Armanino Blog

Disclosing Government Assistance

by Matthew Perreault, Matthew Chavez
February 22, 2016

In November, the Financial Accounting Standards Board (FASB) released a proposal that would give investors, analysts and taxpayers a better idea of the types of economic incentives companies receive from all levels of government. The plan calls for new footnote disclosures describing the nature of the assistance, the significant terms and conditions, and how the assistance affects line items in the financial statements.

Expanded disclosures
The FASB wants businesses that receive tax breaks, grants, low-interest loans and other incentives from government bodies to disclose additional information about these items. Proposed Accounting Standards Update (ASU) No. 2015-340, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, calls for public and private entities—except for not-for-profit organizations—to disclose information about the types of government-assistance arrangements the entity has, how it accounts for government assistance, and how the assistance affects its financial statements.

“The proposed ASU would provide users with more information about existing government assistance agreements to help them better assess the nature of the assistance and the significant terms and conditions of the agreement,” the FASB said in a news release.

More specifically, businesses would have to disclose:

  • The method applied to account for the assistance,
  • The financial statement line items that reflect the assistance,
  • Significant terms and conditions of the agreement, including any contingencies, and
  • The amount of government assistance not recognized directly in a financial statement line item.

The disclosures would apply to legally enforceable agreements in which the government body determines whether a business will receive assistance and in what amount. The board has said it wants to know more about agreements for incentives tailor-made for one company and incentives offered to several companies that involve an application process.

Such deals could include a city offering property tax abatements for a decade to encourage a new business to set up headquarters there, or $4,000 per employee to pay for job training costs. The disclosures wouldn’t apply to assistance that a business receives simply by meeting eligibility requirements, such as income tax deductions for charitable contributions.

Surprise dissension
In an unusual move, FASB Chairman Russell Golden dissented from the proposal. FASB chairpeople typically craft consensuses around accounting issues and only in rare circumstances dissent from the issuance of a change to U.S. Generally Accepted Accounting Principles (GAAP). Although Golden supported the objective of the proposal—increasing transparency about government assistance agreements—he didn’t believe the overall benefits justified the costs.

In its basis for conclusions section, the proposal notes that Golden is concerned that “an entity could incur significant costs as a result of the proposed requirement that an entity should disclose, unless impracticable, the amount of assistance received but not recognized directly in any financial statement line item. Specifically, Mr. Golden is concerned about procedures and controls that entities may need to establish to estimate those amounts.”

Pros and cons
Early feedback on the project signals that the proposal will face some resistance. Multinational companies are expected to have an especially difficult time complying with the planned disclosure rules. Often, larger entities operate in many countries, with each country offering a variety of government arrangements or incentives. Tracking the details of hundreds (or in some cases thousands) of government agreements could become cumbersome.

In July, members of the FASB’s Private Company Council (PCC) also expressed reservations about the proposed disclosures. Smaller companies are worried about violating confidentiality agreements with local governments for special tax breaks or leaking information to competitors.

Despite these concerns from public and private businesses, investors and analysts have told the FASB that they want to know the extent to which government assistance is subject to political whim and whether a business could survive without it.

Stay tuned
The FASB has been mulling the idea of upping the ante on government assistance disclosures since 2012, after the Securities and Exchange Commission issued a report on key differences between U.S. and international accounting standards. The proposed enhancements would better align the two sets of standards, but the proposal faces an uphill battle. Comments are due by February 10, 2016. After it receives public comment, the FASB will redeliberate on the proposal.

February 22, 2016

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