The Impact of GASB Statement No. 96 on U.S. Cities and Their Interaction with Businesses

In an era where technology drives efficiency and innovation, cities across the United States increasingly rely on subscription-based information technology arrangements (SBITAs) to enhance public services. Recognizing the growing prevalence of these arrangements, the Governmental Accounting Standards Board (GASB) issued Statement No. 96 in May 2020. This new standard provides comprehensive guidance on accounting and financial reporting for SBITAs, fundamentally altering how cities operate and interact with businesses. This article explores the implications of GASB Statement No. 96 for municipal governments and their business partners, shedding light on the challenges and opportunities that arise from its implementation.

Understanding GASB Statement No. 96

GASB Statement 96, titled "Subscription-Based Information Technology Arrangements," establishes uniform accounting and financial reporting requirements for governments that enter into SBITAs. Prior to this statement, there was a lack of specific guidance on how governments should account for these technology subscriptions, leading to inconsistencies and potential misrepresentation of financial obligations.

Under GASB 96, a SBITA is defined as a contract that conveys control of the right to use a vendor's IT software, alone or in combination with tangible capital assets, for a period of time in an exchange or exchange-like transaction. Essentially, it treats SBITAs similarly to capital leases, requiring cities to recognize a subscription liability and a corresponding intangible asset.

Transforming Accounting Practices

Recognition of Subscription Liabilities and Assets

One of the most significant changes introduced by GASB 96 is the requirement for cities to recognize a subscription liability and an intangible right-to-use asset at the commencement of a SBITA term. This means that cities must now account for the long-term financial commitments associated with technology subscriptions on their balance sheets, rather than treating them as simple period expenses.

The subscription liability represents the present value of subscription payments expected to be made during the subscription term, discounted using the interest rate implicit in the arrangement or the government's incremental borrowing rate. The intangible asset reflects the right to use the underlying IT assets over the subscription period.

Impact on Financial Statements

By bringing SBITAs onto the balance sheet, GASB 96 enhances the transparency and comparability of financial statements. Stakeholders, including taxpayers, investors, and oversight bodies, gain a clearer understanding of a city's financial obligations and resource utilization. This increased visibility can affect key financial ratios and indicators, potentially influencing credit ratings and borrowing costs.

Challenges in Implementation

Implementing GASB 96 poses several challenges for cities:

• Data Collection: Cities must inventory all existing SBITAs, which may be numerous and varied across different departments.
• Valuation: Determining the present value of subscription liabilities requires accurate estimation of future payments and appropriate discount rates.
• Systems and Processes: Accounting systems may need upgrades to handle the new reporting requirements, necessitating staff training and potential investments in technology.

Operational Implications for Cities

Budgeting and Financial Planning

The recognition of subscription liabilities affects not only accounting practices but also budgeting processes. Cities must now consider the long-term financial commitments of SBITAs when planning budgets, ensuring that future payment obligations are adequately funded. This may lead to more cautious decision-making regarding entering into new technology subscriptions, as the impact on financial statements becomes more pronounced.

Procurement and Contract Management

GASB 96 encourages cities to adopt a more strategic approach to procurement and contract management. With SBITAs affecting the balance sheet, cities may:

• Negotiate More Favorable Terms: Cities might seek shorter subscription terms, flexible renewal options, or better pricing to manage liabilities.
• Standardize Contracts: Implementing standard contract language can facilitate consistent accounting treatment and simplify compliance.
• Enhance Vendor Relationships: Close collaboration with vendors is essential to obtain necessary information for accounting and reporting.

Internal Controls and Governance

The new standard necessitates stronger internal controls over SBITAs. Cities must establish policies and procedures to ensure:

• Complete and Accurate Recording: All SBITAs are identified and properly accounted for.
• Compliance Monitoring: Ongoing compliance with GASB 96 requirements is maintained.
• Risk Management: Potential risks associated with SBITAs, such as termination clauses or variable payments, are identified and mitigated.

Interactions with Businesses

Increased Transparency and Accountability

For businesses providing subscription-based IT services to cities, GASB 96 introduces new dynamics in the relationship. Vendors may experience increased scrutiny from municipal clients who are now more attuned to the financial implications of SBITAs. This can lead to:

• Greater Demand for Information: Cities may require detailed breakdowns of payment schedules, interest rates, and other contractual terms to comply with accounting requirements.
• Negotiation of Contract Terms: Businesses might need to be more flexible in contract negotiations, accommodating cities' preferences for terms that minimize balance sheet impacts.
• Long-Term Partnerships: The recognition of subscription liabilities can encourage cities to foster longer-term relationships with trusted vendors to manage obligations effectively.

Opportunities for Businesses

While GASB 96 presents challenges, it also offers opportunities for businesses:

• Value-Added Services: Vendors can differentiate themselves by providing support in compliance efforts, such as offering transparent pricing models or assisting with accounting disclosures.
• Competitive Advantage: Businesses that understand and adapt to the needs arising from GASB 96 can position themselves as preferred partners for municipal clients.
• Innovation in Offerings: Developing subscription models that align with cities' financial objectives can create new market opportunities.

Broader Implications for Public Sector Technology Adoption

Encouraging Strategic IT Investments

GASB 96 may prompt cities to be more strategic in their technology investments. With SBITAs impacting financial statements, there is an incentive to:

• Assess Return on Investment (ROI): Cities may conduct more rigorous analyses of the benefits derived from IT subscriptions relative to their costs and liabilities.
• Prioritize Essential Services: Focus on subscriptions that are critical to operations and public service delivery.
• Explore Alternative Solutions: Consider on-premises solutions or shared services that might offer more favorable accounting treatment.

Enhancing Financial Management Practices

The standard can serve as a catalyst for improving overall financial management within cities. By necessitating better tracking of long-term obligations, GASB 96 encourages:

• Improved Asset Management: Comprehensive understanding of all IT assets and their utilization.
• Integrated Planning: Alignment of IT strategies with financial planning and budgeting.
• Stakeholder Communication: Clearer reporting to stakeholders about technology investments and associated obligations.

Case Studies: City Responses to GASB 96

City of Springfield: Streamlining SBITA Management

The City of Springfield undertook a comprehensive review of its SBITAs in response to GASB 96. By centralizing contract management and implementing new software tools, the city:

• Reduced redundancies in subscriptions across departments.
• Negotiated better terms with vendors due to increased purchasing power.
• Achieved greater compliance and improved financial reporting accuracy.

City of Riverdale: Vendor Collaboration

The City of Riverdale collaborated closely with its key IT vendors to facilitate the implementation of GASB 96. Vendors provided detailed contract information and worked with the city to adjust subscription terms. This partnership led to:

• Customized subscription models that aligned with the city's financial objectives.
• Enhanced vendor relationships and service quality.
• A smoother transition to the new accounting standard.

Preparing for the Future

Action Steps for Cities

To navigate the changes brought by GASB 96, cities should:

1. Educate Stakeholders: Ensure that elected officials, management, and staff understand the implications of the new standard.
2. Inventory SBITAs: Conduct a thorough inventory of all existing subscription-based IT arrangements.
3. Assess Systems and Processes: Evaluate whether current accounting systems can accommodate the new requirements and plan for necessary upgrades.
4. Develop Policies: Establish clear policies and procedures for entering into and managing SBITAs.
5. Engage with Vendors: Communicate with vendors to obtain required information and negotiate favorable terms.

Role of Professional Advisors

Cities may benefit from engaging professional advisors, such as accounting firms or consultants, to assist with:

• Interpreting the technical aspects of GASB 96.
• Implementing new accounting systems or software.
• Training staff on compliance and reporting requirements.

Conclusion

GASB Statement No. 96 represents a significant shift in how cities account for subscription-based information technology arrangements. By bringing these obligations onto the balance sheet, the standard enhances transparency and accountability but also introduces complexities in financial reporting and operational management.

Cities must adapt by revising accounting practices, strengthening internal controls, and engaging strategically with IT vendors. While the transition presents challenges, it also offers opportunities to improve financial management, foster stronger vendor relationships, and make more informed technology investment decisions.

For businesses providing IT services, understanding the implications of GASB 96 is crucial. By aligning offerings with the needs of municipal clients and supporting them through the compliance process, vendors can build stronger partnerships and gain a competitive edge.

In an increasingly digital world, GASB 96 underscores the importance of thoughtful stewardship of technology resources. By embracing the changes it brings, cities can enhance their financial health and continue to leverage technology to serve their communities effectively.

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