The FASB on May 26, 2021, unanimously voted to finalize a revised version of rules it proposed about six years ago on government assistance disclosures – a first step to bring consistency in the way companies report those items.
The disclosure rules would provide investors with an understanding of the terms and conditions, contingencies and longevity of government assistance agreements, the risks associated with those agreements and how the agreements would affect financial results, according to board discussions.
The standard will be issued in the third quarter this year.
“I view this as a positive incremental change,” FASB member Gary Buesser, an analyst voice on the board, said. “Investors have asked us for government grants, direct government grants, ‘provide us with the information about A how much and B where is it presented in the income statement, the balance sheet,’ and what we’ve seen in 2020, the airline industry did a very good job of that, so I look at this proposal as kind of codifying what the airline industry did for all companies and I think that’s what investors have asked us for,” he said.
The rules will take effect for fiscal periods after December 15, 2021, for both public and private companies. Companies, however, can apply the guidance earlier.
Government assistance refers to perks and other incentives policymakers provide to lure large companies to establish a business in their state with the goal of driving economic growth by boosting jobs for residents. On Monday, for example, Peloton announced plans to spend about $400 million to build its first U.S. factory in Ohio. The company anticipates adding more than 2,000 jobs in Ohio over the next few years.
There are no explicit accounting rules for government incentives in U.S. GAAP, and therefore accounting differences have bubbled up among companies.
The Nitty Gritty
Under the forthcoming rules, companies will be required to disclose: the nature of the government assistance; the accounting policy used to account for government assistance; and which line items on the balance sheet and the income statement are affected by the assistance and the amounts.
Companies would also disclose the significant terms and conditions of the agreement attached to the government assistance, including the durational period of the agreement, commitments made by the company and the government, and provisions, if any, for recapturing government assistance, including the conditions under which recapture is allowed and any other contingencies.
If there is something in an agreement that would legally prohibit a company from disclosing information the rules would require, the company would state that because of legal prohibitions in its agreement it is not allowed to disclose the information. The company would provide a general description of what that type of information is.
Surprise: Probably Won’t be Used for PPP Loans
The emerging slimmed guidance would not apply to much of the government assistance in CARES Act because companies said they typically report items such as Paycheck Protection Program (PPP) loans as debt – a surprising outcome, the discussions indicated.
If PPP loans are accounted for as debt by a company, for example, then the company would apply debt accounting disclosure rules.
“Initially I felt some sense of urgency to get this out there because of the pandemic related relief that has been given over the last little while, but then based on some of the analysis that the staff did, I took away from the discussion that these disclosure requirements wouldn’t apply to most of the CARES Act relief,” FASB member Christine Botosan observed.
“That helped me in terms of that sense of urgency, I don’t think it’s going to move the needle that much in terms of what the disclosures would be that we would see incremental to what’s going to be provided anyway during this time period,” she said.
The board added the project to its technical agenda in early 2014, and in 2015 issued Proposed Accounting Standards Update (ASU) No. 2015- 340, Government Assistance (Topic 832): Disclosures by Business Entities About Government Assistance, with a 2016 comment deadline.
After redeliberations the project was put on backburner amid the pandemic and for further staff research including on implementation costs. Though the board is issuing a revised version of the proposal, the document will not be reexposed for public comment because the guidance was included in the initial proposal and its due process was being properly followed.
“For me this project’s a good lesson on sometimes when we shoot too broadly, we don’t do anything for long periods of time,” FASB Chair Richard Jones said. “And to be fair I would much rather have gone with this scope a few years ago, because we would have had something going into the pandemic – the largest volume of government assistance we’ve ever seen,” he said.
This article originally appeared in the May 27, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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