7.10 Intangible Assets
(Last Modified on August 7, 2023)
GASB Statement No. 51, Accounting and Financial Reporting for Intangible Assets establishes standards for accounting and reporting of intangible assets. GASB Statement No. 51, as amended, does not address accounting for Subscription-Based Technology Arrangements (SBITAs). SBITAs are explained and further discussed in section 7.10.4.
An intangible asset is property, which possesses the following characteristics:
* Lacks physical substance, such as computer software
* Nonfinancial in nature which has no monetary form
* Initial useful life extends beyond one reporting period.
Examples of intangible assets include easements, water rights, timber rights patents, trademarks and computer software. Intangible assets may be purchased, licensed or internally generated.
Intangible assets should be measured/valued in the same manner as other capital assets: historical cost, or if donated, estimated fair value at date of donation.
7.10.1 Depreciation Amortization Methodology
(Last Modified on August 7, 2023)
Amortization is the accounting process of allocating the intangible asset’s capitalized costs to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset. Amortization is not a matter of valuation, but a means of cost allocation. Intangible assets are not amortized based on a decline in their fair market value but based on systematic charges to expense.
An intangible asset that has an indefinite useful life is **not** amortized if there are no legal, contractual, regulatory, technological, or other factors that limit its useful life. A permanent right of way easement would be an example of an intangible asset that is considered to have an indefinite useful life.
Intangible assets with discernable useful lives should be amortized over the estimated useful life using the straight-line method (historical cost less residual value, divided by the useful life.)
7.10.2 Capitalization Threshold
(Last Modified on August 7, 2023)
Intangible assets should be capitalized on the accrual basis of accounting in the institution’s accounting records if the asset meets all of the following conditions:
- Is owned by the institution and held for operations, not for resale,
- Has a useful life that exceeds one (1) year,
- Meets the appropriate capitalization threshold(s), as shown below:
Intangible Asset Description and Capitalization Thresholds
| Asset Description | Cost Threshold | Useful Lives |
|---|---|---|
| Software (purchased or internally generated) | $1 Million | 10 years |
| Water Rights | $100,000 | 20 years |
| Timber Rights | $100,000 | 20 years |
| Mineral Rights | $100,000 | 20 years |
| Easements | $100,000 | 20 years |
| Asset Description | Cost Threshold | Useful Lives |
|---|---|---|
| Patents | $100,000 | 20 years |
| Trademarks | $100,000 | 20 years |
| Copyrights | $100,000 | 20 years |
7.10.3 Internally Generated Intangible Assets
(Last Modified on May 1, 2017)
Common types of internally generated intangible assets include computer software, patents, trademarks and copyrights.
Generally, intangible assets are considered internally generated if they are:
Created or produced by the institution or a third party entity contracted by the institution, or
Acquired/purchased from a third party, but require more than a minimal incremental effort on the part of the institution to achieve their expected level of service capacity.
Costs incurred in creating an internally generated intangible asset should either be expensed or capitalized depending on the asset’s stage of development. In initial development, outlays incurred related to the development of an internally generated intangible asset, should be capitalized only when all three of the following have occurred:
Determination of the specific objective of the project and the nature of the service capacity that is expected to be provided by the intangible asset upon the completion of the project.
Demonstration of the technical or technological feasibility for completing the project so that the intangible asset will provide its expected service capacity.
Demonstration of the current intention, ability, and presence of effort to complete or, in the case of a multiyear project, continue development of the intangible asset.
Only outlays incurred subsequent to meeting the above criteria should be capitalized. Outlays incurred prior to meeting those criteria should be expensed.
Internally Generated Computer Software
Internally Generated Computer Software (IGCS) is the most common type of intangible asset that is generated internally.
In addition to the capitalization criteria discussed above, which is applicable for all internally generated intangible assets, IGCS will only meet those capitalization criteria if/when both of the following occur:
Activities in the preliminary project stage are completed; and,
Management implicitly or explicitly authorizes and commits to funding the software project, at least currently in the case of a multiyear project.
As with other internally generated intangible assets, IGCS is considered internally generated when it is either:
Developed in-house by institution personnel or contractors on behalf of the institution, or
Commercially available software that is purchased or licensed by the institution and modified using more than minimal effort before placing in in operation. An example would be purchased software that has been specially modified to add special reporting capabilities.
Capitalization of IGCS Based on Stages of Software Development
Costs incurred in developing and installing IGCS are either expensed or capitalized depending on the stage of the asset’s development.
Software development generally involves three stages based on the nature of the activities, not timing of occurrence.
Preliminary Project Stage: Activities in this stage include the conceptual formulation and evaluation of alternatives, the determination of existence of needed technologies, and final selection of alternatives for development of the software. Activities in this stage should be expensed as incurred.
Application Development Stage: Activities include the design of the chosen path, including software configuration and software interfaces, coding, installation of computer hardware, and testing, including parallel processing phase. Activities in this stage should be capitalized to the point at which the computer software is substantially complete and operational.
Post-Implementation/Operation Stage: Training and application maintenance activities. Activities in this stage should be expensed as incurred.
Data conversion costs, costs that allow for access or conversion of old data by new information systems should be capitalized only to the extent necessary to make the computer software operational. Otherwise, those costs should be expensed as part of Stage 3-Post Implementation.
When dealing with IGCS costs, it is particularly important to capture them into the appropriate project stage to ensure there is an accurate proration of costs between expenses and capitalized activity. Costs incurred during the Application Development State are subject to capitalization.
Examples of capital costs incurred during the Application Development State would include:
- External direct costs of materials and services, such as third party fees for services
- Costs to obtain software from third parties
- Travel costs incurred by employees in their duties directly associated with development
- Payroll and payroll-related costs of employees directly associated with or devoting time in coding, installing, or testing
- Interest costs incurred during the application development
Modifications of internally generated software that is already in operation should only be capitalized if the modifications result in any of the following:
- An increase in the functionality of the software; or,
- An increase in the efficiency of the software; or,
- An extension of the estimated useful life of the software.
Note: If an institution determines that a shorter useful life is appropriate for software, then the method for estimating the useful life must be formally documented.
7.10.4 Subscription-Based Information Technology Arrangements (SBITAs)
(Last Modified on September 18, 2023)
GASB Statement No. 96, Subscription-Based Information Technology Arrangements (SBITAs), is effective for fiscal years beginning after July 01, 2022. GASB Statement No. 96 establishes standards for accounting and reporting of a right-to-use subscription asset.
A SBITA is defined 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.
There are three main criteria that a contract must have to meet the definition of a SBITA:
- Control of the Right to Use
In order to determine whether the contract conveys the control of the right to use the underlying information technology asset, an institution will need to assess whether it has both of the following:- The right to obtain the present service capacity of the underlying information technology assets as specified in the contract
- The right to determine the nature and manner of use of the underlying information technology assets as specified in the contract
Most contracts contain a termination for defaulting or misuse of the underlying IT asset, this is more of an exception to allow the lessor a protection and should not preclude the determination of the right to use from existing.
- Period of Time
A SBITA should be established as the right to use an underlying IT asset for a period of time. - Exchange or Exchange-Like
The foundational principle of this standard is that SBITAs are similar to leases. In a SBITA transaction, an institution receives the right to use software in exchange for the promise to make payments over time. If the transaction is a nonexchange transaction, it would not be deemed a SBITA. An example of a transaction that may not be deemed a SBITA as a result of not meeting the exchange or exchange-like criterion would be a software license where the payment may be for a nominal charge that is deemed a nonexchange transaction.
SBITA Capitalization Threshold
SBITA items that are greater than $100,000 over the subscription term and the initial term exceeds 12 months are capitalized.
SBITA Exclusions
Not all SBITAs are subject to GASB Statement 96. The following are excluded from GASB 96 SBITAs:
- Contracts that convey control of the right to use another party’s combination of IT software and tangible capital assets that meets the definition of a lease in GASB Statement No. 87, Leases, in which the software component is insignificant when compared to the cost of the underlying tangible capital asset (for example, a computer with operating software or a smart copier that is connected to an IT system)
- 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 in paragraph 5 of GASB Statement No. 94, Public-Private and Public-Public Partnerships and Availability Payment Arrangements
- Licensing arrangements that provide a perpetual license to governments to use a vendor’s computer software, which are subject to GASB Statement No. 51, Accounting and Financial Reporting for Intangible Assets, as amended
- Contracts with a combination of a tangible capital asset and an insignificant software component.
Short-Term Contracts
GASB Statement 96 establishes a provisional exception for SBITAs with a maximum possible term of 12 months (or less), including any options to extend, regardless of their probability of being exercised. For these situations, an expense should be recognized when incurred.
Subscription Term
The SBITA term starts with the noncancelable period plus the periods covered by options to extend the SBITA (if reasonably certain of being exercised by either the institution or the vendor) and the periods covered by options to terminate (if reasonably certain of not being exercised by either the institution or vendor). The SBITA term should exclude any cancelable period (such as a rolling month-to month-SBITA). Fiscal funding clauses and cancelation clauses that allow a government to cancel a SBITA, typically on an annual basis, if the government does not appropriate funds for the subscription payments, should affect the subscription term only if it is reasonably certain that the clause will be exercised.
Reasonably Certain
When determining whether an option to extend or terminate is reasonably certain the following factors need to be considered:
- Significant economic incentives 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 institution’s demand for the SBITA vendor’s IT assets
- Significant economic disincentive, such as cost to terminate and sign a new SBITA
- History of exercising options to extend or terminate
- The extent to which the underlying IT asset(s) is essential to the provision of institution services
7.10.4.1 Measuring the SBITA
Future SBITA Payments
The SBITA liability should be measured at the present value of payments expected to be made during the subscription term. Future subscription payments should include the following: fixed payments (less incentives), variable payments based on index rate, variable payments that are in substance fixed, termination penalties (if the subscription term reflects the government exercising (1) an option to terminate the SBITA or (2) a fiscal funding or cancellation clause, and any other payments reasonably certain of being exercised.
Variable payments other than those that depend on an index or a rate, such as variable payments based on future performance of a government, usage of the underlying IT assets, or number of user seats, should not be included in the measurement of the subscription liability. Rather, those variable payments should be recognized as an expense in the period in which the obligation for those payments is incurred
Fixed in substance SBITA example: The institution has a SBITA that includes paying the vendor for the total number of users. There is a minimum charge for $3,000 per month for the first 300 users. The $3,000 per month would be a variable payment that is in-substance fixed and the $3,000 per month would be used in determining the liability.
Beginning Balance: Fixed payments (less incentives)
Plus: Variable payments based on index rate
Plus: Variable payments that are in substance fixed
Plus: Termination penalties/other payments reasonably certain of being exercised
Total Subscription Payments
Measure the total subscription payments at present value to determine the subscription liability.
Discount Rate
After determining the future SBITA payments, the institution should discount these payments using the interest rate the vendor charges the institution, which may be the interest rate implicit in the SBITA. If the interest rate cannot be easily determined, the institution should use the incremental borrowing rate. Since USG institutions fall under the state reporting entity, the State of Georgia’s incremental borrowing rate will be used when that rate is necessary. The State of Georgia’s incremental borrowing rate will be provided to the Chief Accounting Officer’s annually.
Measuring SBITA Asset
Generally, the subscription liability will equal the subscription asset. Some exceptions to this may include subscription payments made prior to commencement (less incentives received) or when it is necessary to expend funds prior to placing the IT asset into service (an example may include implementation costs).
Beginning Balance: Subscription liability amount
Plus: SBITA payments made prior to commencement
Plus: Capitalizable initial implementation costs payments
Plus: Costs related to increased functionality or efficiency after asset is placed into service.
(Less: SBITA incentives received)
Subscription Asset Balance
Amortization of SBITA Asset
A subscription asset should be amortized over the shorter of the subscription term or the useful life of the underlying IT asset. Generally, the subscription asset will be amortized over the subscription term since a subscription asset that has a useful life shorter than a subscription term would indicate that a contract was executed for payments past the useful life of the underlying IT asset.
Capitalization of a SBITA Based on the Stages of Implementation
Costs incurred in developing and installing a SBITA are either expensed or capitalized depending on which stage the cost is categorized.
A SBITA generally involves three stages based on the nature of the activities, not timing of occurrence. Training costs should be expensed as incurred, regardless of the stage in which they are incurred. Data conversion should be considered an activity of the initial implementation stage only to the extent that it is determined to be necessary to place the subscription asset into service—that is, in condition for use. Otherwise, data conversion should be considered an activity of the operation and additional implementation stage.
- Preliminary Project Stage: Activities in this stage include the conceptual formulation and evaluation of alternatives, the determination of existence of needed technologies, and final selection of the SBITA vendor. Activities in this stage should be expensed as incurred.
- Initial Implementation Stage: Activities in this stage include ancillary charges related to designing the chosen path, such as configuration, coding, testing, and installation associated with the government’s access to the underlying IT assets. Other ancillary charges necessary to place the subscription asset into service also should be included in this stage. The initial implementation stage for the SBITA is completed when the subscription asset is placed into service. Activities in this stage should be capitalized to the point at which the SBITA is placed into service (i.e. go live). Payments that are made in advance of the SBITA commencement term should be recorded as Intangible Right-To-Use in Progress.
- Post-Implementation/Operation Stage: Activities in this stage include maintenance, troubleshooting, and other activities associated with the government’s ongoing access to the underlying IT assets. Activities in this stage also may include additional implementation activities, such as those related to additional modules, that occur after the subscription asset is placed into service. Activities in this stage are generally expensed as incurred unless a modification results in either 1) increased functionality of the asset that provides the ability to perform additional tasks, or 2) increased efficiency of the asset or level of service of the asset.
Multiple Modules
If a SBITA has more than one module and the modules are implemented at different times, the initial implementation stage for the SBITA is completed and the subscription asset is placed into service when initial implementation stage is completed for the first independently functional module or for the first set of interdependent modules, regardless of whether all remaining modules have been completely implemented. For the remaining modules of that SBITA, all additional implementation activities should be considered subsequent implementation outlays and should be accounted for in accordance.
SBITA Contracts with Multiple Components
If a SBITA contract contains multiple components, such as (a) a contract that contains both a subscription component and a non-subscription component or (b) a contract that contains multiple underlying IT asset components, each component should be accounted for as a separate SBITA or non-subscription component and allocate the contract price to the different components. Examples of non-subscription components include a separate perpetual licensing arrangement and maintenance services for the IT assets. If it is not practicable to determine a best estimate for price allocation for some or all components in the contract, all components should be accounted for as a single SBITA.
If a SBITA involves multiple underlying IT asset components and the IT asset components have different subscription terms, each underlying IT asset component should be accounted for as a separate subscription component.
To allocate the contract price to the different components:
- First, as long as price allocations appear reasonable, prices for individual components included in the contract should be used. Discounts for bundling multiple subscription components or bundling subscription and non-subscription components together in one contract may be considered when determining whether individual component prices appear to be reasonable.
- If a contract does not include prices for individual components, or if any of those prices appear to be unreasonable, professional judgment should be used to determine the best estimate for allocating the contract price to those components. If it is not practicable to determine a best estimate for price allocation for some or all components in the contract, a government should account for those components as a single SBITA.
If multiple components are accounted for as a single SBITA, the accounting for that SBITA should be based on the primary subscription component within that SBITA. For example, the primary subscription component’s term should be used for the SBITA if those components have different terms.
Contracts with a combination of a tangible capital asset and an insignificant software component are excluded under GASB 96 SBITAs.
Contract Combinations
Contracts that are entered into at or near the same time with the same SBITA vendor should be considered part of the same contract if either of the following criteria is met:
- The contracts are negotiated as a package with a single objective.
- The amount of consideration to be paid in one contract depends on the price or performance of the other contract
If multiple contracts are determined to be part of the same contract, that contract should be evaluated in accordance with the guidance for SBITA Contracts with Multiple Components.
Modifications and Terminations
Amendments to the contract currently in effect may require a re-measurement of the subscription liability or subscription asset if the modification is deemed significant. An amendment is considered to be a modification of the SBITA unless the institution’s right to use the asset decreases. If the right to use the asset decreases, this would be deemed a termination of the SBITA (may be full or partial) since this would no longer meet the definition of a SBITA (control of the right to use criterion). The institution should account for a partial or full SBITA termination by reducing the carrying values of the subscription asset and liability and recognizing a gain or loss for the difference.
An institution should account for an amendment during the reporting period resulting in a modification to a SBITA contract as a separate SBITA (that is, separate from the most recent SBITA contract before the modification) if both of the following conditions are present:
- The SBITA modification gives the government an additional subscription asset by adding access to more underlying IT assets that were not included in the original SBITA contract.
- The increase in subscription payments for the additional subscription asset does not appear to be unreasonable based on (1) the terms of the amended SBITA contract and (2) professional judgment, maximizing the use of observable information (for example, using readily available observable standalone prices).
In contrast to amending the provisions of the SBITA contract, exercising an existing option, such as an option to extend or terminate the SBITA, is subject to the below guidance for remeasurement.
A government should reassess the subscription term only if one or more of the following occur:
- The government or SBITA vendor elects to exercise an option even though it was previously determined that it was reasonably certain that the government or SBITA vendor would not exercise that option.
- The government or SBITA vendor elects not to exercise an option even though it was previously determined that it was reasonably certain that the government or SBITA vendor would exercise that option.
- An event specified in the SBITA contract that requires an extension or termination of the SBITA takes place.
Initial and Subsequent Reporting
| Liability | Asset | |
|---|---|---|
| Commencement of Subscription Term* | Record subscription liability equal to present value of subscription payments (fixed payments, variable payments, that depend on rate, variable payments that are fixed in substance, payments for penalties, subscription incentives, and any other payments reasonably certain of being required) | Record subscription asset equal to subscription liability + capitalizable initial implementation costs payments made to SBITA at contract commencement + payments made to SBITA vendor at contract commencement |
| Subsequent Periods | Reduce subscription liability as payments are made for portion related to principal Record interest expense | Record amortization expense and allowance for amortization on subscripting asset over the subscription term using straight-line method |
*The subscription term begins when the subscription asset is place into service. This occurs when (1) the initial implementation stage is complete and (2) the institution has obtained the control of the right to use the underlying IT assets. For FY 23 (implementation year), the total of the SBITA contract starts from July 1, 2022 (or the date the SBITA beings if after July 1, 2022) through the end of the subscription term.
7.10.4.2 SBITA Resources
- State Accounting Office SBITA Accounting Policy
- USG SBITA Journal Entry Guide
- GeorgiaFirst Guidance for Leases (see Asset Management job aids)
- GASB 96 – SBITA Analysis Tool
7.10.4.3 Glossary
Cancelable period – Periods for which an institution and vendor both have an option to extend or terminate.
Commencement Date – The date the underlying asset is available for use which may be the same date as the contract execution date.
Contract – An agreement (written or verbal) between two or more parties that creates an enforceable right and obligation.
Discount Rate – For the institution, the discount rate for the SBITA is the rate implicit in the software contract unless that rate cannot be readily determined. In that case, the institution is required to use its incremental borrowing rate.
Exchange or Exchange –Like – A transaction in which each party receives and sacrifices something of approximately equal value.
Fiscal Funding Clause – A provision by which the SBITA is cancelable if the legislature or other funding authority does not appropriate the funds necessary for the government unit to fulfill its obligations under the software contract.
Implicit Rate – The rate of interest that at a given date, causes the aggregate present value of (a) the SBITA payments and (b) the amount that an institution expects to derive from the underlying subscription based IT asset following the end of the SBITA term to equal the sum of (1) the fair value of the underlying IT asset. However, if the rate determined is less than zero, an implicit rate of zero should be used.
Incentive – This may be a rebate, discount or cash payment to the SBITA vendor to induce an institution to enter into a SBITA. Examples of an incentive also include an agreement to pay preexisting subscription obligations to a third party, other reimbursements of end user costs, free subscription periods, reductions of interest or principal charges by the SBITA vendor.
Incremental Borrowing Rate – The rate of interest that the institution would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the SBITA payments in a similar economic environment. For entities within the state reporting entity (including USG institutions), this is the State’s incremental borrowing rate, provided by the State Accounting Office.
SBITA – 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.
SBITA Term – The period during which a government has a noncancellable right to use the underlying IT assets. The subscription term also includes periods covered by an option to extend (if it is reasonably certain that the government or SBITA vendor will exercise that option) or to terminate (if it is reasonably certain that the government or SBITA vendor will not exercise that option).
Noncancelable Period – The period for which a SBITA contract is enforceable and the SBITA is cancelable only upon the occurrence of some remote contingency.
Period of Time – The total period of time that an asset is used to fulfill a contract.
Reasonably certain – Implies a higher level of certainty. It is much more likely to occur than unlikely to occur.
Right to Use – the right to obtain the present service capacity from use of the underlying IT asset and the right to determine the nature and manner of its use.
Short-term SBITAs – SBITAs that, at the commencement of the SBITA, have a maximum possible term of 12 months or less, including any options to extend.
Underlying IT Asset – An IT asset that is the subject for the SBITA for which a right to use the IT asset has been conveyed.
Variable Payments Based on Index – Payments that are linked to a benchmark and may fluctuate to reflect changes in market rental rates.
Variable Payments, In-Substance Fixed – Payments that are structured as variable SBITA payments but are in-substance fixed. This is when there are multiple sets of payments that the institution could make, but it must make at least one of these. An example of this is when an institution has a SBITA with payments that vary based on the total number of users with a minimum amount due regardless of the number of users.
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