Proposed Accounting Standards Update Issued: November 12, 2015 Comments Due: February 10 2016 Government Assistance (Topic 832) Disclosures by Business Entities about Government Assistance The Board issued this Exposure Draft to solicit public comment on the addition of Topic 832 of the FASB Accounting Standards Codification. Individuals can submit comments in one of three ways: using the electronic feedback form on the FASB website, emailing written comments to director@fasb.org, or sending a letter to Technical Director, File Reference No. 2015-340, FASB, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116.
The FASB Accounting Standards Codification is the source of authoritative generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. An Accounting Standards Update is not authoritative; rather, it is a document that communicates how the Accounting Standards Codification is being amended. It also provides other information to help a user of GAAP understand how and why GAAP is changing and when the changes will be effective. Notice to Recipients of This Exposure Draft of a Proposed Accounting Standards Update The Board invites comments on all matters in this Exposure Draft and is requesting comments by February 10, 2016. Interested parties may submit comments in one of three ways: Using the electronic feedback form available on the FASB website at Exposure Documents Open for Comment Emailing a written letter to director@fasb.org, File Reference No. 2015-340 Sending written comments to Technical Director, File Reference No. 2015-340, FASB, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116. Do not send responses by fax. All comments received are part of the FASB s public file. The FASB will make all comments publicly available by posting them to the online public reference room portion of its website. An electronic copy of this Exposure Draft is available on the FASB s website. Copyright 2015 by Financial Accounting Foundation. All rights reserved. Permission is granted to make copies of this work provided that such copies are for personal or intraorganizational use only and are not sold or disseminated and provided further that each copy bears the following credit line: Copyright 2015 by Financial Accounting Foundation. All rights reserved. Used by permission.
Proposed Accounting Standards Update Government Assistance (Topic 832) Disclosures by Business Entities about Government Assistance November 12, 2015 Comment Deadline: February 10, 2016 CONTENTS Page Numbers Summary and Questions for Respondents... 1 5 Amendments to the FASB Accounting Standards Codification... 7 15 Background Information, Basis for Conclusions, and Alternative View... 16 24 Amendments to the XBRL Taxonomy... 25
Summary and Questions for Respondents Why Is the FASB Issuing This Proposed Accounting Standards Update (Update)? The FASB is issuing this proposed Update to increase transparency about government assistance arrangements including (1) the types of arrangements, (2) the accounting for government assistance, and (3) their effect on an entity s financial statements. Today, diversity exists in the recognition, measurement, and disclosure of government assistance arrangements because no explicit generally accepted accounting principles (GAAP) exist for government assistance received by business entities. Preagenda research revealed that there are many pervasive forms of government assistance. Requiring disclosures about government assistance in the notes to financial statements could improve the information that is provided to users when analyzing an entity s financial results and prospects for future cash flows. Who Would Be Affected by the Amendments in This Proposed Update? The proposed amendments would apply to an entity or entities, other than notfor-profit (NFP) entities within the scope of Topic 958, Not-for-Profit Entities, that have entered into a legally enforceable agreement with a government to receive value. Under these agreements, the government determines whether an entity will receive assistance and/or how much assistance an entity will receive even if the entity meets the applicable eligibility requirements. The scope of the proposed amendments would not apply to transactions in which the government is (1) legally required to provide a nondiscretionary level of assistance to an entity simply because the entity meets applicable eligibility requirements that are broadly available without specific agreement between the entity and the government or (2) solely a customer. What Are the Main Provisions? The amendments in this proposed Update would result in entities providing information on existing government assistance agreements for annual reporting periods that would enable a user to better assess all of the following: 1. The nature of the assistance, related accounting policies used to account for government assistance, and the effect of government assistance on an entity s financial statements 2. Significant terms and conditions of the legally enforceable agreement. 1
The amendments would require the following disclosures about material existing government assistance agreements for annual reporting periods: 1. Information about the nature of the assistance, including a general description of the significant categories and the related accounting policies adopted or the method applied to account for government assistance 2. Which line items on the balance sheet and income statement are affected by government assistance and the amounts applicable to each line item 3. Significant terms and conditions of the agreement, including commitments and contingencies 4. Unless impracticable, the amount of government assistance received but not recognized directly in the financial statements. The amount of government assistance received but not recognized includes value that was received by an entity for which no amount has been recorded directly in any financial statement line item (for example, a benefit of a loan guarantee, a benefit of a below-market rate loan, or a benefit from tax or other expenses that have been abated). How Would the Main Provisions Differ from Current Generally Accepted Accounting Principles (GAAP) and Why Would They Be an Improvement? Current GAAP has no explicit guidance on the accounting for, or the disclosure of, government assistance received by business entities. The amendments in this proposed Update would improve financial reporting by providing disclosure requirements to increase transparency about government assistance arrangements, including (1) the types of arrangements, (2) the accounting for government assistance, and (3) their effect on an entity s financial statements. When Would the Amendments Be Effective? In the first set of financial statements following the effective date, the amendments in this proposed Update would be applied to all agreements (1) existing at the effective date and (2) entered into after the effective date. Retrospective application would be permitted. (The effective date will be determined after the Board considers stakeholder feedback on the amendments in this proposed Update.) 2
How Do the Proposed Provisions Compare with International Financial Reporting Standards (IFRS)? The amendments in this proposed Update are consistent with IFRS in that IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, provides guidance on disclosing government grants and other forms of government assistance. However, IAS 20 also provides guidance on recognition and measurement of government grants, but not other forms of government assistance. IAS 20 requires the following disclosures: 1. The accounting policy adopted for government grants, including the methods of presentation adopted in the financial statements 2. The nature and extent of government grants recognized in the financial statements and an indication of other forms of government assistance from which the entity has directly benefited 3. Unfulfilled conditions and other contingencies attached to government assistance that has been recognized. The scope of IAS 20 does not include government assistance that is provided for an entity in the form of benefits that are available in determining taxable profit or loss or that is determined on the basis of income tax liability. The disclosures required by this proposed Update are consistent with those required by IFRS. In addition, this proposed Update would require that, unless impracticable, an entity disclose the amount of government assistance received but not recognized directly in any financial statement line item (for example, a benefit of a loan guarantee, the benefit of a below-market rate loan, or a benefit from tax or other expenses that have been abated). Questions for Respondents The Board invites individuals and organizations to comment on all matters in this proposed Update, particularly on the issues and questions below. Comments are requested from those who agree with the proposed guidance as well as from those who do not agree. Comments are most helpful if they identify and clearly explain the issue or question to which they relate. Those who disagree with the proposed guidance are asked to describe their suggested alternatives, supported by specific reasoning. Question 1: Do you agree that the scope of the amendments in this proposed Update should be limited to legally enforceable agreements in which an entity or entities receive value from a government? Do you also agree that the scope of the proposed amendments should not apply to transactions in which the government is (a) legally required to provide a nondiscretionary level of assistance to an entity simply because the entity meets applicable eligibility requirements that are broadly available without specific agreement between the 3
entity and the government or (b) solely a customer? If not, what other types of arrangements should be included in or excluded from the scope of the amendments in this proposed Update? Explain why. Question 2: Do you agree that the proposed disclosure requirements should be the same for both domestic assistance and foreign assistance? If not, please explain why and what proposed disclosure requirements you believe should differ. Are there any unique types of foreign assistance that should be considered? If so, explain why and be specific about any unique types of foreign assistance. Question 3: Do you agree that the scope of the proposed amendments should not exclude government assistance agreements that are within the scope of Topic 740, Income Taxes? If not, explain why. Question 4: Do you agree that the scope of the proposed amendments should exclude NFP entities? Alternatively, should any proposed disclosure requirement(s) be applied by NFP entities? If so, specify which proposed disclosure requirement(s) and explain why. Question 5: Are the proposed scope and disclosure requirements operable and auditable? Do your existing information sets and systems, internal controls, and so forth capture the information required to be disclosed by the proposed amendments? If not, which aspects of the scope or disclosures pose operability, auditability, and/or cost issues and why? Question 6: Do you agree that an entity should be required to disclose, unless impracticable, the amount of government assistance received but not recognized directly in any financial statement line item? If not, explain why. Question 7: For preparers, are there any restrictions (legal or otherwise) that exist in government assistance agreements that would preclude an entity (for example, confidentiality or proprietary reasons) from disclosing the information required by the amendments in this proposed Update? If so, specify what those restrictions are, whether they relate to foreign or domestic assistance, and which proposed disclosures cause concern and why. Question 8: For users, do you agree that the information required by the proposed amendments would improve transparency about government assistance agreements? Is the information required by the proposed amendments important for your analysis of an entity? If so, specify which disclosures and why. If not, identify the disclosures and explain why. Is there additional information that should be required to be disclosed in the notes to financial statements? If so, be specific. Question 9: The proposed amendments would not amend Topic 270, Interim Reporting, to add any specific interim disclosure requirements. Instead, required interim disclosures about government assistance would be limited to material changes occurring since the most recent annual period. Should the proposed 4
amendments include additional interim disclosure requirements? If so, what disclosures do you think should be added and why? Question 10: Do you agree that the amendments in this proposed Update should be applied to all agreements (a) existing at the effective date and (b) entered into after the effective date with retrospective application permitted? If not, explain why. Question 11: The proposed amendments would apply to both public business entities and nonpublic business entities (private companies). Should the proposed amendments be different for nonpublic business entities? If so, describe why and how you think they should be different. Question 12: How much time would preparers need to implement the proposed amendments? Should the amount of time needed to implement the proposed amendments by entities that are not public business entities be different from the amount of time needed by public business entities? 5
Amendments to the FASB Accounting Standards Codification Introduction 1. The Accounting Standards Codification is amended as described in paragraph 2. Terms from the Master Glossary are in bold type. Addition of Topic 832 2. Add Topic 832, with a link to transition paragraph 832-10-65-1, as follows: [For ease of readability, the new Topic is not underlined.] Government Assistance Overall Overview and Background General 832-10-05-1 A vast array of government assistance arrangements exist between different governments and entities, which have varying complexities and terms. Some types of government assistance are pervasive. A number of terms are used to describe a variety of programs with different structures including tax credits, tax exemptions, tax abatements, loan guarantees, cash grants, project grants, and low-interest or interest-free loans. 832-10-05-2 This Topic provides guidance for disclosures about certain legally enforceable government assistance agreements. Scope and Scope Exceptions General > Overall Guidance 832-10-15-1 The Scope Section of the Overall Subtopic establishes the scope for this Topic. 7
> Entities 832-10-15-2 The guidance in this Topic applies to all entities except not-forprofit entities. > Transactions 832-10-15-3 The guidance in this Topic applies to an entity or entities that have entered into a legally enforceable agreement with a government to receive value. Under these agreements, the government determines whether an entity will receive assistance and/or how much assistance an entity will receive even if the entity meets applicable eligibility requirements. 832-10-15-4 This Topic does not apply to transactions in which the government is either of the following (see paragraphs 832-10-55-4 through 55-15 for illustrations): a. Legally required to provide a nondiscretionary level of assistance to an entity simply because the entity meets the applicable eligibility requirements that are broadly available without specific agreement between the entity and the government. In these arrangements, the government does not have discretion over whether an entity will receive assistance and how much assistance an entity will receive. b. Solely a customer. 832-10-15-5 Differences exist among jurisdictions about the establishment of a legally enforceable agreement. An entity shall consider established practices and processes in each jurisdiction in determining whether and when an agreement with a government is legally enforceable. 832-10-15-6 A government, as used in this Topic, includes domestic, foreign, local, regional, and national governments, including related governmental entities (for example, departments, independent agencies, government-sponsored entities, boards, commissions, and other component units) and intergovernmental organizations. 832-10-15-7 In certain cases, a legally enforceable agreement with the government may be within the scope of this Topic and other Topics (for example, Topic 740 on income taxes). In those cases, an entity shall comply with the guidance in those Topics in addition to the guidance in this Topic. However, an entity need not disclose information in accordance with the guidance in this Topic if it has already provided the information in accordance with another Topic. Glossary Customer (definition 1) 8
A party that has contracted with an entity to obtain goods or services that are an output of the entity s ordinary activities in exchange for consideration. Not-for-Profit Entity An entity that possesses the following characteristics, in varying degrees, that distinguish it from a business entity: a. Contributions of significant amounts of resources from resource providers who do not expect commensurate or proportionate pecuniary return b. Operating purposes other than to provide goods or services at a profit c. Absence of ownership interests like those of business entities. Entities that clearly fall outside this definition include the following: a. All investor-owned entities b. Entities that provide dividends, lower costs, or other economic benefits directly and proportionately to their owners, members, or participants, such as mutual insurance entities, credit unions, farm and rural electric cooperatives, and employee benefit plans. Disclosure General [Note: Paragraph 832-10-50-1 contains paragraph references from the proposed Accounting Standards Update, Notes to Financial Statements (Topic 235): Assessing Whether Disclosures Are Material.] 832-10-50-1 To the extent material, an entity shall provide disclosures required by this Topic for annual reporting periods. See paragraphs 235-10-50-7 through 50-9 for additional guidance on assessing whether disclosures are material. 832-10-50-2 The objectives of the disclosure requirements in this Topic are for an entity to provide information about existing government assistance agreements that will enable a user to better assess all of the following: a. The nature of the assistance, related accounting policies used to account for government assistance, and the effect of government assistance on an entity s financial statements b. Significant terms and conditions of the legally enforceable agreement. > Nature of the Assistance, Related Accounting Policies, and Effect on Financial Statement Amounts 9
832-10-50-3 An entity shall disclose the following about existing government assistance agreements to the extent material: a. The nature of the assistance, including a general description of the significant categories (for example, grants, loans, or tax incentives) and the form in which the assistance has been received (for example, as a reduction of an expense, a refund of taxes paid, free resources, or a cash grant) b. The accounting policy used to account for government assistance (for example, whether assistance is recognized immediately into income or recognized over the life of a related asset) c. Which line items on the balance sheet and income statement are affected by government assistance (for example, whether the assistance has been deducted from the carrying value of an asset or presented as a performance obligation liability) and the amounts applicable to each line item d. Unless impracticable, the amount of government assistance received but not recognized directly in the financial statements. The amount of government assistance received but not recognized includes value that was received by an entity for which no amount has been recorded directly in any financial statement line item. If impracticable, an entity shall disclose that fact and explain why the disclosure is impracticable. See paragraphs 832-10-55-1 through 55-3 for implementation guidance. > Significant Terms and Conditions of the Agreement 832-10-50-4 An entity shall disclose information about the significant terms and conditions of the agreement. Terms and conditions that might be appropriate include, but are not limited to, any of the following: a. The duration or period of the agreement, tax rate or interest rate provided by the agreement, or the effect on the entity s tax or interest rate from the agreement b. Commitments made by both the entity and the government c. Provisions, if any, for recapturing government assistance (for example, when the government is permitted to take back the assistance), including the conditions under which recapture is allowed d. Other contingencies. Implementation Guidance and Illustrations General > Implementation Guidance 10
832-10-55-1 Paragraphs 832-10-55-2 through 55-3 provide additional guidance that addresses the application of the guidance on government assistance in paragraph 832-10-50-3(d). > > Disclosure 832-10-55-2 Types of government assistance that may not have been recognized directly in any financial statement line item could include, but are not limited to, any of the following: a. A benefit of a loan guarantee b. A benefit of a below-market-rate loan or below-market-rate lease payment c. A benefit from tax or other expenses that have been abated. 832-10-55-3 The value of the assistance could include the amount on which an entity and the government agree to be abated in the form of a reduction of expenses that an entity otherwise would have been obligated to pay (for example, a reduced tax or interest rate). In these instances, an entity should disclose the amount (for example, of tax or interest reduction) that would have affected the financial statements if the benefit was recorded directly in any financial statement line item. > Illustrations 832-10-55-4 The following Examples illustrate how an entity might apply certain aspects of the guidance in this Topic. The analysis in each Example is not intended to represent the only manner in which the guidance could be applied, and the Examples are not intended to apply to only a specific illustration. Although some aspects of the Examples may be present in actual fact patterns, all relevant facts and circumstances of a particular fact pattern would need to be evaluated when applying the guidance in this Topic. > > Scope 832-10-55-5 The Examples in paragraphs 832-10-55-6 through 55-15 illustrate the guidance in paragraphs 832-10-15-3 through 15-4 on determining whether an entity has a legally enforceable agreement in which that entity receives value from a government. 832-10-55-6 The Examples in paragraphs 832-10-55-7 through 55-10 illustrate when government assistance would be included in the scope of this Topic because they represent situations in which a qualifying legally enforceable agreement has been entered into in which an entity receives value from a 11
government and the arrangement does not meet either of the criteria in paragraph 832-10-15-4. > > > Example 1 832-10-55-7 Entity A enters into an agreement with Local Government A to receive quarterly cash rebates of up to 5 percent of gross wages for the next 40 years. Entity A must create 4,000 jobs and pay an average wage equal to at least the national average or the state average (whichever is greater). The rebate percentage and the term of the incentive are negotiated between Entity A and Local Government A. > > > Example 2 832-10-55-8 Entity B enters into an agreement with Country B to spend approximately $5 million to establish a facility in Country B and create at least 2,000 new jobs. In exchange, Entity B receives a tax credit over the next 10 years and job training assistance valued at $300,000 to train up to 1,500 new employees at its new facility. Before entering into the agreement to provide assistance to Entity B, Country B had discretion over whether to provide assistance to Entity B, as well as how much to provide. > > > Example 3 832-10-55-9 Entity C enters into an agreement with the State C to receive a cash grant in the amount of $10 million to build a facility in State C. Entity C agrees to create at least 2,000 jobs and invest $3 million in new infrastructure. Grant funds are disbursed annually to Entity C on the basis of a percentage of withholding taxes paid by new employees. State C also provides Entity C with a tax abatement of up to 75 percent of the property tax bills through a reduction in the assessed value of the facilities that Entity C constructs. State C agrees to construct certain infrastructure features that are ancillary to newly constructed facilities. The agreement contains clawback provisions that apply if Entity C fails to meet its commitments, such as employment levels and timeliness of relocation. State C has discretion over the assistance provided to Entity C. > > > Example 4 832-10-55-10 Entity D, a local restaurant, enters into an agreement with the government to receive a 50 percent property tax reduction in return for increasing the size of its restaurant and catering facility and increasing employment. Entity D also receives a low interest rate loan. The amounts in the agreement are negotiated between the government and Entity D. Before entering into an 12
agreement to provide assistance to Entity D, the government had discretion over whether to provide assistance to Entity D, as well as how much to provide. 832-10-55-11 The Examples in paragraphs 832-10-55-12 through 55-15 illustrate when government assistance would not be within the scope of this Topic because they do not represent situations in which a qualifying legally enforceable agreement has been entered into in which an entity receives value from a government because the arrangement has met either of the criteria in paragraph 832-10-15-4. > > > Example 5 832-10-55-12 Tax laws and regulations indicate that an entity may claim a tax credit of a specified amount for each type of qualified energy-efficient appliance produced by an entity during the calendar year. The total credit for any type of qualifying appliance is specified under tax laws and regulations (for example, $25 per qualifying dishwasher or $150 per qualifying refrigerator). Entity E meets the eligibility requirements and decides to produce qualifying appliances. Entity E demonstrates that it has met the eligibility requirements and the government is legally required to provide the tax credits. > > > Example 6 832-10-55-13 Tax laws and regulations indicate that an entity that makes a qualifying charitable contribution during the year can take a tax deduction of the total amount of contribution up to 10 percent of the taxpayer s taxable income on its income tax return. Entity F elects to make a charitable contribution. Because Entity F has met the prescribed conditions and made a qualifying charitable contribution, the government is legally required to provide Entity F with the tax deduction. Entity F must demonstrate eligibility; however, once eligibility has been verified, the assistance must be legally provided to Entity F. > > > Example 7 832-10-55-14 Tax law allows a qualified entity (on a broadly available basis) to retain 100 percent of the withholding taxes from new jobs created for 3 years. Any entity that fails to make the required investment of creating jobs within two years must immediately cease retaining any withholding taxes from jobs at the facility, repay all withholding taxes previously retained plus interest of 5 percent per year, and forfeit all rights to retain withholding taxes for the remainder of the withholding period. Entity G is a qualified company that opts to create new jobs that meet the amount of required investment per the program and retains 100 percent of the withholding taxes from the new jobs it creates. Entity G submits a report documenting the new jobs created and the total payroll and confirms that 13
the business meets the requirements for the new jobs created. The government is legally required to provide assistance to Entity G. > > > Example 8 832-10-55-15 Entity H enters into a three-year legally enforceable agreement with Local Government D to clean the offices of Local Government D on a weekly basis. Local Government D agrees to pay Entity H $100,000 per year, which is the stand-alone selling price of the services. Cleaning services are an output of Entity H s ordinary activities. Local Government D is the customer of Entity H. Transition and Open Effective Date Information General > Transition Related to Accounting Standards Update No. 2015-XX, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance 832-10-65-1 The following represents the transition and effective date information related to Accounting Standards Update No. 2015-XX, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance: a. The pending content that links to this paragraph shall be effective for fiscal years, and interim periods within those years, beginning after [date to be inserted after exposure]. b. The pending content that links to this paragraph shall be applied in the first set of financial statements following the effective date to all agreements: 1. Existing at the effective date 2. Entered into after the effective date. c. Retrospective application of the pending content that links to this paragraph is permitted. 14
The amendments in this proposed Update were approved for publication by six members of the Financial Accounting Standards Board. Mr. Golden voted against publication of the amendments. His alternative view is set out at the end of the basis for conclusions. Members of the Financial Accounting Standards Board: Russell G. Golden, Chairman James L. Kroeker, Vice Chairman Daryl E. Buck Thomas J. Linsmeier R. Harold Schroeder Marc A. Siegel Lawrence W. Smith 15
Background Information, Basis for Conclusions, and Alternative View Introduction BC1. The following summarizes the Board s considerations in reaching the conclusions in this proposed Update. It includes reasons for accepting certain approaches and rejecting others. Individual Board members gave greater weight to some factors than to others. Background Information BC2. Diversity in practice exists in the recognition, measurement, and disclosure of government assistance arrangements because no explicit GAAP exists for government assistance received by business entities. For example, some entities apply the guidance in the Contributions Received Subsections of Topic 958 on NFP entities, even though paragraph 958-605-15-6 excludes from its scope transfers of assets from governmental units to business entities. Other entities apply the guidance in either IAS 20 or Topic 450, Contingencies. BC3. Preagenda research revealed a lack of decision-useful information in financial reporting for a wide variety of government assistance. The Board added this project to its agenda on January 29, 2014. After considering the vast array of government assistance arrangements, diversity in practice, and resources that would be needed to complete a comprehensive project addressing the recognition and measurement of government assistance in a reasonable period of time, the Board decided to focus the amendments in this proposed Update on developing disclosures in the notes to financial statements to increase transparency about government assistance arrangements including (a) the types of arrangements, (b) the accounting for government assistance, and (c) their effect on an entity s financial statements. Scope Transactions BC4. The Board decided that the proposed amendments would apply to an entity or entities that have entered into a legally enforceable agreement with a government to receive value (assistance) in which the government determines whether an entity will receive assistance and/or how much assistance an entity 16
will receive. The scope of the proposed amendments would not apply to transactions in which the government is either: a. Legally required to provide a nondiscretionary level of assistance to an entity simply because the entity meets the applicable eligibility requirements that are broadly available without specific agreement between the entity and the government. In these arrangements, the government does not have discretion over whether an entity will receive assistance and how much assistance an entity will receive. b. Solely a customer. BC5. The Board concluded that a legally enforceable agreement that requires the government to determine whether the entity will receive some form of government assistance and/or the amount of assistance distinguishes government assistance programs from other types of government transactions. In addition, a legally enforceable agreement identifies the most prevalent forms of government assistance on which the Board concluded users would benefit from additional disclosures. BC6. The Board further concluded that such agreements are the types of arrangements that lack the most transparency because they may include unusual or unique terms and conditions that may not be readily apparent or otherwise known to a financial statement user. BC7. The scope of the proposed amendments also would exclude government assistance that a government is legally required to provide to an entity on a nondiscretionary level simply because an entity met applicable eligibility requirements. This type of assistance can be broadly available to businesses on the basis that they have undertaken qualifying activities during the year (for example, some types of income tax credits or deductions claimed on tax returns). In these instances, the government is legally bound to provide the assistance rather than having discretion over whether an entity will receive assistance or the amount. This type of assistance is not typically reflected in a legally enforceable agreement. Furthermore, certain Board members do not believe that broadly available income tax deductions represent assistance by the government that should be included in the scope of the proposed amendments. BC8. Thus, the Board decided that limiting the scope to legally enforceable agreements that do not meet either of the criteria in paragraph 832-10-15-4 would exclude the majority of income-tax-related assistance. Most income-taxrelated assistance would not be within the scope of the proposed amendments because it often is available at the election of the taxpayer with the government having no discretion over the amounts of assistance. However, the Board concluded that an entity would be required to comply with the same proposed disclosure requirements when tax assistance meets the description of government assistance, regardless of whether the assistance is related to income taxes, sales taxes, property taxes, or any other form of tax assistance. Lastly, the Board discussed and decided not to exclude transactions that are 17
within the scope of Topic 740, Income Taxes. The Board concluded that the current disclosure requirements in Topic 740 would not provide transparency about certain forms of income tax assistance that qualifies as government assistance under the proposed amendments. BC9. The Board acknowledges that differences exist among jurisdictions on the establishment of a legally enforceable agreement; however, an entity would consider established practices and processes in each jurisdiction in determining whether and when an agreement with a government creates enforceable rights and obligations. BC10. The Board decided to exclude transactions in which a government is solely a customer from the scope of the amendments in this proposed Update. The Board concluded that transactions in which a government is solely a customer do not create the need for additional disclosures because the provision of decision-useful information for most of those transactions is addressed by other areas of GAAP (for example, transactions within the scope of Topic 606, Revenue from Contracts with Customers). Not-for-Profit Entities BC11. The Board decided to exclude not-for-profit (NFP) entities from the scope of the amendments in this proposed Update. The Board recognizes that NFP entities have guidance to follow on the accounting for government assistance that meets the definition of a contribution in Topic 958 and concluded that users of NFP entity financial statements do not have a significant need for additional information. Some stakeholders indicated that Topic 958 provides limited disclosure requirements and that there is diversity in practice in the accounting for government assistance among NFP entities when distinguishing contributions from exchange transactions. The Board may consider whether any of the proposed disclosure requirements should be applied to NFP entities after considering feedback on the amendments in this proposed Update. Government BC12. The Board decided that a government, as used in the scope of the amendments in this proposed Update, includes domestic, foreign, local (city, town, and municipal), regional (state, provincial, and territorial), and national (federal) governments, including related governmental entities (for example, departments, independent agencies, government-sponsored entities, boards, commissions, and other component units), and intergovernmental organizations. Generally, intergovernmental organizations are formed by multiple governments, and the goals and scopes can differ and vary. Common examples of intergovernmental organizations include the worldwide or global organizations (including the United Nations), regional organizations (including the European Union or the Port Authority of New York and New Jersey), or economic organizations (including the World Trade Organization). The Board concluded 18
that the scope would be broad enough to ensure that most types of assistance received that meet the description of government assistance would be disclosed by entities. Information about government assistance received by an entity could be relevant to a user regardless of which type of governmental entity is providing the assistance. Disclosures BC13. The Board decided to develop disclosure objectives that are based on the decision questions in the proposed FASB Concepts Statement, Conceptual Framework for Financial Reporting Chapter 8: Notes to Financial Statements. The Board also used that proposed Concepts Statement to assist in identifying relevant disclosure requirements and to provide insight into the Board s reasons for requiring disclosures. The proposed objectives also are intended to assist preparers with the use of discretion in complying with the disclosure requirements in this proposed Update. Nature of the Assistance and Related Accounting Policies BC14. Because of diversity in practice and lack of explicit GAAP guidance on recognizing and measuring government assistance in the financial statements, the Board decided to require that an entity disclose information about the nature of the assistance and the related accounting policies adopted or methods applied to account for government assistance, including where the information is presented on the balance sheet and income statement. Disclosure of the nature of the assistance and the related accounting policies will help a user to understand the effect that government assistance has on the financial statements to facilitate better investment decisions. Amounts BC15. The Board decided to require that an entity disclose the amounts recognized in the balance sheet and income statement and the related line items that are affected by those amounts. Agreements may include different types of government assistance, causing the effects of government assistance to differ in nature. Therefore, the Board concluded that it is critical to users in their analyses to understand not only the nature of government assistance, but also how that assistance relates to other information in the financial statements. The Board decided not to require, but, rather, to permit an entity to disaggregate government assistance by various factors, including type of government or geography. BC16. The Board decided to require, unless impracticable, that an entity disclose the amount of government assistance that has been received under existing agreements but has not been recognized directly in any financial statement line item. Common types of assistance that an entity may not recognize in any 19
financial statement line item include a benefit from a loan guarantee, a benefit from a low interest rate or interest-free loan, or a reduced amount of property or other type of tax. In these instances, an entity would disclose the amount that would have affected the financial statements. BC17. The Board concluded that, if practicable, an entity would be required to disclose all amounts affecting the financial statements, including the amounts recognized and not recognized directly in any financial statement line item. Disclosure of amounts could provide users with more complete information about the effect of government assistance on an entity s financial results. BC18. The Board decided that determining the value of assistance often will be practicable and will depend on the nature and extent of the assistance. For example, an entity may receive a tax abatement on sales or payroll tax incurred during a period. An entity can determine the value of the assistance on the basis of what the sales or payroll tax would have been using the standard rates. In other instances, the amount of the tax abated may be stated and quantified in the agreement. The Board concluded that, if practicable, the benefits of a disclosure of amounts not recognized directly in an entity s financial statements justify the costs of obtaining that information. The Board was concerned about the practicability of this disclosure because some entities may not have systems and processes in place to determine this information. To mitigate concerns about costs, the Board decided that an entity would be required to disclose the amounts of government assistance received but not recognized in any financial statement line item unless it is impracticable to obtain that information. Significant Terms and Conditions BC19. The Board decided to require that an entity disclose the significant terms and conditions of government assistance agreements. The Board concluded that this information is relevant and that the rights and obligations associated with government assistance agreements are important to users. The proposed amendments would require disclosure of amounts that are quantifiable within an agreement. For example, if an agreement indicates that an entity is entitled to receive a grant in the amount of $100,000 ($20,000 per year) for the next five years, this information would be disclosed. Some financial statement users have commented that their analysis of an entity could benefit from information about terms and conditions of the agreement, how long the assistance will last, and what is driving the underlying economic effect of the transaction. The Board concluded that if an entity is aware of an event or condition that has occurred that may alter the entity s future cash flows, the entity would be required to disclose unfulfilled conditions attached to government assistance. 20
Estimated Amounts of Government Assistance Expected to Affect Future Periods BC20. The proposed amendments do not require disclosure of amounts of government assistance expected to affect future periods under existing agreements that are based on predictions, forecasts, or other similar assumptions about uncertain or unknown future events that are beyond management s control. The Board concluded that disclosing information about the terms and conditions of an agreement and their effect on current-period financial statements would provide sufficient information to users in understanding the potential effect on future cash flows in a cost-beneficial way in comparison with an entity having to determine an estimated amount for future periods. For example, if an agreement indicates that an entity will receive a property tax abatement for the next 20 years, the entity would disclose those terms and the amount of the abatement received in the current annual period (including the estimated amount of the abatement that was received but not recognized directly in any financial statement line item) without having to disclose estimated future amounts. Interim Disclosures BC21. The Board concluded that the existing disclosure requirements in Topic 270, Interim Reporting, would be sufficient to ensure that users receive relevant information in the interim financial statements about government assistance. The Board, therefore, decided not to amend Topic 270 to include specific interim disclosures about government assistance. An entity would look to Topic 270 to determine which, if any, disclosures about government assistance to include in its interim financial statements. Assessing Materiality BC22. The Board decided that an entity would refer to the guidance in the proposed FASB Accounting Standards Update, Notes to Financial Statements (Topic 235): Assessing Whether Disclosures Are Material, to determine the disclosure requirements to which it must comply. Confidentiality BC23. The Board discussed the following concerns raised by some stakeholders: a. Individual agreements may include confidentiality clauses that prohibit providing the disclosures required by the amendments in this proposed Update. 21
b. How the proposed amendments may require disclosure of proprietary information. c. How increased transparency about government assistance could affect government spending or jeopardize ongoing or future negotiations with a government. Although stakeholders were concerned about confidentiality as a potential issue, they did not provide the Board with any specific information or examples. The Board concluded that no additional guidance was necessary on concerns about confidentiality. The Board concluded that it would need additional information to understand and support broad concerns on confidentiality and proprietary information. The Board, therefore, included a question for respondents in this proposed Update on what restrictions may exist in government assistance agreements that would preclude an entity from disclosing the information that would be required by the amendments in this proposed Update. Based on any feedback received, the Board may consider these issues in setting the final disclosure requirements. Private Company Considerations BC24. The Board decided not to prescribe alternative disclosure requirements for private companies. The Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies indicates that relevance should be considered first when determining whether to provide an alternative disclosure. The Board concluded that the amendments in this proposed Update would provide relevant information to users of private companies on cash balances, current or future cash flows, significant events and transactions affecting cash flows that are unusual in nature, and significant contingencies and commitments affecting future cash flows. Many members of the Private Company Council (PCC) strongly support the Board s efforts to increase transparency about government assistance agreements through disclosure in the notes to financial statements. Other PCC members expressed concern about disclosing proprietary or confidential information on government assistance agreements. Effective Date and Transition BC25. The amendments in this proposed Update would be applied to the first set of financial statements following the effective date. An entity would apply the new disclosures to all agreements: a. Existing at the effective date b. Entered into after the effective date. 22
BC26. The Board concluded that the proposed transition method that would be applied to existing and new agreements would provide users with decision-useful information and would be more cost-effective than full retrospective application. However, if an entity would like to apply the proposed amendments retrospectively, it may do so. BC27. The effective date for the amendments in this proposed Update, as well as whether early adoption would be permitted, will be determined by the Board after considering stakeholder feedback. Benefits and Costs BC28. The objective of financial reporting is to provide information that is useful to present and potential investors, creditors, donors, and other capital market participants in making rational investment, credit, and similar resource allocation decisions. However, the benefits of providing information for that purpose should justify the related costs. Present and potential investors, creditors, donors, and other users of financial information benefit from improvements in financial reporting, while the costs to implement new guidance are borne primarily by present investors. The Board s assessment of the costs and benefits of issuing new guidance is unavoidably more qualitative than quantitative because there is no method to objectively measure the costs to implement new guidance or to quantify the value of improved information in financial statements. BC29. The Board believes that the benefits of implementing the amendments in this proposed Update would justify the costs. The proposed amendments would provide information about government assistance agreements, including (a) the types of agreements, (b) the accounting for government assistance, and (c) their effect on an entity s financial statements. The proposed amendments would not create new accounting requirements other than additional disclosures for which information should be available. BC30. The proposed disclosures would not require a change to recognition and measurement. The disclosures are intended to bring increased transparency about how entities are currently accounting for government assistance and the effect on their financial position. The Board expects that the costs of implementing the proposed amendments will vary among companies because of the volume and varying degrees of government assistance agreements and the level at which an entity receives assistance. Some companies currently have systems in place to track the information that would be required by the proposed amendments and already are disclosing some of the information in their financial statements. Some entities do not currently capture this information, so the cost may initially be higher for them. Other entities may not be affected, specifically if they don t have a significant or any amount of assistance and, therefore, their costs may be lower. The benefits of the proposed amendments would include 23