[ACFR-contacts-news] GASB 96 Training - Follow-up on automatic renewal question

[HAMILTON Robert W * DAS]

Good afternoon ACFR Contacts,

Thanks to everyone that has attended or watched our GASB Statement No. 94 and 96 Training. A quick reminder for those that did not attend the live session: if you haven't already, please watch and notify your SARS analyst that you've watched the recording by close of business this Friday, May 26, this is a Gold Star Date. For convenience, here's a link to the training: https://youtu.be/gV7Wt2rZkm0

During the training, at about the 54:30 mark, we received a question about the treatment of automatic renewals, which are addressed in the Exposure Draft of Comprehensive Implementation Guide 2023, Question 4.7 (link<https://gasb.org/page/ShowDocument?path=GASB%2520Exposure%2520Draft%E2%80%94Implementation%2520Guidance%2520Update%E2%80%942023.pdf&acceptedDisclaimer=true&title=GASB+EXPOSURE+DRAFT%E2%80%94IMPLEMENTATION+GUIDANCE+UPDATE%E2%80%942023&Submit=>). As I listened back to the recording, I wanted to expand on our response to hopefully provide some additional clarity to agencies. I even reached out to the GASB staff to confirm my thinking.

For starters, our response about looking at the contract remains accurate. When in doubt, that will be the best place to get confirmation about the terms and conditions of the SBITA. Next, per the GASB staff, the intent of Question 4.7 was to solely address whether a SBITA with an automatic renewal is an agreement that provides a perpetual license (it does not). The question does not address the particular question that was mentioned in the training.

With that as background, I want to turn to what agencies may want to consider when faced with an arrangement that contains an automatic renewal:


  1.  As noted in the response to Question 4.7, an automatic renewal is an option to terminate the agreement, not an agreement to extend.



  1.  The GASB staff member I spoke with emphasized that in their research, in most cases, an automatic renewal was an option to terminate that was available to both parties at the same time.



  1.  Recall the subscription term of the SBITA, which is covered by paragraph 9 of GASB 96, defining it as the "period during which a government has a noncancellable right to the underlying IT asset..." (emphasis added).



  1.  Paragraph 13 of GASB 96 has the following (emphasis added):

As discussed in paragraph 9, periods for which both the government and the SBITA vendor have an option to terminate the SBITA without permission from the other party (or if both parties have to agree to extend) are cancellable periods and should be excluded from the maximum possible term. For a SBITA that has cancellable periods, such as a rolling month-to-month SBITA or a year-to-year SBITA, the maximum possible term of that SBITA is the noncancellable period, including any notice periods.

Circling back to the question asked during the training, if the agency's automatic renewal arrangement is like most, it will be an option for both the agency and the vendor to terminate the SBITA, indicating that the noncancellable period is ending. Taking it further, if that automatic renewal period occurs annually, it will most likely mean that the arrangement is a short-term SBITA, and therefore expensed as paid. I want to emphasize that agencies consider the likelihood of options to extend or terminate only for noncancellable periods.

I hope that knowing that in majority of cases, an automatic renewal means that both parties have the option to terminate helps frame conversations between agency accounting and procurement staff.

Please feel free to reach out with any questions.

Rob

Robert W. Hamilton, CPA
Statewide Accounting and Reporting Services Manager
Chief Financial Office
Department of Administrative Services
Cell: (971) 719-3031
http://www.oregon.gov/DAS/financial/acctng

Data Classification: Level 1 - Published

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