Alert

The Financial Accounting Standards Board (FASB) has issued Proposed Accounting Standards Update (ASU), Government Grants (Topic 832): Accounting for Government Grants by Business Entities.

The proposed ASU represents a significant step toward establishing clear guidance for the accounting treatment of government grants received by business entities.

Comments are due March 31, 2025.

Scope

The proposed amendments would apply to business entities that receive government grants. A government grant is defined as a transfer of a monetary or a tangible nonmonetary asset, other than an exchange transaction, from a government to a business entity. Examples of government grants may include:

• A transfer of cash to fund future expenditures or reimburse expenditures already incurred.
• A transfer of a tangible nonmonetary asset, including a building, land, or equipment.
• Certain forgivable loans when it is probable the terms for forgiveness of the loan will be met.
• A refundable tax credit that is not within the scope of ASC 740, Income Taxes.

The proposed amendments wouldn’t apply to not-for-profit entities and employee benefit plans or to exchange transactions, income taxes, the benefit of below-market interest rate loans, and government guarantees.

Diversity in Practice

US GAAP doesn’t currently provide specific authoritative guidance for the recognition, measurement, and presentation of government grants received by business entities.

As a result, many business entities analogize to International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance or ASC Subtopic 958-605, Not-for-Profit Entities – Revenue Recognition. This has led to diversity in how such grants are recognized, measured, and presented in financial statements of business entities.

The proposed ASU aims to fill this void in GAAP by incorporating guidance from IAS 20 while making targeted improvements to better align with the needs of stakeholders.

How the Proposed ASU Increases Clarity

Key features designed to increase clarity and consistency in the accounting for government grants include:

• Recognition and Measurement. The proposed ASU would provide clear criteria for when and how to recognize government grants.
• Presentation. The proposed ASU would address how government grants should be presented in financial statements.

Recognition

The proposed amendments would provide recognition criteria whereby a government grant would initially be recognized when it becomes probable that 1) the business entity will comply with the grant conditions and 2) the grant will be received.

The proposed amendments would clarify that the receipt of a government grant doesn’t, in and of itself, provide conclusive evidence that the conditions attached to the government grant have been or will be fulfilled.

Measurement

The proposed ASU distinguishes between grants related to income and grants related to an asset.

• A grant related to an asset is a government grant where the primary condition is for the business entity to purchase, construct, or otherwise acquire a long-term asset.
• A grant related to income is a government grant other than a grant related to an asset, including a grant that reimburses a business entity for operating expenses.

Under the proposed amendments, a grant related to an asset would be recognized either under the deferred income approach or the cost accumulation approach.

A grant related to income and a grant related to an asset in which the deferred income approach is elected would be recognized in earnings on a systematic and rational basis over the periods for which related expenses are recognized. The expenses recognized for a grant related to an asset could include depreciation, gain or loss on sale, or impairment. When the deferred income approach is elected for government grants of a tangible nonmonetary asset, the grant is initially measured at fair value.

When a business entity elects the cost accumulation approach for a grant related to an asset, the grant would be recognized as a reduction of the cost basis of the related asset.

Government grants that become repayable would be required to be accounted for as a change in estimate in accordance with ASC 250, Accounting Changes and Error Corrections.

• Repayment of a grant related to income would be applied against any unamortized deferred credit recognized related to the grant. To the extent that the repayment exceeds any unamortized deferred credit or when no deferred credit exists, the repayment would be recognized immediately in earnings.
• Repayment of a grant related to an asset would be recognized by increasing the carrying amount of the asset if the cost accumulation approach was used or by reducing the deferred income balance by the amount repayable if the deferred income approach was used. The cumulative additional depreciation that would have been recognized in earnings to date in the absence of the government grant would be recognized immediately in earnings.

Presentation

A grant related to income and a grant related to an asset in which the deferred income approach is elected would be presented on the balance sheet as deferred income and presented within earnings either separately under a general heading such as other income or deducted from the related expense.

A grant related to an asset that is accounted for using the cost accumulation approach would be presented on the balance sheet as part of the carrying amount of the asset.

Implications for Businesses

The proposed guidance is intended to lead to more consistent accounting practices among businesses receiving government grants and to improve comparability in financial statements.

Implications for Auditors and Stakeholders

If adopted, the proposed guidance would assist auditors in evaluating compliance and help stakeholders better understand the financial implications of government grants.

Next Steps

Interested parties should review the proposed ASU and consider submitting comments to the FASB by the March 31, 2025, deadline. Engaging in this process can help shape the final standard and ensure it is practical and effective.

This proposed ASU reflects the FASB's commitment to improving financial reporting and addressing the needs of businesses and their stakeholders in the context of government assistance.

We’re Here to Help

If you have further questions or need assistance with this proposed update, contact your Moss Adams professional.

Additional Resources

Manufacturing & Consumer Products Practice