By Rachel Gonner, CPA, CPP, Business Assurance & Advisory Services Senior Manager
New FASB ASU could impact for-profit entities receiving government funds
For-profit entities receiving government grants could soon face significant changes to their accounting practices. The Financial Accounting Standards Board’s (FASB) proposed Accounting Standard Update (ASU) addresses longstanding inconsistencies by offering clear guidance on recognizing and disclosing government grants. With increasing reliance on government funding in sectors like broadband and renewable energy, these changes are timely and much needed.
Key changes under ASU Topic 832
The new ASU largely mirrors the framework of IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, while incorporating targeted improvements. Key highlights of FASB decisions (as of November 19, 2024) include:
- Scope: The proposed ASU applies to transfers of monetary and tangible nonmonetary assets from a government to a for-profit entity, including forgivable loans. Excluded are exchange transactions (Topics 606 and 610-20), items under Topic 740 (Income Taxes), below-market interest rate loans, and government guarantees.
- Recognition and Measurement: Grants would be recognized when it’s probable (1) the entity will meet the conditions of the grant and (2) that the grant will be received.
- Asset Grants: Grants related to assets would be accounted for using either the:
- Cost-accumulation approach: Reduce the cost of the related asset, thereby recognizing the grant through decreased depreciation expense.
- Deferred-income approach: Recognize the grant at fair value as deferred income on the balance sheet, systematically recognized over time as related expenses are incurred. Such expenses might include depreciation of the asset, any gain or loss from its sale, or impairment costs.
- Income Grant: Grants unrelated to assets are reported in the income statement in the period related costs are incurred either (1) separately under a general heading such as other income or (2) as a reduction to the related costs. Any unrecognized grant proceeds are recorded on the balance sheet as deferred income.
- Asset Grants: Grants related to assets would be accounted for using either the:
- Disclosure Requirements: Under Topic 832, entities must disclose the nature, terms, and conditions of government grants and the affected financial statement line items. The proposed ASU adds that entities:
- Must disclose the fair value of a tangible nonmonetary asset grant in the period it is recognized.
- Are not required to disclose specific balance sheet or income statement line items impacted by grants related to assets under the cost-accumulation method in years following the initial recognition of the grant on the balance sheet.
- Transition: Entities will be permitted to apply the proposed guidance prospectively to incomplete grants as of the effective date and future grants, or retrospectively to prior periods.
Legacy GAAP challenges
Under legacy U.S. GAAP, for-profit entities struggle with limited guidance and reliance on analogy-based approaches, often using standards designed for non-profits (ASC 958) or international frameworks (IAS 20). The following is a comparison of key aspects under legacy GAAP and the proposed ASU:
| Aspect | Legacy GAAP Practices | Proposed ASU Guidance |
|---|---|---|
| Recognition Timing | Varied due to subjective interpretation and analogization of ASC 958 (when the grant conditions are met) or IAS 20 (“reasonable assurance" threshold). | Recognize when it’s probable conditions will be met, and the grant will be received. |
| Income vs. Asset Grants | Inconsistent; some treated all grants as income, while others followed IAS 20, treating income grants as income and asset grants as asset reductions. | Income grants: Recognize in the income statement as the related costs are incurred. Any amounts received but not yet recognized as income are recorded as deferred income on the balance sheet. Asset grants: (1) Reduce asset cost or (2) record separately as deferred income, which is systematically amortized as related expenses are incurred (e.g. depreciation of the asset). |
| Disclosures | Minimal and inconsistent, often limited to brief narrative descriptions. This improved somewhat with ASU 2021-10 (Government Assistance, Topic 832), which introduced enhanced disclosure standards. However, practices influenced by IAS 20 sometimes led to more detailed accounts. | Detailed disclosures, including grant nature, terms, and affected financial statement line items. Fair value disclosed for nonmonetary asset grants. Subsequent disclosures not required for grants tied to assets under the cost-accumulation approach. |
| Compliance Complexity | Challenges aligning financial reporting with compliance obligations due to varied practices. | Streamlined, standardized approach under U.S. GAAP simplifies compliance and ensures consistency. |
Industries in the spotlight
The proposed ASU will significantly impact industries that heavily rely on government funding. Standardized reporting and transparency under the new guidance will streamline compliance and enhance investor confidence by providing consistent and reliable financial information. Major industries include:
- Broadband and Telecom: Programs such as the Rural Digital Opportunity Fund (RDOF) and Broadband Equity, Access, and Development (BEAD) are driving rural broadband expansion, creating opportunities for companies like Frontier and Windstream. Government grants and incentives are key for meeting the growing demand for high-speed internet in underserved areas.
- Renewable Energy: Solar, wind, and battery storage companies benefit from grants and tax incentives, like the Investment Tax Credit (ITC) and Production Tax Credit (PTC). These programs support industry growth and contribute to a greener economy.
- Healthcare and Life Sciences: Biotech companies, including Moderna, receive grants to fund research and development. These funds fuel innovation in areas such as vaccine development, therapeutics, and public health solutions.
- Manufacturing: Billions in funding from the CHIPS Act support domestic semiconductor production for companies like Intel and Micron. These grants intend to strengthen U.S. manufacturing and reduce reliance on foreign production.
- Medical Providers: Mental and behavioral health providers receive state and federal grants to grow services and support critical community programs. These initiatives improve access to care and healthcare outcomes in underserved areas.
- Technology: Government incentives promote innovation in AI, cybersecurity, and infrastructure. Tech companies use these funds to address global challenges and enhance digital security.
These industries highlight the proposed ASU’s role in promoting accountability, enhancing the reliability of financial statements, and positioning organizations to secure future funding with greater confidence.
Closing thoughts and next steps
With clear guidance, businesses can better leverage government grants as a strategic tool for growth and sustainability. Industries like broadband, renewable energy, and healthcare, which rely heavily on government funding, will benefit significantly from these improvements.
The comment period for the proposed ASU is open through March 31, 2025, signaling a longer timeline for feedback and deliberation. This extended period suggests that final guidance may not be issued quickly. In the meantime, stay updated on FASB’s ongoing project surrounding this proposed ASU. After the guidance is finalized, evaluate its impact on your financial statements and update accounting policies as needed. Communicate these changes to stakeholders to ensure a smooth transition.
The Keiter Business Assurance & Advisory Services team will continue to provide updates on this and other new or changing regulations. Need assistance preparing your business for the new requirements? Contact your Keiter Opportunity Advisor or Email | Call 804.747.0000
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About the Author
Rachel Gonner, CPA, CPP, Business Assurance & Advisory Services Senior Manager
Rachel is a Senior Manager in Keiter’s Business Assurance and Advisory Services department. She brings a passion for providing superior value to her clients through the highest form of quality service. Understanding her clients’ organizational missions and providing tailored engagement services is paramount to her approach.
More Insights from Rachel GonnerThe information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.
