Subscription Based Information Technology Arrangement (SBITA)

3 Accounting

3.4 Liabilities

3.4.21 Subscription Based Information Technology Arrangement (SBITA)

3.4.21.10 Definition

A Subscription Based Information Technology Arrangement (SBITA) is a contract that conveys control of the right to use another party’s (a SBITA vendor’s) 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.

3.4.21.20 Exclusions

The following items should not follow SBITA accounting and reporting guidance:

• Short-term SBITAs – One that, at the beginning of the SBITA, has a maximum possible term of 12 months or less, including any options to extend – e.g. rolling month-to-month contracts
• Contracts that convey control of both IT software and tangible capital assets if the software component is insignificant – e.g., a smart copier
• Governments that provide the right to use their IT software and associated tangible capital assets to other entities through SBITAs
• Contracts that meet the definition of a public-private and public-public partnership (see BARS 3.4.22)
• Licensing arrangements that provide a perpetual license to governments to use a vendor’s computer software

3.4.21.30 Perpetual License versus Subscription

Perpetual license arrangements are indefinite, whereas SBITAs are for a finite period of time. With a perpetual license, the software is directly downloaded onto the government’s computer or servers. After the software is paid for, the government will never lose access to the software (it can be accessed perpetually).

A subscription contract requires a monthly or annual fee to continue to access the software. If the subscription fee is not paid, the government will lose access to the software. A subscription contract with indefinite renewal periods, is not the same as a perpetual license.

One way to determine whether it is a perpetual license or a subscription bases contract is to ask: “Can I still log in and access the IT software after the engagement term ends?” If the answer is “no,” it is not a perpetual license, and the contract should be further evaluated to determine if it meets the definition of a SBITA.

3.4.21.40 Accounting and Reporting

At the start of the subscription, governments will not report any inflows or outflows on the Schedule 01. Governments will record actual subscription payments made to the SBITA on the Schedule 01 using BARS Code 591.PP.70.

The “P” stands for prescribed numbers that are related to the function of government the SBITA is supporting. Review the chart of accounts for your government to identify the applicable function and determine the full BARS Code. For example, if a government has a water utility fund and has a SBITA for software that calculates the customer water bills, the principal payment would be coded to BARS 591.34.70.

Short-term subscription payments should be coded to normal, functional BARS expenditure codes. For example, if a government has a short-term SBITA for software used by the water utility fund, the subscription expense would be coded to BARS 534.00.40.

Governments are also required to include a note disclosure about their SBITA activity in the Notes to the Financial Statements. See template note at Note X – SBITA.

3.4.21.41 Variable and other non-SBITA payments

Variable payments should be excluded from the subscription liability calculation. Variable payments are those that depend on future performance of the government, usage of the underlying asset, or number of users. For example, a contract may require an additional $50 per user. The payment amount would vary depending on how many employees had user accounts, so that portion of the payment would be excluded from the subscription liability.

Some contracts include additional fees or taxes. Only the portion of the payment that is related to the right to use the asset should be included in the subscription liability calculation. For example, if a subscription contract also includes technical support and sales tax, those are non-SBITA payments and should be excluded from the subscription liability.

BARS Code 591 should only be used for the subscription payments that are related to the right to use the software. The variable and non-SBITA payments should be coded to regular, functional BARS expense codes.  

3.4.1.52 Subscription rate increases 

Some contracts include clauses to increase the rates over time. There are two types of rate increases, known rate increases and variable rate increases. An example of a variable rate increase is an increase based on the Consumer Price Index (CPI) where the amount of the increase will vary depending on the CPI. An example of a known rate increase is a flat 3% annual increase where the increase amount is known and can be calculated for each period. 

If the contract includes a variable rate increase, that rate increase should be ignored for purposes of calculating the liability on the Schedule 09, since the increase amount is unknown at the time of calculation. 

For example, there is a 5-year SBITA that charges $500 per month for the first year and in each subsequent year the payment will be increased based on the CPI. The subscription liability would be $30,000, which is $500 multiplied by 60 months (5 years). Since we do not know what the CPI increase will be in the future, the CPI increase is not factored into our calculation. 

When making the monthly payment, only the original $500 used to calculate the liability should be coded to BARS 591.XX.70. For example, if the subscription payment increased to $550 in the second year, the payment would be split into two different BARS codes: $500 would be charged to BARS 591.XX.70 and the remaining $50 would be charged to a functional BARS expense code. 

Conversely, if a subscription payment increases based on a flat rate, that should be factored into the liability. For example, there is a 5-year SBITA that charges $500 per month for the first year and each subsequent year the payment will be increased by 3%. The subscription liability is $31,855 as shown below: 

This increase is factored into the total liability because it is known and can be accurately calculated at the beginning of the subscription. 

3.4.21.50 Schedule of Liabilities (Schedule 09) Reporting

Governments will report a subscription liability on the Schedule 09 measured at the total amount of future subscription payments. See Schedule 09 reporting instructions.

In the year of implementation, any existing subscriptions should report a beginning balance on the Schedule 09. The beginning balance reported should be the total amount of subscription payments that were remaining as of the beginning of the year. In subsequent years, the beginning balance should match the prior year ending balance.

Any new SBITA contracts that are entered into during the year will be reported as an addition on the Schedule 09. The addition will be the total amount of future subscription payments.

Reductions are the amount the subscription liability is reduced during the year, which is typically the amount of subscription payments made.

If the subscription liability is remeasured for any of the items listed in Section 3.4.21.70, the change in the subscription liability should be reported as either an addition or reduction on the Schedule 09.

3.4.21.60 Subscription Term

To calculate the total amount of future subscription payments for the Schedule 09, governments need to know how many payments will be made, which depends on the subscription term. Here is what should be included in the subscription term:

• The period during which a government has a non-cancelable right to use the underlying IT assets
  • plus periods covered by the government’s or SBITA vendor’s option (contractual right) to extend the SBITA (if reasonably certain the option will be exercised)
  • and periods covered by the government’s or SBITA vendor’s option (contractual right)  to terminate the SBITA (if reasonably certain the option will not be exercised)
• Subscription term excludes periods for which both the government and SBITA vendor each have the option to terminate or both parties must agree to extend.

Determining whether an extension or termination option is reasonably certain of being exercised requires professional judgement and should take into consideration the specific facts and circumstances at your government. Examples of items to consider in this analysis:

• A significant economic incentive, such as contractual terms and conditions for the optional periods that are favorable compared with current market rates
• A potential change in technological development that significantly affects the technology used by the underlying IT assets
• A potential significant change in the government’s demand for the SBITA vendor’s IT assets
• A significant economic disincentive, such as costs to terminate the SBITA and sign a new SBITA (for example, negotiation costs, costs of identifying another suitable underlying IT asset or another suitable SBITA vendor, implementation costs, or a substantial cancellation penalty)
• The history of exercising options to extend or terminate
• The extent to which the underlying IT assets in the SBITA are essential to the provision of government services

3.4.21.61 Short-Term SBITA

A short-term SBITA is one that has a maximum possible term of less than 12 months. The maximum possible term includes all options to extend regardless of whether those options will be exercised or not.

Example: A SBITA contract has an initial noncancelable term of 6 months with an option for the government to extend for another year. The government will most likely not exercise that option.

This is not a short-term SBITA because the maximum possible term is 18 months. The extension option is included in the maximum possible term even if it will not be exercised. The subscription term for accounting purposes would only be 6 months.

For a short-term SBITA, a government should recognize an expense/expenditure when subscription payments are due based on the payment provisions of the SBITA contract.

3.4.21.62 Renewals

Many SBITA contracts have automatic annual renewals. In most cases at each renewal date, the SBITA vendor and the government can cancel the contract. If both parties can cancel the contract, any periods covered by the renewal terms are considered cancellable periods. Cancelable periods are always excluded from the maximum possible subscription term.

For example, if a government has a one-year SBITA contract for their online teleconferencing and the contract automatically renews each year, and both the SBITA vendor and government can cancel at each renewal, then the maximum possible term is only 1 year because the renewal periods are cancelable periods and excluded from the maximum possible term. This would be considered a short-term SBITA.

3.4.21.70 Remeasuring the Subscription Liability

The subscription liability reported on the Schedule 09 must be remeasured (recalculated) if any of the following happen:

• Change in subscription term
  The subscription term might change if the government was previously not going to exercise an extension option, but then determines it will extend the SBITA (or vice versa). In that case, the subscription liability must be remeasured to include the additional payments related to extending the subscription term.
• Contingency for variable payments is resolved.
  If the subscription payments were variable and later on all of the remaining subscription payments become known (no longer variable), then liability must be recalculated using the known amounts.