, disclosures of nonmonetary transactions, pledges of future revenues by pledging governments, clarification of certain provisions in Statement 34 and terminology updates related to GASB 53 and 63 are effective upon issuance.

The requirements related to leases, PPPs, and SBITAs, are effective for fiscal years beginning after June 15, 2022.

The requirements related to financial guarantees and the classification and reporting of derivative instruments within the scope of Statement 53 are effective for fiscal years beginning after June 15, 2023.

Earlier application is encouraged and permitted for all.

If you would like more information regarding Statement 99, please contact our Audits of Governmental Component Units team. We’re here to help.

Read this if you work in finance or accounting or rely on financial reporting information.

Does your financial close process provide the information you need to make educated business decisions? 

Timely reporting of financial results is key to stakeholder decision making. As a result of market and regulatory obligations, companies and organizations are confronted with increasingly strict guidelines for the delivery of timely, accurate reports. Enormous amounts of information on transactions must be processed in a limited timeframe. This requires a great deal of effort on the part of your accounting and finance teams. 

The typical financial close process can be broken down into the following segments:

While this workflow seems straightforward enough, the financial close is not a single flat process, but the combination of many interrelated and often codependent processes—each with its own stages. The closing and reporting process is complex, and involves many different data suppliers and dependencies. Think your billing department, accounts payable, cash receipt, procurement, and more. All of these areas are likely to have data inputs that go into your financial close.
 

It often ends up looking like this when you consider each task:

 
To make the situation more challenging, as companies and organizations grow, the closing process can become more onerous and take longer to complete. Tasks in the financial close process are often added to an existing process—a process that may be more reactionary and based in historical practice, and may not have been well thought-out or planned for the current environment. Adding these tasks and increasing data inputs and outputs adds additional pressure to an incredibly important, but often forgotten task: analysis.

The majority of finance departments spend the bulk of their time on the financial close itself. Unfortunately, this can lead to delays, uncovering mistakes well after the fact, and reports lagging behind current business operations. The later the analysis is performed and the reports are distributed, the less useful they become for decision making. 

Financial close optimization

The good news? There is a strategy to optimize your financial close process, called financial close optimization, or fast closing. Fast closing is the periodic and structured closing and reporting process, in which all knowledge about the financial facts is collected and distributed to stakeholders more quickly.

There is an emerging trend for more frequent financial reporting, which allows companies and organizations to be more nimble and responsive to financial results, especially when facing an unprecedented crisis like the COVID-19 pandemic. Optimizing the financial close process allows for quicker reporting of business results to give stakeholders a more timely financial picture.

We understand the scarcity of human and financial resources continues to prove challenging to financial teams. Creating a culture of continuous improvement is a challenging task for almost any finance team—but given the benefits of a fast closing and the increased costs of a longer close, is this something that can be ignored any longer?

Look out for our next article on tips and strategies to optimize your financial close, which can lead to:

• Freeing up resources to provide finance teams more time for a deeper analysis of operating performance and other strategic objectives
• Providing more accurate and timely reporting
• Improving the organization’s audit readiness 
• Lessening the need for traditional routine tasks 
• Increasing focus on clients, patients, and customers by spending more time looking ahead to possible opportunities. 

If you have any questions on how to improve your financial close, please contact us. We’re here to help.

Read this if your organization operates under the Governmental Accounting Standards Board (GASB).

GASB Statement No. 96 Subscription-Based Information Technology Agreements

Summary

GASB Statement No. 96 defines the term Subscription-Based Information Technology Agreements (SBITA) as “a contract that conveys control of the right to use another party’s (a SBITA vendor’s) information technology (IT) software, alone or in combination with tangible capital assets (the underlying IT assets), as specified in the contract for a period of time in an exchange or exchange-like transaction.”

GASB Statement No. 96 determines when a subscription should be recognized as a right-to-use subscription, and also determines the corresponding liability, capitalization criteria, and required disclosures. 

Why does this matter to your organization?

In 2018, Financial Accounting Standards Board (FASB) issued Accounting Standards Updated (ASU) 2018-15: Cloud Computing Arrangements for Service Contracts, and we knew it would only be a matter of time when a similar standard would be issued by the Governmental Accounting Standards Board (GASB). Today, more and more governmental entities are purchasing software in the cloud as opposed to a software that is housed locally on their machine or network. This creates the need for updated guidance in order to improve overall financial reporting, while maintaining consistency and comparability among governmental entities. 

What should you do?

We are going to walk through the steps to determine if a SBITA exists—from identification through how it may be recognized in your financial statements. You can use this step-by-step guide to review each individual subscription-based software to determine if Statement No. 96 applies.

Step 1: Identifying a SBITA

There is one important question to ask yourself when determining if a SBITA exists:

Will this software no longer work/will we no longer be able to log in once the contract term ends?

If your answer is “yes”, it is likely that a SBITA exists.  

Step 2: Determine whether a contract conveys control of the right to use underlying IT assets

According to Statement No. 96, the contract meets the right to use underlying IT assets by:

• The right to obtain the present service capacity from use of the underlying IT assets as specified in the contract
• The right to determine the nature and manner of use of the underlying IT assets as specified in the contact

Step 3: Determine the length of the subscription term

The subscription term starts when a governmental entity has a non-cancellable right to use the underlying IT assets. This is the period during which the SBITA vendor does not have the ability to cancel the contract, increase or decrease rates, or change the benefits/terms of the service. The contract language for this period can also include an option for the organization or the SBITA vendor to extend or terminate the contract, if it is reasonably certain that either of these options will be exercised.

Once a subscription term is set, your organization should revisit the term if one or more of the following occurs:

• The potential option (extend/terminate) is exercised by either the entity or the SBITA vendor 
• The potential option (extend/terminate) is not exercised by either the government or the SBITA vendor
• An extension or termination of the SBITA occurs 

If the maximum possible term under the SBITA contract is 12 months or less, including any options to extend, regardless of their possibility of being exercised, an exception for short-term SBITAs has been provided under the statement. Such contracts do not need to be recognized under the Statement and the subscription payments will be recognized as outflows of resources. 

Step 4: Measurement of subscription liability 

The subscription liability is measured at the present value of the subscription payments expected to be made during the previously determined subscription term. The SBITA contract will include specific measures that should be used in determining the liability that could include the following:

• Fixed payments
• Variable payments
• Payments for penalties for termination
• Contract incentives
• Any other payments to the SBITA which are included in the contract

The future payments are discounted using the interest rate that the SBITA charges to your organization. The interest rate may be implicit in the contract. If it is not readily determinable, the rate should be estimated using your organization’s incremental borrowing rate. 

Your organization will only need to re-measure the subscription liability is there is a change to the subscription term, change in the estimated amounts of payments, change in the interest rate the SBITA charges to your organization, or contingencies related to variable payments. A change in the discount rate alone would not require a re-measurement. 

Step 5: Measurement of subscription asset

The SBITA asset should be measured at the total of the following:

• The amount of the initial measurement of the subscription liability (noted in Step 4 above)
• If applicable, any payments made to the SBITA vendor at the beginning of the subscription term
• The capitalized initial implementation costs (noted in Step 6 below)

Any SBITA vendor incentives received should be subtracted from the total.

Step 6: Capitalization of other outlays

In addition to the IT asset, Statement No. 96 provides for other outlays associated with the subscription to be capitalized as part of the total subscription asset. When implementing the IT asset, the activities can be divided into three stages: 

• Preliminary project stage: May include a needs assessment, selection, and planning activities and should be recorded as expenses.
• Initial implementation stage: May include testing, configuration, installation and other ancillary charges necessary to implemental the IT asset. These costs should be capitalized and included in the subscription asset.
• Operation and additional implementation stage: May include maintenance and troubleshooting and should be expensed.

Step 7: Amortization

The subscription asset are amortized over the shorter of the subscription terms or the useful life of the underlying IT assets. The amortization of the asset are reported as amortization expense or an outflow of resources. Amortization should commence at the beginning of the subscription term. 

When is this effective?

Statement No. 96 is effective for all fiscal years beginning after June 15, 2022, fiscal and calendar years 2023. Early adoption is allowed and encouraged.

Changes to adopt the pronouncement are applied retroactively by restating previously issued financial statements, if practical, for all fiscal years presented. If restatement is not practical, a cumulative effect of the change can be reported as a restatement to the beginning net position (or fund balance) for the earliest year restated. 

What should you do next? 

With any new GASB Standard comes challenges. We encourage governmental entities to re-review their vendor contracts for software-related items and work with their software vendors to identify any questions or potential issues. While the adoption is not required until fiscal years beginning after June 15, 2022, we recommend that your organization start tracking any new contracts as they are entered o starting now to determine if they meet the requirements of SBITA. We also recommend that your organization tracks all of the outlays associated with the software to determine which costs are associated with the initial implementation stage and can be capitalized. 

What are we seeing with early adoption?

Within the BerryDunn client base, we are aware of at least one governmental organization that will be early adopting. We understand that within component units of state governments, the individual component unit is required to adopt a new standard only when the state determines that they will adopt.

If you are entering into new software contracts that meet the SBITA requirements between now and the required effective date, we would recommend early adoption. If you are interested in early adoption of GASB Statement No. 96, or have any specific questions related to the implementation of the standard, please contact Katy Balukas or Grant Ballantyne.