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A business entity may receive a government grant that provides financial assistance for certain eligible expenditures—for example, to build and operate a factory in a particular location. There is no specific guidance in US GAAP that addresses the accounting for government assistance by a for-profit business entity. Thus, determining the proper accounting treatment for government incentives by business entities can be challenging and will depend on an analysis of the nature of the assistance and the conditions on which it is predicated.
A reporting entity should first assess whether the arrangement with the government is in the scope of specific US GAAP. For example, arrangements where the government is a customer (i.e., exchange transactions) are in the scope of ASC 606. Assistance in the form of a tax credit is subject to ASC 740, Income Taxes, if the credit can be claimed only on the income tax return and can be realized only through the existence of taxable income.
Assistance in the form of a below-market rate loan is accounted for under ASC 470, Debt. ASC 835-30, Imputation of interest, provides guidance for imputing interest when financing is provided or obtained at other-than-market terms. However, ASC 835-30-15-3(e) excludes from the scope of this guidance “transactions where interest rates are affected by the tax attributed or legal restrictions prescribed by a governmental agency (for example, industrial revenue bonds, tax exempt obligations, government guaranteed obligations, income tax settlements).” Thus, a reporting entity would not need to impute interest on a loan from the government with a below-market interest rate.
ASC 105, Generally Accepted Accounting Principles, describes the decision-making framework when no guidance exists in US GAAP for a particular transaction. Specifically, ASC 105-10-05-2 instructs reporting entities to first look for guidance for a similar transaction or event within US GAAP and apply that guidance by analogy. If no guidance for similar transactions is identified, a reporting entity may consider nonauthoritative guidance from other sources (for example, guidance issued by other standard-setters).
In this context, IFRS includes a specific standard, IAS 20, Accounting for Government Grants and Disclosures of Government Assistance, that may be relevant. ASC 958-605 contains the US GAAP on grant accounting, including guidance on evaluating whether government grants are exchange or nonexchange transactions. However, ASC 958-605 excludes from its scope transfers of assets from governments to business entities. As a result, forms of government assistance provided to business entities would not be in the scope of ASC 958-605, but it may be applied by analogy under ASC 105-10-05-2. Alternatively, reporting entities may analogize to IAS 20. As illustrated in Figure FSP 3-2, ASC 958-605 and IAS 20 differ in a few key areas when it comes to accounting for government grants.
Figure FSP 3-2
Differences between ASC 958-605 and IAS 20
Description
IAS 20
Recognition when conditions are present
When the conditions have been substantially met
When there is reasonable assurance that the entity will comply with the conditions and that the grant will be received
Timing and pattern of recognition
When grant is awarded or, if conditional, immediately once the condition is substantially met
Recipients should also consider whether grantor-imposed restrictions exist.
Using a systematic basis over the periods in which the entity recognizes the related expenses or losses that the grants are intended to compensate
When the grant becomes receivable if it compensates for expenses or losses already incurred
Presentation of grant income
Grant income is presented on a gross basis (i.e., grant revenue or other income)
May be reported separately as “other income” or deducted from the related expense
With regard to the evaluation of conditions, IAS 20 does not define “reasonable assurance” but it is generally considered to be similar to the notion of “probable” as used in ASC 450, Contingencies. ASC 958-605, however, does not permit an entity to consider probability or intent in evaluating whether a condition has been or will be achieved; instead, under ASC 958-605, grant income is recognized only when the condition has been substantially met.
Current US GAAP contains no specific disclosure requirements related to government assistance outside of the disclosures in ASC 740 for assistance provided through the income tax credits and ASC 958-605 for not-for-profit entities. However, reporting entities should disclose significant accounting policies related to accounting for government assistance. Disclosures that may be appropriate to include are:
  • Significant terms and conditions of the government assistance, such as the form of the grant (e.g., refund of taxes paid, cash, or other assets), magnitude of the assistance, duration of the assistance, interest rate (if the form of the assistance is a loan), provisions that require repayment to the government, and other unfulfilled conditions or contingencies.
  • Accounting policies used to account for the government assistance (for example, whether it is recognized immediately into income or recognized over a period of time, which financial statement line items are affected, and where recognized).
Note about ongoing standard setting
The FASB has an active project related to disclosure for government assistance. Financial statement preparers and other users of this publication are therefore encouraged to monitor the status of the project. If finalized, financial statement preparers and other users should evaluate the effective date of the new guidance and the implications on disclosure.
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