Defining Issues | November 2023
Insight
The FASB discusses a model for business entities to account for government grants.
As more business entities receive government grants, how to recognize, measure and present these grants has become a more prevalent issue. The limited US GAAP on accounting for government grants has led to diversity in practice.
Applicability
- FASB project: Accounting for government grants
- Business entities that receive government grants
Relevant dates
November 2021: FASB issued ASU 2021-10, Disclosures by Business Entities about Government Assistance
June 2022: FASB sought stakeholder feedback on Accounting for Government Grants via an Invitation to Comment, with comments due by September 12, 2022
November 1, 2023: FASB added a project to its technical agenda on the accounting for government grants by business entities and began initial deliberations
Key impacts
There is limited US GAAP guidance on accounting for government grants. US GAAP prescribes a contribution model for not-for-profit entities in the scope of ASC 958 to account for government grants. In contrast, without specific US GAAP, business entities are left to analogize to other GAAP, which has led to diversity in practice.
Some business entities account for their government grants by analogy to the not-for-profit contribution model under ASC 958-605. Others analogize to the grant model under IAS 20 (government grants and government assistance), under IFRS® Accounting Standards.
In November 2021, the FASB issued ASU 2021-10, which created ASC 832 (government assistance). This ASC requires business entities to disclose information about certain government assistance they receive.
In June 2022, the FASB sought feedback from stakeholders through an Invitation to Comment on whether to incorporate the recognition, measurement and presentation guidance on accounting for government grants in IAS 20 into US GAAP.
After adding the project to its research agenda and engaging in the Invitation to Comment and other stakeholder outreach, the FASB met on November 1, 2023 to refine its project scope and discuss recognition, measurement, presentation and disclosures. The FASB noted throughout the meeting the importance of developing guidance that is operable and decision-useful to investors.
The following are key highlights from the tentative decisions reached at the November 1 FASB meeting:
Project scope
Model
The Board indicated it wants to develop an accounting model that provides guidance on recognition, measurement and presentation of government grants received by business entities. The Board confirmed that the guidance in this project will apply to both public and private business entities.
Scope - definition of a government grant
The Board defined a government grant as assistance by a government in the form of transfers of monetary and tangible nonmonetary assets to a business entity. The project’s scope would include forgivable loans.
Scope exclusions
The project’s scope excludes:
- exchange transactions in the scope of ASC 606 (revenue from contracts with customers) or ASC 610-20 (gains and losses from derecognition of nonfinancial assets);
- items accounted for under ASC 740 (income taxes);
- below-market interest rate loans; and
- government guarantees.
Recognition and measurement criteria
Recognition
The Board tentatively agreed that the threshold to recognize government grants should be ‘probable’, consistent with ASC 606 and ASC 450-20 (loss contingencies).
The Board clarified that an entity would recognize a government grant when it is probable:
- the entity will comply with the conditions attached to the grant; and
- the grant will be received.
The Board confirmed that the project would include guidance for grants related to assets and grants related to income (grants other than those related to assets).
Grants related to income
The Board tentatively agreed that government grants related to income would be recognized in the income statement in the periods in which the entity incurs the grant-related costs.
These grants would be presented on the balance sheet as a deferred liability and as a credit balance in the income statement category related to the costs for which the grant is intended to compensate.
Grants related to assets
Grants related to assets are for the acquisition or construction of an asset and include the receipt of a nonmonetary asset.
The Board tentatively decided that a cost-accumulation approach would be applied to these grants. Therefore, monetary amounts received related to assets would reduce the cost basis of the related asset on the balance sheet, which would reduce the related depreciation expense on the income statement.
Statement of cash flows presentation
The Board tentatively agreed that cash inflows from government grants would be presented based on the principles in ASC 230 (statement of cash flows).
Disclosures
The Board tentatively agreed to amend the scope of ASC 832 to include government grants that are in the scope of this project. The Board plans to consider additional decision-useful disclosure requirements.
Next steps
The FASB will perform further outreach and continue discussions on accounting for government grants.
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