A new proposal that would establish authoritative guidance on the accounting for government grants received by businesses was issued by the Financial Accounting Standards Board (FASB) on Nov. 19.
U.S. accounting rules don’t currently have specific guidance about the recognition, measurement, and presentation of a grant received by a business entity from a government. Therefore, many businesses analogize to the guidance in International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance, or, less commonly, the guidance in Subtopic 958-605, Not-For-Profit Entities—Revenue Recognition, according to the FASB.
“When applying that guidance by analogy, business entities may not apply all of that guidance,” the FASB said in its proposal. “Stakeholders have observed that the lack of specific authoritative guidance on the accounting for government grants has led to questions about the acceptability of certain accounting approaches and has resulted in diversity in practice.”
In 2022, the FASB issued an invitation to comment, 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.
In response, most stakeholders, especially accountants and financial statement preparers, expressed support for developing specific authoritative guidance for the recognition, measurement, and presentation of government grants. Those stakeholders noted that having guidance in GAAP on the accounting for government grants would reduce diversity in practice and increase consistency among business entities because businesses would apply the new U.S. rules instead of analogizing to IAS 20 or other guidance, thus narrowing the variability in accounting for government grants, the FASB said.
By using IAS 20 as a resource, the proposed Accounting Standards Update (ASU) issued by the FASB on Tuesday would establish guidance on how to recognize, measure, and present a government grant, including:
- A grant related to an asset, and
- A grant related to income.
The proposed ASU states:
A grant related to an asset is a government grant in which the primary condition is for the business entity to purchase, construct, or otherwise acquire a long-term asset, including the direct grant of a tangible nonmonetary asset from a government. A grant related to income is a government grant other than a grant related to an asset (for example, a grant that reimburses a business entity for operating expenses).
The amendments in this proposed Update would require a consistent initial recognition threshold for all government grants. In accordance with the proposed amendments, a government grant would be initially recognized when it is probable that (1) a business entity will comply with the conditions attached to the grant and (2) the grant will be received.
The amendments in this proposed Update would require that, upon meeting the initial recognition threshold, a grant related to an asset be recognized in the balance sheet either as:
1. Deferred income (the deferred income approach)
2. A part of the cost basis in determining the carrying amount of the asset (the cost accumulation approach).A grant related to income and a grant related to an asset in which the deferred income approach is elected would be recognized in earnings on a systematic and rational basis over the periods in which a business entity recognizes as expenses the costs the grant is intended to compensate. When a business entity elects the cost accumulation approach for a grant related to an asset, the business entity would recognize the amount of the grant in determining the carrying amount of the asset.
The amendments in this proposed Update would require a business entity to present a grant related to income within earnings either (1) separately under a general heading such as other income or (2) deducted from the related expense.
The rules also would require—consistent with current disclosure requirements—disclosures about the nature of the government grant received, the accounting policies used to account for the grant, and significant terms and conditions of the grant, among others, the FASB said.
Stakeholder comments on the proposed ASU should be submitted to the FASB by March 31, 2025.
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