Despite steadily rising production costs, higher market returns have offset an increased cost base and…
Since the start of the COVID-19 pandemic, businesses have received trillions of dollars in government assistance at the federal, state and municipal levels to help keep employees on the payroll, provide key services and encourage the innovation. About $500 billion of that was made available to businesses through the Coronavirus Aid, Relief, and Economic Security Act (CARES) in March 2020.
In addition to COVID-19-specific relief, the government has prioritized infrastructure contributions to the technology and telecommunications industries in recent years. For example, the US Department of Agriculture has invested $1.5 billion to date in loans and grants to extend broadband service to rural areas. And the Department of Homeland Security is providing $1.9 billion to help vulnerable organizations and communities protect themselves against cyberattacks.
These are just a few examples of the type of government assistance that potentially falls within the scope of a new standard requiring government assistance information.
Grant influx prompts finalization of new disclosure requirements
The influx of grants and loans prompted the FASB to update US GAAP to require new annual disclosures for business entities receiving government assistance. The new disclosure-only standard (Accounting Standards Update No. 2021-10, Government Assistance (Topic 832): Disclosures by Commercial Entities on Government Assistance) is effective for companies in 2022. It aims to provide investors with more consistent and transparent information, given the lack of US GAAP guidance for companies receiving government assistance.
If your company answers “yes” to any of these questions, you should analyze in more detail the new annual information required:
- Are you a for-profit entity that has entered into an agreement to receive assistance from a government entity?
- Do the forms of assistance include cash grants, forgivable loans, or receipt of non-monetary items?
- Isn’t accounting for government assistance specified within the scope of US GAAP?
- Has your company ever created an accounting policy to apply a grant or contribution model to account for government assistance?
- Is government assistance material to your financial statements, individually or when combined with similar forms of assistance?
ASU No. 2021-10
The simplicity of the government aid standard and its disclosure-only nature can make it easy to overlook. However, the types of assistance targeted by the new requirements are broad.
The standard requires government assistance information that includes:
- Information on the nature of the transactions and the associated accounting policy used to account for the transactions;
- The balance sheet and income statement items affected by the transactions, and the amounts applicable to each financial statement item; and
- Material terms and conditions of transactions, including covenants and contingencies.
Companies should consider transactions involving all governmental entities, including foreign and national governments, as well as intergovernmental bodies such as the United Nations or the European Union, and non-governmental entities. Transactions in which the government receives a good or service in return are considered revenue transactions outside the scope of this new standard.
Companies should consider a variety of factors in applying the required disclosures, in particular with emphasis on clearly indicating the nature and form of the aid, as well as the method of accounting for its recognition and measurement, and any commitments required on behalf of the company . The FASB decided not to require additional information, such as the breakdown by geographic area or type of assistance.
Meeting room conversations
Financial managers and members of the audit committee also have a role to play. As part of their oversight of the financial reporting of companies receiving government assistance, executives should ask if their teams are aware of the new disclosure requirement, and audit committee members should ask if the company has the appropriate information. Audit committee members may also wish to inquire about changes to risk assessments and processes that would ensure completeness and accuracy of information.
Although the standard requires annual disclosures, public companies should assess whether there are significant impacts on planned or anticipated changes in selected accounting policies rather than recognition and measurement or whether there are significant new judgments which should be disclosed. If the answer is “yes”, disclosure in the 2022 quarterly financial statements may be required.
The FASB did not address recognition and measurement in financial statements, which could feed into a possible future project. For now, he is focusing on diversity in government aid disclosure.
— Michel KraehnkeCPA, [email protected]is a partner of the professional practice department of KPMG US. To comment on this article or suggest an idea for another article, contact Ken Tysiac at [email protected].