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U.S. GAAP does not specify the accounting for government grants received by “for-profit” enterprises. Practice generally refers to IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, to determine the most appropriate accounting for government grants when no other specific literature is on point. IAS 20 provides guidance on recognition and measurement, presentation, repayment, and disclosure for the following types of government grants:
•  Grants related to assets — government grants requiring an entity to purchase, construct, or otherwise acquire long-term assets to qualify
•  Grants related to income — government grants other than those related to assets
The criteria for initial recognition are the same for grants related to assets and grants related to income. Subsequent recognition and financial statement presentation varies depending on the type and nature of the grant. In addition, in certain fact patterns the receipt of a grant for a renewable power plant may impact the classification of a lease of the plant. See Question 2-26 for further information.
Question 16-1
What guidance should be applied in a for-profit entity’s accounting for government grants?
PwC response
Practice generally refers to IAS 20 by analogy. U.S. GAAP does not specify the accounting for government grants received by “for-profit” enterprises. ASC 958, Not-for-Profit Entities (ASC 958), establishes standards of financial accounting for all entities (not-for-profit and other business enterprises) that receive contributions. Under this model, contributions are generally recognized in the period received or, if conditional, when the conditions on which they depend are substantially met. However, transfers of assets from governmental units to business entities are specifically excluded from the scope of ASC 958.

Excerpt from ASC 958-605-15-6

The guidance in the Contributions Received Subsections does not apply to the following transactions and activities: . . . (d) Transfers of assets from governmental units to business entities.

Certain grants are transfers from the U.S. federal government and therefore would be subject to this scope exclusion.
Prior to the Codification, the Basis for Conclusions of FASB Statement No. 116, Accounting for Contributions Received and Contributions Made, stated that the FASB specifically excluded these types of transfers from its scope because of “specific complexities that may need special study.” In addition to the specific scope exclusion, we believe the contributions received model does not properly reflect the economic substance of the capital grants, which offset a portion of the cost of a long-term asset. Recognizing these grants immediately in income, while the underlying property is amortized over its useful life, would not result in financial statement recognition that reflects the substance of the transaction. Since there is not specific GAAP, reporting entities should consider analogy to IAS 20.

16.2.1 Initial recognition

Prior to initial recognition, a reporting entity should assess whether there is reasonable assurance that it will be able to comply with the grant requirements and that the grant will be received.

IAS 20, paragraph 8

A government grant is not recognised until there is reasonable assurance that the entity will comply with the conditions attaching to it, and that the grant will be received. Receipt of a grant does not of itself provide conclusive evidence that the conditions attaching to the grant have been or will be fulfilled. [Emphasis added]

Initial recognition of a government grant should occur once a reporting entity believes it is probable that it will comply with the grant conditions and that it will be received. This may occur at various points in the process, potentially even after the funds are received, depending on the specific criteria of the grant and the reporting entity’s individual facts and circumstances. Factors to consider in making this assessment include:
•  Conditions of the grant
Has the reporting entity performed sufficient procedures to ensure that all grant conditions have been met? Are there adequate internal controls in place over amounts submitted as part of the grant process? Is there a process in place to comply with ongoing requirements?
•  External audit
If applicable, has an external audit been completed that supports the amount of the grant and compliance with grant conditions?
•  Government oversight
What is the government oversight process prior to granting funds? Are amounts received subject to audit? Are amounts received subject to adjustment after funds have been disbursed?
Depending on the type of grant, reporting entities may be subject to audit and other types of review and scrutiny by the disbursing agent at various points in the process. An audit may identify compliance violations and could clawback portions of the grant. As a result, the amount of the grant may be subject to change.
The timing of recognition of grants may involve judgment because of the lack of agency scrutiny or audit prior to receipt of the funds. In general, funds may be received prior to required compliance audits or any other audits conducted by the granting agency. In addition, certain grants may have ongoing requirements that subject the reporting entity to recapture or return of the grant if the reporting entity fails to meet the stipulations in a future period. Therefore, in addition to assessing compliance prior to initial recognition, a reporting entity should ensure that it has sufficient controls in place over the funds submitted for reimbursement and compliance requirements. Further, reporting entities should implement ongoing monitoring procedures, if applicable, based on the grant requirements.
In summary, reporting entities should ensure that they have met all terms and conditions and consider all available evidence prior to recognition of a grant. If recognition occurs before payment, the reporting entity should record a receivable.
Question 16-2
How is the “reasonable assurance” threshold in IAS 20 interpreted?
PwC response
Paragraphs 7 and 8 of IAS 20 indicate that a government grant should not be recognized until there is reasonable assurance that the grant will be received and that the reporting entity will comply with the specified conditions. Reasonable assurance is not defined within IFRS literature, and there are no bright lines when considering this requirement. We believe it would be difficult to justify recognition of a grant unless the reporting entity believes it is probable that it will comply with the conditions attached to the grant and that the grant will be received.
Question 16-3
If a reporting entity believes it meets the criteria for recognition of a grant after the end of the reporting period but before the financial statements are issued, should the grant be recognized in those financial statements?
PwC response
Generally, no. Although the potential for receiving the grant was known as of the balance sheet date, if a reporting entity has not yet met the criteria for recognition as of the balance sheet date, we believe subsequent receipt of the grant is a nonrecognized subsequent event. In these situations, reporting entities should consider disclosing the status and expected impact of the grant.
ASC 855, Subsequent Events, provides guidance on whether to recognize subsequent events.

Excerpt from ASC 855-10-25-1

An entity shall recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements.

Excerpt from ASC 855-10-25-3

An entity shall not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date but before financial statements are issued or are available to be issued.

As discussed in Question 16-2, we believe reporting entities that prepare financial statements under U.S. GAAP should be able to assert that it is probable funds will be received and that all conditions will be met prior to recognition of a grant. In general, the conditions attaching to a grant (e.g., approval after an audit) are not perfunctory. Therefore, such grants would be recognized in the period in which the recognition criteria are met.
However, the reporting entity should consider disclosure of significant nonrecognized events.

16.2.1.1 Potential loss after initial recognition

Reporting entities should follow the guidance on contingencies in ASC 450, Contingencies, when considering any potential loss after initial recognition. The reporting entity should derecognize any grant (or portion of a grant) if it becomes probable that the grant will have to be repaid.
Similar guidance is included in IAS 20, paragraph 32, which treats any potential repayments as a change in estimate. Amounts that are probable of repayment should be recorded as a reduction of the unamortized deferred credit (or as an increase in the capital asset in the case of an asset grant where the basis has been reduced). If the amount to be repaid is in excess of the remaining unamortized grant balance, the excess should be recorded as a loss in the income statement.

16.2.2 Subsequent recognition

Subsequent recognition guidance for government grants is discussed in IAS 20, paragraph 12.

IAS 20, paragraph 12

Government grants shall be recognised in profit or loss on a systematic basis over the periods in which the entity recognises as expenses the related costs for which the grants are intended to compensate.

IAS 20, paragraph 17, provides further guidance on the recognition period for grants related to capital assets.

IAS 20, paragraph 17

In most cases the periods over which an entity recognises the costs or expenses related to a government grant are readily ascertainable. Thus grants in recognition of specific expenses are recognised in profit or loss in the same period as the relevant expenses. Similarly, grants related to depreciable assets are usually recognised in profit or loss over the periods and in the proportions in which depreciation expense on those assets is recognised.

The framework provided by IAS 20 is used to distinguish situations in which amounts received may be recognized immediately in income from those in which a government grant should be deferred and recognized over the same period that the related asset is depreciated. Government grants should be recognized in the income statement in the same manner as the expenditure for which they are intended to compensate (immediately for grants related to income and over the life of the related asset for grants related to assets). For grants related to assets (such as Section 1603 grants), this recognition model links the grant received to the related capital asset and matches the timing of recognition of the grant with that of the related depreciation.
However, certain grants may have multiple elements that can present recognition challenges. Reporting entities should identify the conditions giving rise to costs and expenses that determine the periods over which the grant should be recognized. It will sometimes be appropriate to allocate part of the grant on one basis (capital) and part on another basis (income). Reporting entities should consider the basis for the grant award in evaluating the appropriate recognition period.

16.2.3 Considerations for regulated utilities

The accounting for a grant received by a regulated utility will depend on how the regulator treats the grant. If the regulator treats the grant as a reduction of utility plant to be recovered through rate base, in general, we believe the reporting entity should follow the models for asset-based grants discussed in UP 16.2 In such cases, the grant should usually be recognized as a reduction of utility plant, with depreciation reduced over the life of the property.
However, in some situations, the regulator may continue to provide for full recovery of the utility plant, while requiring separate return of the grant to the ratepayers. Return of the grant may occur over the same time period as recovery of the related plant or it may be accelerated (e.g., a regulator may require return of the grants over 5 years, compared to a 20-year life for the underlying property). In these situations, the regulator has effectively decoupled the grant from the related asset: the regulated utility is still recovering the full cost of the underlying capital asset plus return over the life of the asset, and the benefit provided from the grant is being viewed by the regulator as a gain to be used to reduce other costs of service.
If the regulator separates return of the grant from recovery of the plant, we believe the grant should be treated as a separate unit of account and accounted for under a separate recognition model. In such cases, the regulator has treated the benefit of the grant as a liability owed to customers, separate from the capital asset. As a result, recognition of the grant as an offset to depreciation would no longer accomplish the IAS 20 objective of offsetting the costs for which the grant is intended to compensate, and the reporting entity would no longer apply the guidance in IAS 20. Instead, because of the intervention of the regulator, we believe the grant would be subject to regulatory accounting as a regulatory liability (a gain that the regulator mandates be given to customers). Prior to the Codification, this was addressed in the Basis for Conclusions of FASB Statement No. 71, Accounting for the Effects of Certain Types of Regulation (FAS 71), paragraph 79(c).

Excerpt from FAS 71, Basis for Conclusions, paragraph 79(c)

For rate-making purposes, a regulator can recognize a gain or other reduction of overall allowable costs over a period of time. . . . By that action, the regulator obligates the enterprise to give the gain or other reduction of overall allowable costs to customers by reducing future rates.

Consistent with the guidance in ASC 980-405-25-1(c), discussed in UP 17.4, the subsequent recognition of the regulatory liability should occur over the period during which the grant is returned to customers. The interaction of regulatory accounting with the receipt of grants is complex and the outcome is highly dependent on the specific facts and circumstances. In addition, the fact that a grant will be flowed through to customers will not always be transparent in rate orders or other regulator communications.

16.2.4 Accounting for deferred income taxes associated with government grants

As discussed in UP 16.3, reporting entities may elect to present the grants as an offset to plant or as a deferred credit on the balance sheet. Regardless of financial statement presentation, receipt of a grant generally creates an income tax timing difference and deferred income tax accounting would apply. ASC 740 addresses the accounting for a similar type of temporary difference in ASC 740-10-25-49 through 25-55 and ASC 740-10-45-22 through 45-24. Under this guidance, the deferred tax asset is determined through a simultaneous equation that generates a corresponding decrease in the book basis of the related capital asset. An example of this treatment can be found in ASC 740-10-55-171 through 55-176 (formerly Example 1 of EITF 98-11).
An acceptable alternative view is to recognize the deferred tax impacts of the transaction as an immediate adjustment to income tax expense, as suggested by ASC 740-10-25-20.
The decision to account for the deferred tax impacts associated with a grant temporary difference as a decrease to the basis of the property or as an immediate adjustment to income tax expense is an accounting policy election that should be consistently applied and disclosed.
1 A current list of Issues Papers of the Accounting Standards Division of the AICPA indicates that an October 1979 paper, Accounting for Grants Received from Governments, was considered superseded by IAS 20.
2 Originally issued as EITF Issue No. 98-11, Accounting for Acquired Temporary Differences in Certain Purchase Transactions That Are Not Accounted for as Business Combinations( EITF 98-11).
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