A PDF of the below Comment Letter can be downloaded here »
Mr. Jackson M. Day
Technical Director
Financial Accounting Standards Board
801 Main Avenue, PO Box 5116
Norwalk, CT 06856-5116
Re: File Reference No. 2024-ED700
Dear Mr. Day,
This letter is submitted by Financial Executives International’s (FEI) Committee on Corporate Reporting (CCR) in response to the Financial Accounting Standards Board’s (FASB or Board) Proposed Accounting Standards Update—Government Grants (Topic 832): Accounting for Government Grants by Business Entities (Exposure Draft or proposed Update).
FEI is a leading international organization comprised of members who hold positions as Chief Financial Officers, Chief Accounting Officers, Controllers, Treasurers, and Tax Executives at companies in every major industry. CCR is FEI’s technical committee of approximately 50 Chief Accounting Officers and Corporate Controllers from Fortune 100 and other large public companies, representing more than $15 trillion in market capitalization. CCR reviews and responds to pronouncements, proposed rules and regulations, pending legislation, and other documents issued by domestic and international regulators and organizations such as the U.S. SEC, PCAOB, FASB, and IASB.
This letter represents the views of CCR and not necessarily the views of FEI or its members individually.
Executive Summary
We commend the Board for proposing authoritative guidance on government grants that is largely based on the guidance in International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance (IAS 20). We appreciate the Board’s consideration of stakeholder feedback provided as part of the FASB’s 2022 Invitation to Comment, Accounting for Government Grants by Business Entities—Potential Incorporation of IAS 20, including CCR’s response. Many companies apply IAS 20 by analogy today, and we support the Board maintaining much of the optionality within IAS 20.
In our letter, we offer broad support for the amendments in the proposed Update, which we believe are generally clear and operable. CCR generally considers the scope of Topic 832 to be appropriate but believes further clarity is needed regarding (1) the applicability to certain types of tax credits and other tax benefits and (2) the interaction with the Board’s proposed Update on Environmental Credits and Environmental Credit Obligations in Topic 818. We generally agree with the proposed guidance on recognition, measurement, and presentation. However, we suggest the Board amend the proposed requirement in paragraph 832-10-30-1 to allow companies the option to initially measure a grant of a tangible nonmonetary asset at fair value or cost, regardless of the recognition approach. We believe the proposed amendments related to cash flow presentation and grants of nondepreciable assets are sufficient. CCR generally supports the proposed amendments on the accounting for government grants that become repayable, as well as the treatment of government-grant-related assets and liabilities assumed in a business combination. We generally believe the proposed disclosure requirements are appropriate but do not support the additional alternative disclosures for grants related to assets under the cost accumulation approach contemplated in the proposed Update, which were considered and ultimately rejected by the Board.
We believe the proposed transition methods are operable and support the option to early adopt. Because the proposed Update is largely based on IAS 20, most companies do not anticipate significant changes in their accounting for government grants nor significant one-time or recurring costs from implementation. However, we still believe it would be beneficial to provide preparers between 12 and 18 months to implement after a final standard is issued.
Scope
Within the “Scope” section, CCR presents several suggested amendments to paragraphs 832-10-15-4A and 832-10-55-5. Please refer to the Appendix for the full text of these paragraphs with CCR’s comprehensive suggestions denoted by underlined text.
Nonrefundable Tax Credits
First, we agree that nonrefundable, nontransferable income tax credits should be excluded from the scope of Topic 832 and accounted for under Topic 740. While the Board addressed this point in paragraphs BC18 and BC24 of the Basis for Conclusions, we believe nonrefundable, nontransferable income tax credits should be explicitly listed in paragraph 832-10-15-4A.
Furthermore, based on the FASB’s response to a previous technical inquiry, current practice permits companies to make a policy election to account for nonrefundable, transferable income tax credits either under Topic 740 or other GAAP. Companies that elect to account for transferable income tax credits outside of the scope of Topic 740 often apply IAS 20 by analogy. CCR believes that the ability to make a policy election to account for transferable income tax credits under Topic 740 or by analogy to Topic 832 should continue to be permitted. Given the FASB previously clarified the accounting for nonrefundable, transferable income tax credits through its technical inquiry response, we recommend the Board formalize its view and explicitly state – either in the Codification or the Basis for Conclusions – that companies may apply a policy election to account for nonrefundable, transferable income tax credits within the scope of Topic 740 or other GAAP (including by analogy to Topic 832).
Refundable Tax Credits
Second, we believe the Board should clarify refundable tax credits that result in a reduction of liabilities due to a sufficient tax liability are within the scope of Topic 832. Paragraph 832-10-55-4 explicitly indicates that a refundable tax credit that is not within the scope of Topic 740 on income taxes is included in the scope of Topic 832. Conversely, paragraph 832-10-55-5 indicates that a reduction of an entity’s liabilities (e.g., a sales, property, or other tax abatement) is excluded from the scope of Topic 832. Situations exist where a refundable tax credit that is not dependent upon having taxable income (i.e., not in the scope of Topic 740) reduces an entity’s liabilities because the entity has a sufficient tax liability, and thus, no actual refund is issued. To avoid confusion and ensure consistent application, we suggest the Board include clarifying language in paragraph 832-10-55-5(b).
Broadly Available Tax Credits Outside the Scope of Topic 740
Third, companies may receive tax credits that are (1) broadly available to companies that meet specific conditions set by the government and (2) outside the scope of Topic 740. For example, governments may encourage companies to build facilities or hire employees in a specific region by offering tax credits to any companies that meet certain predetermined criteria. If the Board’s intent is to limit the scope of Topic 832 to company-specific programs or agreements, we believe the Board should make amendments to explicitly exclude tax credits that are broadly available and outside the scope of Topic 740 from the scope of Topic 832. Specifically, we believe the Board could update paragraph 832-10-15-4A by leveraging the following language from the FASB’s 2015 proposed Update on Government Assistance (Topic 832) – Disclosure by Business Entities about Government Assistance:
This Topic does not apply to transactions in which the government is….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.
Payroll Withholding Tax Incentives
In addition, companies may receive tax incentives calculated based on the number of employees that reduce the company’s state payroll withholding tax liability. These incentives are generally outside of the scope of Topic 740. We suggest the Board consider updating paragraph 832-10-55-5(b) to explicitly exclude these types of incentives from the scope of Topic 832, consistent with sales and property tax abatements.
Topic 818 on Environmental Credits and Environmental Credit Obligations
The FASB’s proposed Update on Topic 818, Environmental Credits and Environmental Credit Obligations (Environmental Credits) addresses the accounting for environmental credits, which include environmental credits granted by a regulatory agency or its designee(s). Consistent with the discussion in paragraph BC48 of the Basis for Conclusions in the proposed Update on Environmental Credits, we believe the Board should clarify in paragraph 832-10-55-5 that environmental credits within the scope of Topic 818 are excluded from the scope of Topic 832.
General Recognition, Measurement, and Presentation
We agree with the overall proposed recognition guidance. We believe it is appropriate to recognize a government grant when it is probable that an entity will both (1) comply with the conditions attached to the government grant and (2) receive the government grant. We support different approaches to account for grants related to assets and grants related to income and strongly agree that there should be two approaches to recognize and present a grant related to an asset (the deferred income approach and the cost accumulation approach). We agree that entities should be required to recognize a grant into earnings on a systematic and rational basis over the periods in which the entity recognizes as expenses the related costs for which the grant is intended to compensate.
We strongly support the optionality in the presentation requirements that allow companies with grants related to income or those electing the deferred income approach for grants related to assets to present grants in earnings either (1) separately under a general heading such as other income or (2) deducted from the related expense.
Initial Measurement of a Grant of a Tangible Nonmonetary Asset
As currently drafted, paragraph 832-10-30-1 would require companies to measure a grant of a tangible nonmonetary asset at fair value if the deferred income approach is elected and at cost if the cost accumulation approach is elected. We do not believe the selection of either the deferred income approach or the cost accumulation approach should dictate the initial measurement of the asset. To maintain consistency with IAS 20 and to allow flexibility, we propose the FASB allow entities to initially measure a grant of a tangible nonmonetary asset at either fair value or cost, regardless of the recognition and presentation approach selected.
Grant of a Nondepreciable Asset
We agree with the Board’s decision to deviate from IAS 20 by not including distinct guidance for a grant related to a nondepreciable asset in the proposed Update. In practice, determining the recognition period for a grant related to a nondepreciable asset may require management judgment, and we believe the proposed guidance already provides a structured approach that will enable entities to develop principled accounting policies while promoting consistency in financial reporting.
Cash Flow Presentation
Consistent with CCR’s feedback in our 2022 letter, we believe cash inflows related to government grants should be presented in the statement of cash flows consistent with how the underlying asset or income to which the grant relates was treated (e.g., if cash was paid to invest in a long-term asset and was classified as an investing activity, any cash received thereafter as a government grant that reduces the cost of the long-term asset should also be classified as an investing activity). We believe the Board’s discussion in the Basis for Conclusions is consistent with CCR’s view:
BC44. …the Board noted that applying the guidance in Topic 230 would result in classifying cash flows from government grants on the basis of the nature of the grant (that is, whether the cash flows from a government grant result from operating, investing, or financing activities).
As a result, we do not believe more explicit guidance on cash flow presentation is necessary.
Disclosure
CCR generally believes the proposed disclosure requirements are appropriate and agrees with the Board’s decision to reject the alternative disclosures for grants related to an asset accounted for using the cost accumulation approach contemplated in the proposed Update:
- The asset carrying amount that would have been recognized if the business entity had not received the grant, or if the deferred income approach had been used; or
- Depreciation expense, gain or loss on sale, or impairment expense that would have been recorded initially or on an ongoing basis over the life of the asset if the grant had not been received or if the deferred income approach had been used
First, providing these alternative disclosures could potentially mislead investors. The availability of a government grant is a key consideration in a company’s investment decisions, and the absence of a government grant may have led the company to make a different decision. Disclosing the carrying amount, depreciation, gain or loss on sale, or impairment expense as if the grant had not been received could distort investors’ understanding of actual events and provide an inaccurate view of company performance and strategic management.
Second, preparing these alternative disclosures would impose significant costs on companies and add complexity in reporting processes. Gathering the necessary information would require maintenance of dual accounting records for each grant related to an asset accounted for under the cost accumulation approach. Additionally, many companies would need to manually track the carrying amount, depreciation expense, gain or loss on sale, and impairment expense, as not all systems can manage and track multiple alternatives. We appreciate the Board’s acknowledgement of the undue cost and burden these alternative disclosures could place on entities electing a cost accumulation approach, as those entities would be required to maintain and track information solely for disclosure purposes.
Effective Date and Transition
We support allowing entities the option to apply the amendments in the proposed Update either (1) prospectively to a government grant that either is not complete or is entered into after the effective date or (2) retrospectively. CCR also agrees that companies should have the option to elect early adoption.
We believe it would be beneficial to provide preparers between 12 and 18 months to implement after a final standard is issued. While most companies do not expect a significant change in their accounting for or disclosure of government grants as a result of implementing the proposed Update, companies will need time to assess the new guidance and document conclusions, policies, processes, and internal controls. Additional time is also needed given the expected concurrent implementation of other standards.
Conclusion
We appreciate this opportunity to provide feedback on the proposed Update related to the accounting for and disclosure of government grants. We thank the Board for its consideration of our comments and welcome further discussion with the Board or staff at your convenience.
Sincerely,
Alice L. Jolla
Chair, Committee on Corporate Reporting
Financial Executives International