United States: FASB Considers Proposal On Required Financial Statement Disclosure Of Government Assistance

Currently, U.S. generally accepted accounting principles (GAAP) do not have explicit requirements for government assistance disclosure.1 On July 24, 2015, the Financial Accounting Standards Board (FASB) considered a requirement that companies disclose in the footnotes of their financial statements the types and amounts of government assistance they receive. FASB has directed its staff to draft a proposed Accounting Standards Update (ASU), which would then be subject to a 90-day comment period before going final.2

Overview

In July 2012, a Securities and Exchange Commission (SEC) staff report comparing International Financial Reporting Standards to GAAP concluded that GAAP lacked explicit requirements for government assistance disclosure. As such, FASB conducted an outreach effort to connect with various stakeholders of public and private companies to determine if companies utilized a consistent reporting method. Following this initiative, FASB concluded that reporting government financial assistance is inconsistent and diverse among financial statement preparers.3 FASB determined that this inconsistency inhibits financial statement analysts to perform trend analysis, make comparisons among companies, and make informed decisions about an entity. To mitigate these inconsistencies, FASB is considering a potential requirement that business entities disclose government assistance to provide uniformity and transparency to the market. Specifically, the objective is to provide the reviewer of financial statements the ability to assess the following:

  • Nature of the assistance and related accounting policies used to account for government assistance;
  • Significant terms and conditions of the legally enforceable agreement;
  • Effect of government assistance on a reporting entity's financial statements; and
  • Assistance that has not been recognized in the financial statements but may have an effect on the financial statements in future periods.4

Information to Be Reported

Under the proposed change, companies would not be required to report all government assistance. The FASB proposal considers any benefit that is readily available and eligible by general law for all companies to be outside the scope of financial statement disclosure (including statutory incentives that are available as of right, fast-track permits and fee waivers).5 Also generally excluded from disclosure would be contracts with governments in which the government is solely a customer.

However, the FASB proposal considers government assistance received through negotiation and covered under legally enforceable agreements to be eligible for financial statement disclosure. This type of government assistance may include, but is not limited to, negotiated government assistance such as grants, loans or tax incentives.6

Interestingly, the Board decided not to prescribe alternative disclosure requirements for private companies, nor to require specific interim disclosure requirements.7

Under the proposal, companies would need to examine government assistance in the aggregate rather than on a case-by-case basis.8 For example, if a company has three separate facilities, each with a property tax abatement, the company would be required to report on the combined rather than the individual requirements. The following example is instructive:

The disclosure would also include the following information:

  • A description of how the accounting policies relate to the nature of the agreements and include:

    • The nature of the assistance, including a general description of the significant categories, such as grants, loans, or tax incentives and mechanisms by which the assistance has been received;
    • The accounting policy used to account for government assistance; and
    • Where the government assistance is presented on the balance sheet and income statement and the amounts recognized.
  • Significant terms and conditions of the agreement. This could include, but is not limited to the following

    • The duration or period of the agreement, the tax rate, or interest rate;
    • Commitments made by both the reporting entity and the government;
    • Any provisions for recapturing government assistance, including the conditions under which recapture is allowed; and
    • Other contingencies.
  • Amounts not recognized in an entity's financial statements but that affect cash flows in the current period.9

Consideration of Materiality

FASB is considering the concept of materiality and level of aggregation of information. The level of materiality and level of aggregation of information required to be disclosed has yet to be formally agreed upon as FASB is deliberating on these issues.10 However, when considering what to report annually, a company should follow the general precept of financial reporting that requires a consideration of whether or not any omission of disclosure would cause the financial statements to be materially misstated as a whole.

Transition Provisions

The FASB proposal would apply the disclosures on a modified prospective basis for financial statements prepared following the effective date of the standards update. However, retrospective application also would be permitted. Agreements affected would include:

  • All agreements existing at the beginning of the current period; and
  • All agreements entered into after the beginning of that period.11

Commentary

If adopted, these changes would allow financial statement users a potential benefit with the proposed disclosure requirements. These changes would make financial statements more transparent by allowing financial statement users to analyze how much of a company's income is generated from government assistance. Further, users would be able to easily compare companies' government assistance disclosure in the financial statements. However, while greater transparency may provide more information for financial statement users, this proposed standard may provide more issues with respect to a company's private matters.

Recipients of negotiated government assistance may not favor the proposed standard. Successfully negotiating a benefit normally provides a competitive advantage for the recipient. By making this information available via disclosure, competitors may be able to level the playing field by requesting and ultimately attaining the same government assistance. Companies that receive government assistance might be concerned with the possibility that enhanced disclosure could affect government spending or endanger ongoing or future negotiations with the government. The Board stated that the ASU would "include a question" about any impediments, legal or otherwise, that may exist in government assistance agreements that would preclude disclosure otherwise required by the ASU.12

Furthermore, if these changes are adopted, companies which are relatively active in securing government assistance programs should consider formalizing a compliance and tracking system to better understand the level of benefits associated with such programs, the value of the benefits, and the financial impact to the business.

Finally, this FASB project should be viewed in conjunction with the pending issuance by the Government Accounting Standards Board (GASB) of new disclosure rules requiring state and local governmental entities to reveal how much revenue is forfeited via tax relief programs.13 Both projects have proven to be controversial to the parties involved in such agreements and to reflect the perceived lack of current disclosures.

Footnotes

1. Minutes of July 24, 2015 Board Meeting on Disclosures by Business Entities about Government Assistance, Financial Accounting Standards Board, Aug. 6, 2015; Board Meeting Handout: Disclosures by Business Entities about Government Assistance, Financial Accounting Standards Board, July 24, 2015. The minutes include the following disclaimer: "The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board's deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue an Accounting Standards Update or a Statement of Financial Accounting Concepts." The handout provides the following disclaimer: "The staff prepares Board meeting handouts to facilitate the audience's understanding of the issues to be addressed at the Board meeting. This material is presented for discussion purposes only; it is not intended to reflect the views of the FASB or its staff. Official positions of the FASB are determined only after extensive due process and deliberations."

2. According to FASB's Web site, the estimated completion of the exposure draft is the fourth quarter of 2015.

3. Board Meeting Handout: Disclosures by Business Entities about Government Assistance, Financial Accounting Standards Board, July 24, 2015, at 3.

4. Minutes of July 24, 2015 Board Meeting on Disclosures by Business Entities about Government Assistance, Financial Accounting Standards Board, Aug. 6, 2015, at 2.

5. Id.

6. Id. at 3.

7. Id. at 4.

8. Board Meeting Handout: Disclosures by Business Entities about Government Assistance, Financial Accounting Standards Board, July 24, 2015, at 8.

9. Minutes of July 24, 2015 Board Meeting on Disclosures by Business Entities about Government Assistance, Financial Accounting Standards Board, Aug. 6, 2015, at 3. Note that the Board decided not to require quantitative disclosure of amounts of government assistance expected to affect future periods under existing agreements based on predictions or forecasts about uncertain or unknown future events that are beyond management's control.

10. Id. at 4. According to FASB, the proposed amendments should refer to the guidance on materiality that is based on the decisions in the Disclosure Framework Project and the proposed changes to Topic 235, Notes to Financial Statements.

11. Id.

12. Id.

13. See proposed GASB Statement No. 77, Tax Abatement Disclosures.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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