FASB aims for consistent grant reporting rules

New guidance proposed by the Financial Accounting Standards Board (FASB) would standardize the reporting for government grants on financial statements, potentially affecting a wide range of transactions for both public and private U.S. companies.

Need for change

COVID-related legislation and the Inflation Reduction Act spurred an increased in federal grants to assist struggling companies and encourage clean-energy projects. During the COVID pandemic, the FASB issued Accounting Standard Update No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities About Government Assistance.

The 2021 rule requires grant recipients to disclose the following details:

• The nature of the grant transactions.
• The accounting policies used to account for the transactions.
• 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.
• Significant terms and conditions of the transactions, including commitments and contingencies.

However, the absence of more specific requirements has made it difficult for stakeholders to compare the underlying accounting of grants from one company to the next.

Many companies voluntarily disclose their grants using the guidance in International Accounting Standard 20, Accounting for Government Grants and Disclosure of Government Assistance. But there are no specific rules under U.S. Generally Accepted Accounting Principles (GAAP) related to the recognition, measurement, or presentation of these grants. So, the FASB added a project on government grants to its technical agenda in 2023.

Scope of proposal

The FASB voted on June 4, 2024, to issue proposed guidance related to this topic, based largely on the international rule. Key decisions made during the FASB meeting include:

• The proposal will cover both monetary assets (such as cash and forgivable loans) and physical assets (such as equipment and land) transferred from governments to businesses.
• Certain loans, government guarantees, and tax credits would be excluded from the guidance.
• Businesses would be required to disclose the fair value of grants of tangible nonmonetary assets in the periods in which grants are recognized.
• Grants related to income would be recognized on the income statement in the periods in which businesses incur any grant-related costs.
• When accounting for grants related to assets, businesses generally would have to disclose the amounts they received based on either the grant’s gross or net value. Those that report grants on a net basis wouldn’t be required to disclose the amount by which they reduced the value of the asset tied to the grant over time.
• For grants related to assets that are accounted for using a cost-accumulation approach, businesses wouldn’t be required to disclose the line items on their balance sheets and income statements that are affected by the grant and the amounts applicable to each financial statement line item in the current reporting period.
• The proposal’s disclosure requirements would apply only to annual reporting periods (not interim periods).

The update also will provide guidance on accounting for leftover grants after a business combination.

Applying the changes

If the proposal is approved, businesses will be allowed to elect to apply it either retrospectively or prospectively for grants that either aren’t completed as of the effective date or are entered into after the effective date.

Those that apply the changes retrospectively would be required to provide the disclosures in the period of adoption under Accounting Standards Codification Topic 250, Accounting Changes and Error Corrections. Those that elect to apply the changes prospectively would be required to disclose the nature of and reason for the change in accounting principle.

The proposal aims to bring greater consistency in reporting government grants. It’s expected to be issued by the end of 2024 with a 90-day public comment period.

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