Despite steadily rising production costs, higher market returns have offset an increased cost base and…
After years of resistance, companies in 2022 will for the first time be forced to disclose in their financial statements how much money they receive in government breaks, grants and incentives. But don’t expect too many details.
The upcoming accounting requirements are so narrow that few types of government assistance programs will be covered by the new rules. And some of the qualifying programs – like the wave of pandemic aid that infused corporate coffers in 2020 – won’t exist when the requirements become mandatory.
“It may not be much that will eventually be disclosed by the time this is released,” said Scott Ehrlich, president of Mind the GAAP LLC, an accounting consultancy firm.
The Financial Accounting Standards Board plans to release the rules in August so that companies can prepare for the 2022 deadline. Companies can apply the rules in advance, so some companies may voluntarily report details on some of the coronavirus relief fund that helped them through the pandemic, said Angela Newell, national insurance partner at BDO USA LLP.
“It’s only technically effective after all of these programs are done,” Newell said. “The hope is that companies voluntarily make these disclosures.”
Captures, rules and exceptions
States, municipalities, and the federal government routinely offer incentives to businesses to create jobs, build new headquarters, or manufacture a certain product. Unlike international accounting rules, US generally accepted accounting principles (GAAP) do not require companies to report receiving money or what promises they have made to get it.
The new rules will require companies to describe in the footnotes of their financial statements the nature of the aid received, how they have accounted for it, which balance sheet or income statement item has been allocated, important terms and duration of agreements. , among other details.
But here’s the catch: They won’t have to spell out those details unless they decide to recognize and measure the aid, to begin with. And there is no obligation for companies to do so.
This created problems during the pandemic as the government provided billions in aid to businesses and accountants struggled to understand how to communicate the value of aid in companies’ financial statements. The American Institute of CPAs has offered non-binding advice to help businesses overcome the confusion.
Under the upcoming FASB requirements, if a business accounted for aid following ASC 958-605, an accounting rule that applies to grants for nonprofit organizations, or if it turned to international guidelines on government aid set out in IAS 20, it would be required to disclose details.
But if aid is ultimately recorded as debt, as stated in ASC 470, companies do not have to follow the disclosure requirements because there are separate rules governing debt that companies must follow anyway. And if the aid takes the form of tax breaks, those details should not be included either.
Tax breaks, like the millions Amazon Inc. raised to build its second headquarters in Arlington, Virginia, are the bulk of government assistance to businesses in a non-pandemic time, said Greg LeRoy, executive director of Good Jobs First, an organization of government transparency. organization.
“For the FASB, ignoring tax breaks is literally ignoring the bottom of the iceberg,” LeRoy said. “They’re turning a blind eye to the big bucks, and that’s the problem.”
Watered down approach
In approving the plan, FASB members recognized the limitations of the new rules and admitted that it was a very watered-down version of a proposal released by the board in 2015. That proposal was almost universally criticized by business.
This would have required companies to reveal details of many other types of government aid, including tax breaks. The effort was so unpopular that it looked like it was going nowhere. But then came Covid and a massive wave of government aid, and the lack of accounting advice frustrated investors and analysts.
Scaling down the proposal to cover immediate needs – details of pandemic relief – was likely the only way to get something off the books, said David Gonzales, vice president of Moody’s Investors Service.
The FASB may also review the requirements later. On June 24, the board asked the public to consider whether it should tackle a list of potential accounting improvements, and government assistance was one of them.
While many companies during the pandemic voluntarily disclosed that they had received help and how much, the lack of accounting requirements meant it was difficult to know when a company recognized the money and its impact on its revenue. . The upcoming FASB requirements help connect the dots, Gonzales said.
“It is intended to address the worst-case scenario where companies are not transparent about their support,” he said. “It helps with that. This does not facilitate the day-to-day analysis of government support and how it affects ongoing operations. “