A new Accounting Standards Update published by the Financial Accounting Standards Board on Dec. 4 establishes authoritative guidance on the accounting for government grants received by business entities.
“During the more than 50 years that the FASB has existed, there has been a lack of authoritative GAAP guidance on how to account for government grants received by business entities,” FASB Chair Richard Jones said in a statement. “The new ASU adds guidance in an area where stakeholders have consistently highlighted a need for it, benefitting both preparers and investors.”
As Jones noted, up until today, GAAP hadn’t contained specific authoritative guidance about the recognition, measurement, and presentation of a grant received by a business entity from a government. In the absence of specific guidance, many business entities 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 Topic 450, Contingencies, and Subtopic 958-605, Not-for-Profit Entities—Revenue Recognition, the FASB said. When applying that guidance by analogy, business entities may not apply all aspects of that guidance.
Stakeholders had told the FASB 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.
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The amendments in the ASU fill that void in GAAP by providing recognition, measurement, and presentation guidance for government grants received by business entities. They apply to business entities—specifically, all entities except for not-for-profit entities and employee benefit plans—that receive a government grant.
The amendments in the ASU also:
- Define government grants and clarify their scope.
- Establish recognition criteria.
- Include disclosure requirements regarding the nature of government grants, accounting policies applied, and significant terms and conditions.
The ASU states:
A grant related to an asset is a government grant, or part of a government grant, that is conditioned on the purchase, construction, or acquisition of an asset (for example, a long-lived asset or inventory). A grant related to income is a government grant, or part of 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 Update require that a government grant received by a business entity should not be recognized until:
- It is probable that (a) a business entity will comply with the conditions attached to the grant and (b) the grant will be received.
- A business entity meets the recognition guidance for a grant related to an asset or a grant related to income.
The amendments in this Update require that a grant related to an asset be recognized on the balance sheet as a business entity incurs the related costs for which the grant is intended to compensate, either as:
- Deferred income (the deferred income approach)
- An adjustment to 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 for which the deferred income approach is elected should be recognized in earnings on a systematic and rational basis over the periods in which a business entity recognizes as expenses the costs for which the grant is intended to compensate.
When a business entity elects the cost accumulation approach for a grant related to an asset, there is no separate subsequent recognition of the government grant proceeds in earnings. The carrying amount of the asset that reflects the government grant proceeds would be used to determine depreciation or other subsequent accounting for that asset.
The amendments in this Update require that a business entity present a grant related to income and a grant related to an asset for which the deferred income approach is elected as part of earnings either (1) separately under a general heading such as other income or (2) deducted from the related expense.
In addition, the amendments in this Update require, consistent with current disclosure requirements, that a business entity provide disclosures, including the nature of the government grant received, the accounting policies used to account for the grant, and significant terms and conditions of the grant.
For public business entities, the amendments are effective for annual reporting periods beginning after Dec. 15, 2028, and interim reporting periods within those annual reporting periods. For entities other than public business entities, the amendments are effective for annual reporting periods beginning after Dec, 15, 2029, and interim reporting periods within those annual reporting periods.
Early adoption is permitted in both interim and annual reporting periods in which financial statements haven’t yet been issued or made available for issuance. If a business entity adopts the amendments in an interim reporting period, it must adopt them as of the beginning of the annual reporting period that includes that interim reporting period.
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