FASB Proposes Guidance on Government Grants for Businesses

• On Nov. 19, 2024, the Financial Accounting Standards Board (FASB) issued a proposal that would establish accounting guidance for business entities that receive government grants. Grants in the scope of the proposal include transfers of monetary assets and tangible nonmonetary assets from a government as well as forgivable loans from a government.
• The proposed guidance largely conforms with International Accounting Standard (IAS) 20, “Accounting for Government Grants and Disclosure of Government Assistance,” though there are some notable differences.
• Business entities would have the option to adopt the proposed amendments prospectively or retrospectively.
• Comments on the proposal are due March 31, 2025.

Subscribe to "Take Into Account" knowledge hub

Background

Existing U.S. GAAP does not provide business entities with specific guidance on how to account for the receipt of government grants. In the absence of such guidance, many business entities resort to analogizing to other areas of U.S. GAAP or international standards. This has led to diversity in both when grants are recognized and how grants are presented in a reporting entity’s financial statements – for example, as income or as a reduction of related expenses.

In response to stakeholder feedback requesting authoritative guidance for business entities, the FASB’s proposed Accounting Standards Update “Government Grants (Topic 832): Accounting for Government Grants by Business Entities” would establish a framework based largely on the recognition, measurement, and presentation requirements of IAS 20.

Breaking it down

Scope

The scope of the proposal includes transfers of both monetary assets and tangible nonmonetary assets from a government to a business entity. Examples include government assistance in the form of grants of land or facility usage, monetary grants, and forgivable loans.

In contrast, the following items would be explicitly outside the scope of the proposed guidance:

Crowe observation: In contrast to the scope of IAS 20, the FASB’s proposal excludes from its scope the benefit of a below-market interest rate loan. In the proposal, the FASB states that the board “does not believe that the benefit, if any, of reporting a hypothetical additional cost of financing (that is, the amount that would potentially exist in the absence of government assistance) and a corresponding amount of grant income would justify the significant cost to provide such information.”

Recognition

Under the proposal, a business entity would recognize the impact of a government grant when it is probable that both 1) the entity will comply with the conditions attached to the grant, and 2) the grant will be received. Importantly, the proposal makes clear the receipt of a government grant does not, in and of itself, provide conclusive evidence that the grant conditions have been or will be met.

Crowe observation: IAS 20 requires an entity to recognize the benefit of a government grant when it is “reasonably assured” that the entity will comply with the grant’s conditions and the grant will be received. The “reasonable assurance” threshold does not appear in the FASB’s proposal but is generally understood to correspond to the “probable” threshold found in Topic 450, “Contingencies.” Thus, the “probable” recognition threshold set forth by the proposal is consistent with that of IAS 20.

Grant types, measurement, and presentation

How an entity initially measures and presents the effects of a government grant depends on whether the grant relates to an asset. Grants related to assets are those in which the primary condition is for the recipient to purchase, construct, or otherwise acquire a long-term asset, including direct grants of nonmonetary assets and monetary grants to acquire or construct an asset.

The following table (and subsequent paragraphs) describes the appropriate measurement and presentation for each grant type:

Grants related to assets

For asset-related grants, an entity would have the option to present the grant as deferred income or as part of the cost basis in determining the carrying amount of the related asset (cost accumulation approach). Under the deferred income approach, the grant proceeds are recognized in earnings on a systematic and rational basis over the periods in which the entity recognizes as expenses the related costs for which the government grant is intended to compensate. When the cost accumulation approach is used, there is no separate subsequent recognition of the grant proceeds in earnings because they are reflected in the carrying amount of the asset.

Grants related to income

For grants related to income – that is, all grants not considered to be asset-related grants – an entity would recognize the grant in the same period as the entity recognizes the expense for the costs to which the grant relates. The grant would be recognized either as income or as a reduction of the related expense caption.

Disclosures

The proposal would require business entities that receive a government grant to provide, on an annual basis, the disclosures outlined in Topic 832, “Government Assistance.” These would include information on:

• The nature of the government grants, including a general description and the form of the grant received
• Relevant accounting policies, including financial statement line items affected
• Significant terms, including the duration of the arrangement, commitments made by either party, and provisions for recapture or any other contingencies, if applicable
• If applicable, a general description of legal restrictions that prevent the entity from providing any of the aforementioned disclosures

For asset-related grants, disclosure of the financial statement line items affected by the transaction and the amount by which each line item is affected in the reporting period is required only in the period in which the grant is recognized on the balance sheet.

Entities receiving grants of tangible nonmonetary assets also would be required to disclose the fair value of the grants when recognized on the balance sheet.

Business combination guidance

The proposal also provides application guidance on the recognition and measurement of grant-related liabilities acquired in a business combination. It specifies that an entity that acquires grant-related assets and liabilities in a business combination should typically apply the guidance in Topic 805, “Business Combinations,” but provides for the following exceptions:

• If an entity has fully complied with the conditions attached to a grant, the acquirer shall not recognize deferred income for the grant.
• If an entity has not fully complied with the conditions attached to an income-related grant as of the acquisition date but determines it is probable that such conditions will be met, the acquirer shall recognize any deferred income from the grant in accordance with the proposal’s measurement guidance.
• Any liability to repay government grant proceeds shall be recognized in accordance with Subtopic 450-20, “Loss Contingencies.”

Transition and effective date

Business entities would have the option to apply the amended guidance prospectively or retrospectively. The FASB will determine an effective date for the proposal when it deliberates constituent feedback on the proposal. Early adoption would be permitted.

FASB materials reprinted with permission. Copyright 2024 by Financial Accounting Foundation, Norwalk, Connecticut. Copyright 1974-1980 by American Institute of Certified Public Accountants.