Since the start of the COVID-19 pandemic, companies have received trillions of dollars in government assistance at the federal, state, and municipal levels to help keep employees on payroll, provide key services, and incentivize innovation. About $500 billion of that was made available to businesses through the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020.
In addition to COVID-19-specific relief, the government has prioritized infrastructure contributions from the technology and telecommunications industries in recent years. For instance, the U.S. Department of Agriculture has invested $1.5 billion to date in loans and grants to expand 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 are potentially in the scope of a new standard requiring disclosures about government assistance.
Influx of grants prompts finalization of new disclosure requirements
The influx of grants and loans prompted FASB to update U.S. 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 Business Entities About Government Assistance) is effective for companies in 2022. It aims to provide investors with more consistent and transparent information, given the lack of U.S. GAAP guidance for companies receiving government assistance.
If your company answers "yes" to any of these questions, you need to further analyze the new required annual disclosures:
- Are you a for-profit entity that has an agreement to receive assistance from a government entity?
- Do the forms of assistance include cash grants, forgivable loans, or the receipt of noncash items?
- Is the accounting for the government assistance not specified within the scope of U.S. GAAP?
- Has your company already created an accounting policy to apply a grant or contribution model to account for government assistance?
- Is the 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 assistance standard and its disclosure-only nature may make it easy to overlook. However, the types of assistance caught by the new requirements is broad.
The standard requires disclosures about government assistance that include:
- Information about the nature of the transactions and the related accounting policy used to account for the transactions;
- The line items on the balance sheet and income statement that are affected by the transactions, and the amounts applicable to each financial statement line item; and
- The significant terms and conditions of the transactions, including commitments and contingencies.
Companies should consider transactions involving all government entities, including both foreign and domestic governments, as well as intergovernmental bodies such as the United Nations or European Union, and nongovernmental-related entities. Transactions in which the government receives a good or service in return are considered a revenue transactions outside the scope of this new standard.
Companies should consider a variety of factors in the application of the required disclosures, specifically a focus on clearly noting the nature and form of the assistance, as well as the accounting policy for its recognition and measurement, and any commitments required on behalf of the company. FASB decided not to require additional disclosures, such as disaggregation by geography or type of assistance.
Finance leaders and audit committee members also have a role to play. In their oversight of financial reporting for companies receiving government assistance, leaders should ask whether their teams are aware of the new reporting requirement, and audit committee members should ask whether the company has the proper disclosures. Audit committee members may also want to inquire about changes to risk assessments and processes that would ensure the completeness and accuracy of information.
While the standard requires annual disclosures, public companies should evaluate whether there are material impacts to the planned or intended changes in accounting policies selected over recognition and measurement or whether there are new material judgments that will be required to be disclosed. If the answer is "yes," disclosure in the 2022 quarterly financial statements may be required.
FASB did not address recognition and measurement in financial statements, which could be fodder for a potential future project. For now, it is focused on addressing the diversity in disclosure of government assistance.
— Michael Kraehnke, CPA, email@example.com, is a partner in the Department of Professional Practice at KPMG U.S. To comment on this article or to suggest an idea for another article, contact Ken Tysiac at Kenneth.Tysiac@aicpa-cima.com.