The FASB on November 17, 2021, issued a new accounting standard to create consistency in the way companies disclose certain types of government incentives they receive to set up shop in a locality.
The standard comes at a time when investors have been clamoring for more detailed information around government incentives businesses get – some to the tune of billions of dollars in breaks. And given the increase in government assistance related to the COVID-19 pandemic, the number of companies that have adopted accounting policies on government assistance has increased.
The disclosures will provide reporting information that would help investors to understand 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.
Companies would disclose, for example, forgivable loans from the government or a receipt of cash or other assets but based on the accounting method they used to record the transaction.
“The new ASU responds to requests from investors and other capital allocators by adding disclosures that will provide transparent and comparable information about certain types of government assistance that entities receive,” FASB Chair Richard Jones said in a statement. “This, in turn, will help them make better-informed decisions.”
The guidance is the FASB’s first step to provide rules on the topic as there are no explicit rules in U.S. GAAP and accounting differences have bubbled up among companies, hampering the ability of investors to make informed decisions.
The standard, Accounting Standards Update (ASU) No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities About Government Assistance, took about seven years to be completed.
It is effective for fiscal periods after December 15, 2021, for both public and private companies. Earlier application is permitted.
Government incentives are offered by policymakers to lure big companies like Amazon.com, Inc., Tesla, Inc., Walmart Inc. to establish a business in their state with the goal of driving economic growth and boosting jobs for residents. It is typically a win-win for both parties.
The FASB first proposed the disclosures in 2015, but the topic proved to be somewhat controversial, generating some pushback from companies over concerns that too much competitive information would be divulged.
Ultimately the board decided on a slimmed down version of the proposal after weighing cost versus benefits and operational matters, according to the “Basis for Conclusions” section of the standard.
Already some market watchers have said they wanted more to be included in the package, finding it too limited as it does not require disclosure of the biggest tax breaks companies get, such as property tax.
Especially important to analysts is how much of a company’s profits stem from its own business acumen versus a reliance of incentives baked into their business models. Some have said the rules are a good first start.
Businesses will be required to provide annual disclosures about transactions for the government that are accounted for by applying a grant or a contribution accounting model by analogy to guidance such as Topic 958, Not-for-Profit Entities, or International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance.
Companies would disclose: information about the nature of the transactions and the related accounting policy used to account for the transactions; the line items on the balance sheet and income statement that are affected by the transactions, and the amounts applicable to each financial statement line item; and significant terms and conditions of the transactions, including commitments and contingencies.
This article originally appeared in the November 18, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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