FASB Proposes Rule on How Companies Account for Government Grants
June 4, 2024
The standard setter wants to establish requirements around the recording of cash, buildings, land, equipment and certain loans provided by a government
The Financial Accounting Standards Board wants to establish requirements on how companies account for government grants in their financial reports, a move to help investors compare businesses with each other as such aid becomes more prevalent.
The standard setter on Tuesday voted, 4-3, to propose that U.S. public and private companies recognize grants, something most companies already voluntarily do by applying an existing standard on government-aid accounting from the FASB’s international counterpart, the London-based International Accounting Standards Board.
The proposal focuses on the transfer of both monetary assets like cash and loans expected to be forgiven as well as physical assets such as buildings, land and equipment between a government and a company. A rule, if finalized, wouldn’t apply to certain loans, government guarantees or tax credits. The proposal also borrows heavily from the IASB rule, which has gone largely unchanged since 1983.
For a grant related to income, companies would have to recognize the grant on their income statement in the periods in which they incur any related expenses.
For a grant related to an asset, companies would have to account for and disclose the amounts they received but would have the option of whether to record the gross or net value of the grant. If companies opt for the net basis, they wouldn’t have to disclose the amount by which they reduced the value of the asset tied to the grant over time, the board said, adding it would pose too much of a compliance burden.
The FASB also will provide guidance on how companies should account for leftover grants belonging to a business with which they merged, for example if the construction of a factory is still under way.
The proposal goes further than a rule the FASB set in 2021 in response to the wave of government assistance amid the Covid-19 pandemic. That rule required companies to disclose details about the nature of the grant, its terms and conditions, and the line items in the financial statements affected by the transaction.
Board members Joyce Joseph, Fred Cannon and Christine Botosan said the proposal’s costs would exceed the benefits. “In my view, this proposal doesn’t do anything to improve the information that investors will receive,” Botosan said. “Instead of cleaning up the mess that is IAS 20, we’re codifying that mess,” she added, referring to the international standard.
There are no specific U.S. rules on such accounting. “It’s hard to believe, in our five volumes of accounting literature, that’s one of the few topics we don’t have guidance telling people how to do the accounting,” FASB Chairman Rich Jones said in an interview last December. “Plugging that hole and working on that project is important particularly as we see the rise of government grants.”
“Very often it’s easier to say, ‘Let’s just drop it’ than to have some hard decisions,” Jones said Tuesday, referring to the reasons for the lack of a proposal over the decades.
Businesses received 4,841 new grants from the U.S. government last year, down 2% from the annual average over the prior decade, according to USAspending.gov, a public website that tracks federal spending.
One of the most recent examples of large-scale grants is the Chips and Science Act, a package signed by President Biden in 2022 that included $39 billion of direct grants for chip factories to cover as much as 15% of the total cost of each project up to $3 billion per fabrication plant. Intel in March received up to $8.5 billion of grants for several projects. Taiwan Semiconductor Manufacturing, Samsung Electronics and Micron Technology each got more than $6 billion for their projects.
Federal grants have been prevalent in recent years as several government programs aimed to assist companies in weathering the pandemic and the Inflation Reduction Act sought to help the U.S. build clean-energy industries.
Despite the 2021 rule, the absence of more specific requirements has made it difficult for investors to compare the underlying accounting of grants across public companies. Of the companies with the 50 biggest assistance packages in the initial year of mandatory reporting, 29 didn’t mention the assistance at all in their financials, according to an academic study published in the quarterly journal Accounting Horizons in March. Public companies have to determine whether a particular grant is significant enough to disclose.
Two of the 50 companies disclosed the assistance received and the commitments they made in exchange, the study from Lillian Mills, dean of the accounting department at the University of Texas at Austin, and Ryan Hess, assistant accounting professor at the University of Georgia, found.
The FASB aims to issue a formal proposal in the fall and ask the public for feedback over a 90-day period, a spokeswoman said.
[Wall Street Journal]
