Three years after proposing to require companies to provide details about assistance they receive from governments, the FASB is close to specifying the types of support that should be disclosed. The board is expected to include grants, tax assistance, low-interest-rate loans, and loan guarantees in the final amended guidance.
The FASB on November 14, 2018, took a major step forward in its long-running effort to force companies to reveal the government assistance they receive.
The board agreed that when it issues the update to U.S. GAAP, it will spell out the agreements that qualify as government assistance. The wording, which will be worked out behind the scenes and then discussed publicly and finalized in 2019, is expected to include grants, tax assistance, low-interest-rate loans, and loan guarantees.
“While I’d like to say we have principles-based standards, the involvement of government — not just at the federal, but state, local, municipality level, outside the U.S, all of the forms — call for a very clear scope,” FASB Vice Chairman James Kroeker said.
The decision was a departure from the route the FASB headed down earlier this year, when the board was working on a principle businesses would use to determine the kind of government support they had to disclose to investors and their value. The board originally said it wanted businesses to focus on legally enforceable agreements, where businesses receive cash, other assets, or benefits that reduce or eliminate the business’s expenditures.
Financial reporting professionals asked for more guidance about the disclosure rules and also expressed frustration with the time and effort it would take to gather details, particularly for companies operating in multiple jurisdictions.
Clear wording would “would result in the lower cost to implement,” said FASB member Marsha Hunt.
The FASB also agreed that public companies would have until reporting periods that start after December 15, 2020, to comply with the new disclosure requirements. Companies with fiscal years that match the calendar would start providing the information in 2021. Private companies would disclose the incentives one year later.
When they make the transition to the new standard, businesses would have to disclose the information in the first set of financial statements following the effective date to both agreements that have not been completed as of the effective date as well as those entered into after the standard goes live.
The board plans to meet in early 2019 to discuss finalizing the project, FASB Chairman Russell Golden said.
The FASB’s examination of government assistance is meant to shed light on the types of incentives states and cities offer to companies, such as Amazon, Inc., to build its headquarters in a particular location or hire a certain number of new employees. It also can include low-interest loans. The disclosures will exclude incentives related to income taxes.
The FASB wants annual disclosures about the transactions, including the nature of the assistance, the related accounting policy, and the effect on financial statement amounts. The board also wants to require information about significant terms and conditions of agreements such as the duration of agreement, interest rates, commitments and contingencies, and any provisions for recapturing government assistance.
The board included these provisions in the November 2015 Proposed Accounting Standards Update (ASU) No. 2015-340, Government Assistance (Topic 832): Disclosures by Business Entities About Government Assistance. The proposal said investors and analysts wanted more information about sources of business funding, including which government assistance is subject to political whim and whether a business could survive without it.
Many businesses and auditors balked at some of the requirements, especially one that would have required companies to disclose the amount of government assistance received but not recognized directly in the financial statements. In reviewing feedback, the FASB decided to scrap it. The FASB also narrowed other aspects of the proposal as it weighed feedback and debated the merits of the disclosure.
U.S. GAAP offers no explicit guidance on recognition and measurement or the disclosure of assistance that businesses receive from governments. At a time when states and cities increasingly are offering expensive incentives to lure employees, investors, analysts, and the public want to know the details about the packages. Information about less high-profile deals also is important to investors; many want to know the value of the deals to help understand how well a business may fare if the grant or tax break disappears.
