The Financial Accounting Standards Board (FASB) unanimously voted to finalize a revised version of rules it proposed about six years ago on government assistance disclosures. This decision on May 26 is an important step towards consistency in the way companies report those items.
Inconsistency in practice
Government assistance refers to perks and other incentives policymakers provide to lure large companies to establish a business in their states with the goal of driving economic growth by boosting jobs for residents. Under existing U.S. Generally Accepted Accounting Principles, there are no explicit accounting rules for government incentives, leading to differences in how companies report these agreements.
In 2015, the FASB issued a proposal that was designed to bring more transparency about government incentives. However, the FASB put that project on the backburner due to stakeholder concerns about the potential implementation costs of the rules. In 2019, the FASB decided to study whether the benefits of the disclosure requirements would justify the costs companies would incur to comply with them.
The COVID-19 pandemic resurrected the issue of government assistance disclosures. Investors are especially curious about financial relief received under the Coronavirus Aid, Relief, and Economic Security (CARES) Act and other government support during the COVID-19 crisis that would have a material impact on financial results. The CARES Act and subsequent actions provided qualifying companies with forgivable loans, payroll tax credits and payroll tax deferrals. The measures include funding for an unemployment program offered through employers.
Nitty-gritty details
After six years of deliberations, the FASB decided to finalize its government disclosures project, though the final rules will be a scaled-back version of the 2015 proposal. The updated rules will apply to grants of assets, tax assistance, low-interest-rate loans, loan guarantees and forgiveness of liabilities.
Under the forthcoming rules, companies will be required to disclose:
- The nature of the government assistance,
- The accounting policy used to account for government assistance, and
- Line items on the balance sheet and the income statement that are affected by the assistance and the amounts.
Companies will also need to disclose the significant terms and conditions of the agreement attached to the government assistance, including the duration of the agreement, commitments made by the company and the government, and provisions, if any, for recapturing government assistance. This includes the conditions under which recapture is allowed and any other contingencies.
The FASB realizes that there may be sensitivities around disclosing agreements with government entities. So, the rules would require a company to disclose if an agreement contains a provision that would legally prohibit a company from sharing certain required information. The disclosure would provide a general description of what that type of information is.
PPP loan surprise
Investors who want more information about Paycheck Protection Program (PPP) loans provided under the CARES Act may be surprised to discover that the new disclosure rules likely won’t apply to this type of government assistance. Companies typically account for PPP loans as debt, so the company would apply debt accounting disclosure rules.
“Initially I felt some sense of urgency to get this out there because of the pandemic related relief that has been given over the last little while, but then based on some of the analysis that the staff did, I took away from the discussion that these disclosure requirements wouldn’t apply to most of the CARES Act relief,” FASB member Christine Botosan observed.
Coming soon
The FASB plans to issue the standard in the third quarter of 2021. The rules will take effect for fiscal periods after December 15, 2021, for both public and private companies. Early adoption will be allowed. For more information about how the new disclosure rules will affect your company’s financial statements, contact your CPA.
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