US Grant Accounting Proposal Critiqued as Too Narrow in Scope

The US accounting standard-setter’s proposal for how businesses should record the value of government grants is too slim in scope and offers too much flexibility to produce streamlined results, firms and professional associations said.

The Financial Accounting Standards Board’s draft plan to plug a hole in the US accounting rulebook offers companies options that could lead to differences in reporting, making it more difficult to compare financial reports across businesses, comment letters due early this week said.

“Comparability in financial reporting is critical for investor analysis, yet the proposed amendments allow for multiple accounting approaches that reduce consistency,” an American Accounting Association committee said in its letter.

FASB’s plan, released in November, aims to streamline how businesses recognize and measure certain asset- and income-based grants, including those that have been part of a flood of government relief that helped keep businesses afloat during the height of the Covid-19 pandemic. No specific US accounting rule currently captures government breaks and cash grants.

FASB’s approach borrowed heavily from the London-based International Accounting Standards Board’s IAS 20, which provides guidance on government assistance accounting.

The project would benefit financial statement preparers and users by maintaining convergence with the international rules, Big Four accounting firm PricewaterhouseCoopers LLP said in its letter.

Still, PwC and other Big Four accounting firms suggested ways for FASB to expand the project’s breadth and clear up potential confusion.

Tax Credits

Nonrefundable, transferable tax credits are currently “the most significant government incentives” provided to US businesses—yet they don’t appear to be in the project’s scope, KPMG LLP said.

The Biden-era Inflation Reduction Act created a “new marketplace for tax credits,” many of which are transferable and can be monetized via sale to a third party, according to the firm’s letter.

FASB’s narrower scope is not aligned with its international counterpart’s IAS 20, which applies broadly to government assistance, according to the American Accounting Association group’s letter.

Deloitte & Touche LLP told FASB to widen its project to explicitly include transferable tax credits, given that many businesses view them as a type of government grant.

‘Probable’ Threshold

Under FASB’s plan, businesses would initially recognize grants when it’s “probable” that they will comply with the conditions and will receive the grants.

There could be a variety of interpretations regarding what’s “probable,” a letter from a Pennsylvania Institute of Certified Public Accountants committee said.

Many people refer to “probable” as a “75% to 80% threshold, which is too low for recognizing revenue,” the group said.

It’s unclear at what point it’s probable a grant will be received, Deloitte said. There are different milestone dates, such as when a grant application is submitted and when it is approved.

Not every commenter agreed. Crowe LLP emphasized that the guidance is clear and consistent with IAS 20’s “reasonably assured” threshold.

Auditors already have “meaningful experience” applying the IAS 20 threshold given recent Covid-19 relief measures, Crowe said.

Still, the threshold is inconsistent with existing US rules, the American Accounting Association group argued.

Not-for-profits recognize contributions in the period they’re received, not when it’s probable they’ll be received, the association said.

The group questioned why government grant recognition should be based on the probability of future events occurring.

Room for Interpretation

The proposal is flexible, leaving room for divergent interpretations, several accounting firms noted.

Grant Thornton LLP, BDO USA PC, and RSM US LLP were among others who told FASB to limit the options for how to account for a grant related to an asset.

FASB suggested two ways for companies to recognize those grants on the balance sheet: a deferred income approach and a cost accumulation approach.

The deferred income approach would mean grants are recognized in earnings over the periods in which a business recognizes as expenses the costs the grant is intended to compensate. The cost accumulation method would mean businesses recognize the amount of the grant in determining the carrying amount, or book value, of the asset.

Businesses with similar grants could have different accounting outcomes depending on what path they take, an American Institute of CPAs committee said in its letter.

A single presentation approach would give financial statement users a “clearer understanding” of grants’ economic impact, according to Grant Thornton.

FASB has considered the potential consequences of removing current accounting options, but “this level of costliness is not quantified nor compared to the costliness of investors making assumptions and estimates on their own,” the CFA Institute, which provides finance education for investment professionals, said in its letter.

Comment letter respondents differed over which approach FASB should retain, if it were to choose one.

While the Edison Electric Institute and American Gas Association jointly pushed for the cost accumulation approach, BDO USA opted for requiring the deferred income approach.

An Institute of Management Accountants subgroup argued, however, that the board should keep the two approaches. The group noted in a letter that flexibility helps to avoid hefty implementation costs.

CliftonLarsonAllen LLP and PwC agreed that having multiple options could be beneficial.

FASB declined to comment on the stakeholder feedback it’s received. It will discuss feedback on the draft plan at a meeting that has yet to be scheduled.