New rules FASB’s crafting on government grants won’t incorporate popular international standard

An accounting standard on government grants for businesses will be developed, the FASB said on Nov. 1, 2023, pushing past a decade of hesitancy to tackle a topic that has kicked up big debates in the past.

The board said that the lack of explicit rules in U.S. GAAP presents a compelling need to develop a standard as accounting differences have cropped up negatively in the capital marketplace. These differences leave investors somewhat clueless about such transactions, according to the discussions.

All seven FASB members agreed to adding the project to the board’s technical agenda, stressing that the issue met the standard-setting criteria.

“When we talk about diversity, I don’t know any greater way to create diversity than to be silent and I’d emphasize analogies to other standards don’t necessarily mean complying with those other standards,” FASB Chair Richard Jones said. “There may be some views that you should be but that doesn’t necessarily mean that, so I do view adding this project as the potential to reduce diversity and provide increased transparency on these issues.”

This is the first project the FASB has added to its rulemaking agenda to address the recognition, measurement and presentation of government grants for businesses – coming from requests received during its agenda consultation period last year. Years ago the board considered adding a project but ultimately decided to focus on disclosures first—resulting in a narrow disclosure standard in 2021. A related accounting topic was subsequently put on the board’s research agenda for study of whether it was feasible to develop guidance, and if so how.

The developing accounting standard will be narrowly focused to ensure it is doable, according to board discussions. Specifically, it will focus on transactions whereby the government transfers monetary and tangible nonmonetary assets - e.g. cash or tangible assets, the board agreed. Further, the scope includes refundable credits and similar items whereby a company is receiving cash from a government for something that is not related to income taxes.

Excluded from the scope are items under Topic 740, Income Taxes, exchange transactions, transactions under Topic 606, Revenue from Contracts with Customers, services and intangible assets, property tax abatements, and reduced tax bills.

An issue that came to light was that although the FASB will consider aspects of International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance, that standard will not be incorporated into GAAP, as suggested in last year’s Invitation-to-Comment (ITC) No. 2022-002, Accounting for Government Grants by Business Entities Potential Incorporation of IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, into Generally Accepted Accounting Principles.

Many U.S. businesses analogize to IAS 20 when recognizing, measuring and presenting government grants. But that standard was slammed by some FASB members as being outdated and ineffective, having been developed decades ago

“I do find it concerning that many entities analogize to IAS 20,” FASB member Christine Botosan said. “IAS 20 is a very weak standard, it’s out of date, it’s 40 years old - it doesn’t have any conceptual underpinning and it doesn’t provide investors with adequate decision useful information,” she said.

Similarly, FASB member Frederick Cannon said that modernized rules were needed today, stressing that the board should rely on IAS 20 as little as possible.

Developing two different models

On other related matters, the board also tentatively decided:

·         to develop two different accounting models dependent on whether a business is getting a grant that is related to an asset versus all other grants. If it is a grant that is related to an asset, when the grant is recognized, the business would reduce the carrying value of the asset on the balance sheet. If the business is not getting a grant that is not related to an asset then it would show that grant on the income statement separately against the related expense.

·         to extend the related disclosures that are already in GAAP, plus consider whether other disclosures should be required. Also to require that the fair value of nonmonetary assets be disclosed.

·         against developing different provisions for private companies.

·         not to give specific guidance on cash flows but rather to require that companies follow the principles in Topic 230, Statement of Cash Flows.

·         the grant would be recognized when it is probable that an entity would comply with the conditions of the grant and that the grants will be received.

Discussions will continue at a future meeting.

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