Government Grants Accounting to Get New Rules, Establishing Reporting Guidelines for Businesses

he FASB voted on June 4, 2024, to issue a proposal that aims to standardize and clarify the accounting practices for government grants, marking a significant stride towards resolving longstanding inconsistencies in financial reporting.

The proposal will be issued this year with a 90-day public comment period, the board said. The move follows years of debate and calls for reform from various stakeholders in the financial community.

FASB Chair Richard Jones emphasized the importance of the coming provisions, noting that “20 years from now there will be some board sitting here if we drop this project saying ‘boy wouldn’t it be nice to have some accounting for government grants’… let’s face it, the board was told loudly and clearly 10 years ago to add this to the agenda.”

The proposal will aim to introduce a new standard for recognizing, measuring, and presenting government grants received by business entities, marking a significant milestone for US GAAP.

The guidance would apply universally to all business entities, covering a range of transactions, including monetary and tangible nonmonetary assets transferred from governments to businesses, as well as forgivable loans. The proposal will leverage International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance.

Botosan, Joseph to Write Alternative Views

The rules weren’t unanimously approved by the FASB: Board members Joyce Joseph and Christine Botosan expressed their intent to write an alternative view.

Joseph said the proposal would provide inadequate ongoing disclosure requirements, particularly around the fair value of asset grants, which she argues could obscure financial analysis. Botosan’s concerns lie with the proposal’s approach to cost and benefits, emphasizing that it fails to meet investors’ needs for a gross presentation and fair value measurement of non-monetary assets, among other issues.

In general, the focus of the June 4 meeting was to continue on prior discussions to develop aspects of the proposals including disclosure, evaluating overall benefits against costs, and to determine whether to issue the proposal.

While there is a consensus on the board that the proposal marks progress, opinions varied on whether the benefits would justify the costs. Some members argued that the proposal would fill a crucial gap in GAAP and will enhance comparability and transparency. However, others held concerns that it might not sufficiently reduce complexity or meet investors’ needs for detailed information.

“It’s a growing issue with government grants becoming more significant in investors’ minds,” FASB member Frederick Cannon said. “I can’t support an Exposure Draft that didn’t at least use the proposed disclosures by the staff, which investors said were critical.”

Key decisions from the meeting include:

• Scope of Disclosures: Limiting disclosures to grants directly related to specific projects to streamline reporting and focus on relevant transactions.
• Mandatory Fair Value Disclosures: Entities will be required to disclose the fair value of tangible non-monetary assets received as grants, aiding stakeholders in decision-making.
• Detailed Disclosure for Asset-Related Grants: Entities must disclose how these grants affect both the balance sheet and the income statement, particularly concerning depreciation impacts.
• Annual Disclosure Requirements. The board decided to retain the requirement for annual disclosures only, opting not to extend it to interim periods. The board concluded that existing interim reporting guidelines provide sufficient information, and additional interim disclosures would not significantly enhance transparency.
• Business Combinations: One of the more complex issues addressed was the accounting of government grant-related assets and liabilities in business combinations. The board discussed several alternatives, ranging from applying general business combination accounting rules to providing specific exceptions or guidance. The decision was to further explore these alternatives, seeking to integrate government grants accounting into the broader framework of business combination accounting without compromising clarity or simplicity.