FASB Backpedals: Will Tailor International Accounting Rules on Government Grants for US GAAP

The FASB on April 3, 2024, voted 6 to 1 to tailor an international accounting standard on government grants and incorporate it into US GAAP — backpedaling on prior decisions that would have carved a different path of rules. Board academic Christine Botosan fervently dissented.

The board said that the lack of explicit rules in GAAP presents a compelling need to stem accounting differences that have cropped up negatively in the US capital marketplace. Further, the international accounting standard is already understood and used and would fix an issue that was left unaddressed for years, according to the discussions.

“When we do outreach with investors we hear that frequently they do look at domestic and international companies and so I do think it’s incumbent upon us when we have absence of GAAP that looking to international standards can be helpful,” FASB Chair Richard Jones said. “One thing I know is not to ‘do nothing,’ which is what we’ve done over and over again on this topic; we don’t make any progress,” he said among other remarks.

The board will leverage the accounting framework within International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance, and revise it in targeted areas, according to the discussions. The standard will be improved in areas such as scope, recognition threshold, and cash flow statement presentation. Views were mixed about whether additional implementation guidance to illustrate some of the main principles of the requirements would be necessary.

“One of the primary reasons to do something is so we will have a complete codification and that people wouldn’t be left guessing whether or not they can apply certain practices,” FASB Vice Chair James Kroeker said. “I first encountered this issue in the early 2000s working with a company that at the time received significant grants… the conclusion that we collectively came to was IAS 20; there was very significant disclosure – I don’t think any of their investors were confused by that,” he said. “Fast forward 10 years I think went through an era where regulators were challenging whether it was appropriate to apply IAS 20 by analogy notwithstanding the absence of any GAAP all the way through the pandemic where we had to issue a paper that outlined some of the alternatives that might be acceptable, so I think having something in the codification really is the improvement.”

Majority Agreed with Staff Analysis

The decision comes about four months after the board voted against incorporating IAS 20 into GAAP so that it could develop rules that would remove differences in accounting approaches. Following that November 2023 meeting, the board heard from various advisers that the decision it had tentatively landed on would not be a better route. (See New Rules FASB’s Crafting on Government Grants Won’t Incorporate Popular International Standard in the November 3, 2023, edition of Accounting & Compliance Alert.)and ( Developing Accounting Rules on Government Grants for Businesses Looking Tricky for FASB in the January 5, 2024, edition of ACA.)

At the April 3 meeting, the majority vote was in agreement with staff members, who said that many business entities currently apply IAS 20 by analogy to account for government grants. The standard is “widely understood and incorporating it into GAAP was supported by the majority of stakeholders who responded to the board’s Invitation-to-Comment on government grants,” a staff accountant told the board.

Further, staff said that because of the lack of guidance that specifically addresses government grants, providing a standard would reduce diversity in practice because companies would no longer be able analogize to Subtopic 958-605, Not-for-Profit Entities—Revenue Recognition or other guidance. “Given the wide variety of government grants that would be subject to this guidance, the staff thinks that optionality would result in a more workable solution and allow entities to select the approach that best fits their situation,” staff said. “And the required disclosures would provide investors with the transparency needed to perform their analysis.”

Botosan’s Dissent

In dissenting, Botosan said that IAS 20 was not a good place for the board to land because the standard was developed about 40 years ago “to codify all of the different ways that entities around the world accounted for government grants in practice,” as opposed to improving financial reporting.

Further, “twenty years after it was passed, the IASB was told that it was out of date and that it had problems,” she said. “Since IAS 20 allows almost any approach to accounting for government grants, however, I don’t find it at all surprising that most US entities stated that they analogize to IAS 20 because almost anything goes.”

Botosan argued that instead of “codifying existing diversity and bad accounting practice,” the board should improve financial reporting for government grants based on the existing US GAAP model in Subtopic 958-605.

“Subtopic 958-605 addresses many of the concerns that have been expressed about IAS 20, but unlike IAS 20 which is old and out of date, 958-605 was strengthened and updated by us as recently as 2018,” Botosan said. Subtopic “958-605 eliminates the optionality that IAS 20 allows and investors have said they don’t like the optionality, that it harms comparability and that it reduces the usefulness of the information that they’ve received,” she said, among other reasons.

Tough Topic

The topic has been a contentious one in the past for the board and thus this is its first rulemaking project to address the recognition, measurement and presentation of government grants for businesses – coming from requests received during its agenda consultation period two years ago.

Years ago the board considered adding a project but ultimately decided to focus on disclosures first — resulting in a narrow disclosure standard in 2021. A related accounting topic was subsequently put on the board’s research agenda for study of whether it was feasible to develop guidance, and if so how.

In agreeing with staff, comments by some board members signal future challenges that might ensue on the topic.

“Current practice allows for significant optionality – there are some relatively modest improvements by codified IAS 20 which is current practice,” FASB member and analyst Frederick Cannon, said. “This is clearly low cost to preparers and would be least disruptive in terms of accounting; in terms of the benefit of codified practice,” he said. “I do believe that there will be ongoing cost to investors though.”

Discussions will continue at a future meeting.