Breaking it down
Purpose and scope
The FASB issued the ITC in response to the fact that U.S. GAAP currently does not provide guidance on how government grants should be recognized, measured, and presented in the financial statements of business entities (that is, those other than not-for-profit entities). This lack of guidance has led to diversity in practice; some entities, but not all, analogize to IAS 20.
Crowe observation: As mentioned in a previous post in the Crowe Take Into Account knowledge hub, the COVID-19 pandemic highlighted the need for an accounting model within U.S. GAAP to address how business entities should account for government grants. Without explicit U.S. GAAP guidance, many business entities accounted for certain government grants received during the pandemic by analogizing to other models, including, but not limited to, IAS 20.
Crowe observation: Because Accounting Standards Codification (ASC) Topic 958-605, “Not-for-Profit Entities – Revenue Recognition,” already provides guidance on the accounting by not-for-profit entities for grants received from governments, the ITC does not address the applicability of IAS 20 to not-for-profit entities.
Crowe observation: The ITC is not requesting feedback on government assistance disclosures due to the fact that disclosure guidance already exists in ASU 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities About Government Assistance.” Government assistance disclosures are slightly broader in scope than those required by IAS 20.
The ITC solicits stakeholder feedback on the IAS 20 accounting model for government grants as well as the nature of government grants received and the models used by business entities to account for such grants. Among other things, the ITC asks stakeholders for feedback on the understandability, operability, and decision-usefulness of IAS 20’s scope, certain definitions, and its recognition, measurement, and presentation requirements. A complete list of questions can be found in the ITC.
Some of the ITC’s focus areas
These are summaries of several of the ITC’s focus areas:
1. Scope. IAS 20 applies to government grants, which are defined as “assistance by a government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity.” IAS 20 also includes several scope exceptions, including benefits related to income tax.
The ITC solicits stakeholder feedback on the operability of the definition of government grants and the IAS 20 scope exceptions.
2. Timing of grant recognition. Per IAS 20, government grants are not recognized in income until there is reasonable assurance that a recipient will (a) comply with the conditions associated with the grant, and (b) receive the grant.
The ITC notes that reasonable assurance is not defined in IAS 20 and seeks input on the operability of the term and how it is applied in practice.
Crowe observation: ASC 606, “Revenue From Contracts With Customers,” uses a threshold of “probable” in determining whether a contract with a customer exists (paragraph 606-10-25-1(e)). One of the questions in the ITC focuses on whether this guidance also should be applied to determine reasonable assurance as previously noted.
3. Presentation in the financial statements. IAS 20 allows for either gross or net presentation on the balance sheet or income statement, based on the type of grant.
Crowe observation: The ITC seeks input on the optionality provided in IAS 20 and whether such optionality affects the usefulness of financial information. The issue of whether the gross or net policy election would be appropriate under U.S. GAAP might be a topic for FASB discussion in the event this project is added to its agenda.
Crowe observation: IAS 20 does not provide guidance on how the statement of cash flows is affected by cash grants received. The question on whether such guidance should be incorporated into any future standard on the accounting for government grants likely will be subject to discussion and debate.
4. Below-market loans. IAS 20 requires that a government loan with a below-market interest rate be treated as a government grant and the benefit of the below-market rate accounted for in accordance with IAS 20.
Crowe observation: U.S. GAAP currently does not require recognition of the benefit from a below-market interest-rate loan received from a government. The ITC asks for feedback on whether such information would be decision-useful and how often such loans are received in practice.
Next steps
Comments on the ITC are due by Sept. 12, 2022.
The FASB invites individuals and organizations to comment on all matters in the ITC, but it is not necessary to comment on all issues. The responses will be evaluated, and the FASB will consider whether to add a project to its agenda on recognition, measurement, and presentation of government grants for business entities.
