Accounting for government grants took on a new importance during the COVID-19 pandemic and the resulting economic disruption. Many companies that traditionally have not received direct federal assistance received funding through a variety of programs that were launched or expanded, including in the form of the Paycheck Protection Program (PPP) loans, Employee Retention Tax Credit (ERTC), Families First Coronavirus Response Act (FFCRA), Provider Relief Funds (PRF), Restaurant Revitalization Funds (RRF), and Shuttered Venue Operators (SVO) grants, among others.
A common challenge that companies have faced is how to account for the influx of these funds because U.S. Generally Accepted Accounting Principles (US GAAP) does not provide a comprehensive framework that for-profit companies can follow to account for the receipt of government funds. The Financial Accounting Standards Board (FASB) recently released an update that affects companies that accounted for these funds as government grants. Companies would have accounted for these transactions with the government by analogizing to a contribution accounting model such as the model included in International Accounting Standards 20 Accounting for Government Grants and Disclosures (IAS 20) or the guidance in ASC Subtopic 958-605 Not-for-Profit Entities: Revenue Recognition.
Below is a high-level summary of the most recent standard change and how it could affect your accounting for government grants.
Who Is Affected?
The Accounting Standard Update (ASU) 2021-10 was issued on Nov. 17, 2021, and affects business entities (except for not-for-profits and employee benefit plans) that have accounted for a transaction by analogy to guidance applicable to a contribution (aka a grant), including grants of cash, assets, services, or any other transaction with a government.
Why the Change?
The FASB’s aim is to increase the transparency around government assistance and allow investors and other financial statement users to make better-informed decisions by providing more details on the transactions and the accounting policies applied. Disclosures about types of assistance, an entity’s accounting for the assistance, and the effect of the assistance on an entity’s financial statements will provide comparable and clear information to investors and financial statement users, helping them understand the financial results and future prospects of the businesses accepting government assistance.
Key Changes to Know About
The new disclosures about government assistance transactions required by the ASU include:
- Information about the nature of the transactions and the related accounting policy used to account for them.
- Line items on the balance sheet and income statement affected by the transactions, and the amounts applicable to each financial statement line item.
- Any significant terms and conditions of the transactions, including commitments and contingencies.
These disclosures are necessary because the current US GAAP provide no specific guidance on accounting for or disclosing government assistance. The above disclosures will improve financial reporting and, hopefully, increase transparency. The guidance further explains that the disclosure would include, but are not limited to, the following:
- Duration or period of the agreement
- Commitments made by other the reporting entity and the government
- Provision that require recapture of amounts awarded by the government, including the conditions that would require recapture
- Other contingencies
Importantly, the standard also permits an entity to omit significant terms and conditions of a transaction when the terms and conditions would be appropriate to disclose under the above guidance, but there is a legal prohibition from disclosure. In which case, the entity shall disclose a general description of the information and identify which disclosures they are legally omitted from disclosures.
Effective Date and Transitions
The amendments in ASU 2021-10 are effective for all business entities within their scope for financial statements issued for annual periods beginning after Dec. 15, 2021 (calendar year end 2022). Early adoption is permissible.
Business entities have two options for transitions. They can elect to apply the standard change prospectively to all transactions within the scope and any government assistance reflected in financial statements at the date of initial application, as well as new transactions entered into after the date of initial application. Alternately, entities can apply the amendments retrospectively to those transactions.
Where Can I Learn More?
For more information on accounting for government grants under the new guidance, contact us.