The Financial Accounting Standards Board (FASB) recently issued a proposed Accounting Standards Update (ASU), Government Grants (Topic 832): Accounting for Government Grants by Business Entities, to establish authoritative guidance on the recognition, measurement and presentation of government grants received by business entities.
Current guidance on the accounting for government grants to business entities does not exist in U.S. Generally Accepted Accounting Principles (U.S. GAAP). As a result, business entities will often analogize to the guidance in International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance, or the guidance in Subtopic 958-605, Not-For-Profit Entities—Revenue Recognition. The proposed ASU leverages the guidance in IAS 20 to codify similar guidance in U.S. GAAP addressing the recognition, measurement and presentation of government grants by business entities.
Under the proposed amendments, a government grant would be recognized when it is probable that both of the following criteria will be met:
- The business entity will comply with the conditions of the grant.
- The grant will be received.
Upon meeting these criteria, the accounting treatment would differ based on whether the grant relates to an asset on the balance sheet or income. A grant relates to an asset if the primary condition for receiving the grant is to purchase, construct or otherwise acquire a long-term asset. This includes when a government provides a direct grant of a tangible nonmonetary asset.
A business entity that receives a government grant related to assets would be permitted to recognize the grant as either:
- Part of the cost of the asset (cost accumulation approach), or
- Deferred income (deferred income approach).
For a grant related to an asset accounted for using the cost accumulation approach, there is no separate subsequent recognition of the government grant proceeds in the income statement because they have been reflected in the carrying amount of the asset, which will be depreciated in accordance with the entity’s existing policies.
Grants related to an asset accounted for using the deferred income approach and grants related to income would both be recognized in the income statement on a systematic and rational basis over the periods in which the entity recognizes as expenses the related costs for which the government grant is intended to compensate. When received in advance, grant proceeds would be presented as deferred income on the balance sheet.
The proposed guidance would require a business entity to present a grant related to income within earnings either:
- Separately under a general heading such as other income, or
- Deducted from the related expense.
Entities that have government grants within the scope of this proposal would apply the existing disclosure requirements in Topic 832, Government Assistance, including disclosures about the nature of the government grant received, the accounting policies elected to account for the grant and significant terms and conditions. The proposed ASU would also require disclosure of the fair value of grants of tangible nonmonetary assets in the period in which the grant is recognized.
Furthermore, the proposed ASU would provide specific guidance about whether and how to recognize and measure grant-related liabilities assumed in a business combination.
The FASB will determine the effective date for the proposed ASU, and whether early application should be permitted, after considering feedback from stakeholders.
The proposed ASU would permit an entity to apply the proposed guidance either prospectively or retrospectively.
Stakeholders are encouraged to review and provide input on the proposed ASU by March 31, 2025.
