Published Date:
Feb 11, 2025
Updated Date:
February 11, 2025
In the wake of the COVID-19 pandemic, the economy saw a greater reliance on government grants. The accounting methods for Paycheck Protection Program (PPP) loans and other COVID relief programs revealed a hole in U.S. GAAP. With no current standard that dictates how to account for government assistance in for-profit entities, companies applied accounting in a variety of ways. This variance in GAAP application led to significant differences in reported cash flows and financial performance across entities. Due to this lack of uniformity and cohesion, investors and practitioners alike have expressed a desire for a standard for reporting government grants.
On November 1, 2023, the FASB added a project to their agenda addressing government grants. The objective of the project is to develop a new standard of reporting for business entities who receive grants to eliminate inconsistencies in application. This project specifies requirements for the recognition, measurement, and presentation of grants. The issued exposure draft presents several potential changes to current practices that companies can anticipate as they account for government grants.
Current Guidance
While there are currently no dedicated standards in the U.S. for recognizing government grant funds, certain transactions with the government fall in the scope of existing standards. This includes:
- Payments for goods or services, including exchange transactions under ASC 606
- Income tax credits under ASC 740
- Below-market interest rate loans under ASC 470
If the grant does not fall under existing GAAP, companies must analogize to another framework, in accordance with ASC 105-10-05-2. Though there are a variety of methods that are currently in practice, most companies apply either ASC 958-605 or IAS 20. There are some key differences in the way that these standards account for government grants that lead to a large disparity in the way grants affect financial statements.
ASC 958-605 covers recognition of government grants for non-profit entities. While transfers of assets from government entities to business entities are explicitly excluded from the scope, this standard is still commonly used as a framework. Entities that analogize to this standard recognize the grant as revenues or gains in the period received, as well as assets, decreases in liabilities, or expenses, depending on the nature of the grant. In order to recognize the grant, the entity must wait until they receive the grant or substantially meet the conditions.
IAS 20 is also frequently used. It is the oldest unrevised standard currently in use by IFRS. IAS 20 recognizes the grant over the period in which the expenses or losses the grant is compensating for are recognized on the income statement. The grant can be recognized either as an offset to related expenses or within the other profit/loss section, providing more flexibility to the financial statement preparers. Entities can recognize this grant “when there is reasonable assurance the entity will comply with the conditions attaching to them; and the grants will be received”.[2]
This table from PwC’s Viewpoint guide highlights the major reporting differences in these standards:
For transactions related to government grants that aren’t explicitly defined in US GAAP, ASC 832 was added November 17, 2021. This standard requires certain disclosures so investors can understand which accounting method was used for the government grant. Required disclosures include:
- The nature of the transaction
- The accounting policy used
- The line items on the balance sheet and income statement that are affected
- The significant terms and conditions of the transactions
While these disclosures give transparency to financial statement users to help with comparison, work is still required from the users of the financial statements to make the information comparable across entities.
Exposure Draft Decisions
The board has voted that IAS 20 will be used as a starting point for the proposed standard, with changes made to several areas. The new standard will be added to ASC 832, and the topic’s title will be changed to “Government Grants”. Below are the targeted improvements to the standard per the FASB Board.
Scope
The proposed standard would define the scope as “transfers of monetary and tangible nonmonetary assets from a government to a business entity, including forgivable loans.” [4] It will exclude topics already covered by other existing areas of the codification, including the transactions listed in Current Guidance. It will also exclude employee benefit plans and below-market interest rate loans.
Recognition
The Board has adopted recognition timing similar to IAS 20. Grants will be recognized when it is probable that:
- The entity will comply with the conditions of the grant
- The grant will be received
The term “probable” was adopted over “reasonable assurance” because it is more widely recognized and understood in US GAAP.
Measurement
Grants related to assets are defined as a “monetary grant for the acquisition or construction of an asset as well as a grant of a nonmonetary asset”.[5] These types of grants can be recognized in either a cost-accumulation approach or a deferred income approach. In the cost accumulation approach, the grant is added to the cost basis of the associated asset and there is no subsequent recognition in later periods. In the deferred income approach, the grant is initially recognized as deferred income on the balance sheet but is subsequently recognized as expenses for which the grant is intended to compensate as they occur.
Any grant that does not meet the standards of grants related to assets and is included in the scope of the project is defined as a grant related to income. This type of grant may only be recognized using the deferred income approach. Similar to grants related to assets, the initial grant is recognized as deferred income on the balance sheet. On the income statement, income related to the grant will be recognized as expenses related to the grant occur.
Disclosures
All disclosure requirements in ASC 832 will still be mandatory for grants in the scope of this project. For grants using the cost-accumulation approach, the requirement to identify the line items on balance sheets and income statements affected by the grant would no longer apply. The fair value of a tangible non-monetary asset must be disclosed in the period that it is recognized.
Opposing Views
A majority of the board members have voted to approve this draft, but some have expressed concerns that the proposed standard does not resolve the current lack of comparability for investors. One key drawback is the optionality that remains within the new standard. Depending on the type of grant and the method used, the standard still allows for multiple methods of accounting for government grants. While this reduces some of the approaches that are currently in practice, the alternative accounting methods will require additional work for investors to examine financial statements of differing companies’ side-by-side.
The other major concern is that investors called for a gross presentation approach due to its increased transparency. However, the proposed standard allows for a net presentation approach, which provides the investors with less information. Without a full disclosure of the gross amount of government grant, the comparability across the three options for accounting methods is limited.
Conclusion
Currently, the board is accepting comment letters for feedback related to the exposure draft. If approved, the new ASC 832 would allow for either a prospective transition or a retrospective transition through a cumulative-effect adjustment. None of the current board decisions are final and are subject to change, however, the proposed standard marks a step enhancing transparency and comparability in financial reporting. The adopted standard will also align US GAAP more closely with international standards of reporting. Ultimately, the proposed standard seeks to provide more reliable information to investors and other users of financial statements, supporting more informed decision-making in the marketplace.
Resources
https://www.youtube.com/watch?v=M3_CUXDtxT4
https://fasb.org/page/ShowPdf?path=GGRANTS.ITC.001.RAY PFEIFFER.pdf
[1]https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/income_taxes/income_taxes__16_US/ch_18_taxcredits/18_1_ch_overview.html
[2] https://www.ifrs.org/issued-standards/list-of-standards/ias-20-accounting-for-government-grants-and-disclosure-of-government-assistance/
[3]https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/financial_statement_/financial_statement___18_US/chapter_3_income_sta_US/310-Accounting-for-government-assistance.html#pwc-topic.dita_52561480-1be9-4dd1-9dcd-bea068538040
[4] https://fasb.org/page/ShowPdf?path=GGRANTS-TBDs to Date-20240604.pdf&title=Accounting for Government Grants—Tentative Board Decisions to Date
[5] https://fasb.org/page/ShowPdf?path=GGRANTS-TBDs to Date-20240604.pdf&title=Accounting for Government Grants—Tentative Board Decisions to Date
[6] 832-10-15-9 through -12 of Exposure Draft
[7] 832-10-15-13 through -15 of Exposure Draft
Footnotes
Feb 11, 2025