Government grants: Understanding new FASB guidance

Thought Leadership from PWC's National Office Welcome to PWC's Accounting Podcast. I'm Heather Horn. Thanks for joining us today for an episode on the latest developments in accounting and reporting. For this episode, I'm pleased to welcome our guest host, Pat Durban, a regular on the podcast and one of PWC's WD Chief Accountants in the National Office. I'll turn it over to Pat now to introduce the episode and start the conversation. Welcome to PWC's Accounting Podcast. I'm Pat Durban. Today's episode focuses on a topic that has been on many companies' radar for years, accounting for government grants. Until recently, USGAP didn't provide a comprehensive model or frankly any model for business entities which led to significant diversity and practice for accounting for government grants. That should change with the FASB's issuance of new guidance to establishes a consistent framework for recognizing, measuring, presenting and disclosing government grants. Joining me to help me break it all down is one of my partners, Angela Ferguson. We're both from the National Office and we both spend time in this space. So with that, Angela, let's dive in. So thanks for joining me. The topic is government grants. For a specific reference, that's FASB's Accounting Standards Update or ASU 2025-10, which was issued in 2025. Maybe we should just start with an overview of the standard and the guidance for government grants. Yeah, sure. So I guess some background on why we have a new standard. We can start there. And you already mentioned in your TUP that there is no specific USGAP guidance with an accounting model for a grant received by a business entity from a government. And so currently most companies are looking to international accounting standards, IAS20, for a model that they often apply by analogy. Some look to other models like the guidance for not-for-profits on contributions, but I would say generally most companies are looking to this IAS20 guidance. A few years ago, there was a bit of an uptick in grant activity with some of the things going on with COVID. And this put a little bit more focus on the fact that we don't have our own guidance for government grants. The FASB first decided to put in place some more disclosure requirements about government grants and government assistance. And those went into a fact back in 2022. But then they also decided to go ahead and take on a project that addressed the whole model, including recognition and measurement and presentation. So that's where we are today. This new standard is effective in 2020-9 for public, calendar year, and companies. And non-public companies have another year. So we're going way out to 2030 if you can believe it. Seems like a long time off. Any reason why we think the FASB gave us so much time for a standard that largely codifies IAS20? Well, I think as they were starting to issue a bunch of standards right at the end of 2025 and they were starting to build up, they felt like they needed to push out some of the effective dates. Any other controversy or any tension with just using the IAS20 model? Yeah, I mean, the headline obviously is that it's basically the model that companies are applying by analogy today and IAS20. And not all of the board members actually supported this approach. Some felt like they should start with more of a clean sheet and look to other models in US gap first instead of starting with IAS20. However, the majority supported going forward with the current approach, noting it was really the most cost-effective and expedient way to fill the gap in our current gap on this topic. So I guess not to bury the headline, but it sounds like if you're familiar with IAS20 or been applying something like that, then you're probably going to be fairly familiar with this model as we run through it now. Yeah, that's right. And so I'm likely to really be a big change to your accounting. Great. So maybe we'll get into it then and we'll start with some just basic concepts in the standard. It applies to a transfer from the government of either a monetary asset or a tangible non-monetary asset to a business entity. A government that could include a domestic foreign, any local government or entity sort of under the direction of those governments. But maybe it's worth spending a few minutes on what's not in scope and maybe you can help with that. Sure, it's kind of a long list because first it's not applicable to transactions where there is other existing guidance and gap such as an exchange transaction. For example, a revenue contract where the government is your customer. That would be under ASC606. It's not applicable to transactions in the scope of ASC740 on income taxes. And then not for profit entities will continue to apply guidance that they have on contributions in ASC958605. It also doesn't apply to the benefit of a below market interest rate and loan from the government, even like a zero interest loan. That is you wouldn't impute interest on that loan and call it a government grant. It also doesn't apply to government guarantees, intangibles or services. That actually ends up being a scope that's more narrow than IS20. But it seemed like the reason for that as commented in the basis and by some of the board members is that they didn't want to inadvertently create new accounting for things that would not generally be accounted for as a grant today. So really just trying to avoid unintended consequences. But it means you also exclude certain things that people do account for like grants. And one that we talk about a lot are tax credits that are non-refundable but transferable. Sometimes some companies do not account for those under ASC740 but do account for those like a government grant. And even though they will not be officially in the scope of this new standard, we believe that if you are applying a government grant model that the new standard would be the most relevant model to apply by analogy. And maybe we'll come back to that topic on transferable credits because I do think that's one we get quite a few questions on. I guess maybe just sort of summarizing the scoping. It sounds like the FASB may be in keeping with how they've been approaching a lot of things lately, trying to be very much very targeted, very focused sort of narrow in this vein of trying to get achievable standard setting done not create unintended consequences. But it does leave some gaps that create some friction. And I think the transferable credits is a good one. They sort of seem to still live out there in kind of limbo. Anything else you want to highlight on the scope? Yeah, a couple quick things. First, it does apply to forgivable loans. So when it's probable that a company will meet the criteria for a loan to be forgiven, then you basically would treat that just like getting cash from the governments. It's a loan you never have to pay back. Also, I would comment that the standard doesn't specifically address or contemplate that an arrangement would include a government grant and something else, like some other element. For example, a transaction that includes partially an exchange transaction, but partially also a government grant. And so if a company encounters something like this, they are really going to have to apply judgment to first decide whether there are multiple elements in that arrangement. And then secondly, if you do conclude there's a government grant, how are you going to do any kind of allocation between elements that's not laid out in the standard that's something that you'll have to apply judgment to? Yeah, it certainly seems like we're seeing a bit more creative arrangements involving the government and business entities. I think that's a good reminder that you really have to think about what all is happening there. So maybe if we just turn to the accounting model once we conclude we're in the scope here of having a government grant, I think there's sort of two broad principles. First, it's the threshold of when you recognize a grant and that's essentially a probable threshold. So you don't have to satisfy all of the conditions or have everything fully crystallized before you can recognize a grant as long as you believe it's probable. And then I think the second principle is that we recognize the income from the grant in the income statement in the same period or periods as the expenses that the grant is intended to compensate if the grant is funding. So those are the broad concepts. Maybe be helpful to just walk through an example of how that really works. Sure. And there's two types of grants in the standard. So I'm going to walk through an example of each. So you have a grant related to an asset and a grant related to income. So for a grant related to an asset that is a grant that's conditioned upon the purchase or the construction of an asset such as a grant that is a reimbursement of the cost to construct a building, say. So, companies are going to get this grant that they can claim once the building is completed. So, for the probable threshold, as the company is making the expenditures to build this building, if it's probable they're going to complete it, they can begin to account for the grant. And for recognition, there's going to be two options, a policy choice here. First, the company can offset the asset for the building itself, the caring value of the asset, with the amount of the grant. This is called the cost accumulation approach, or you could think of it as the net approach for the balance sheet. The other option is that the company can record a deferred grant liability as that asset is recorded. And then that deferred grant liability will be subsequently recognized as income in the income statement. And it would be recognized over the period that the building is depreciated. So, you have either the reduced depreciation on the building if you use the cost accumulation approach. That's how it shows up the income statement, or you just have this deferred income that we amortize into income if we use the deferred income approach. The gross approach for the balance sheet, yes, exactly. So, then the other type of grant is called a grant related to income. And this is essentially everything else, everything that's not related to an asset. So, an example of an income grant could be reimbursement for R&D expenditures that a company is going to make. So, thinking about that type of a grant, oftentimes you will receive the cash as you provide proof of incurring those expenditures. And so, then you're looking at that probable threshold as the company is making those expenditures, they're going to begin accounting for the grant, because they're probable they're going to get it as they make the expenditures. And then from a recognition standpoint, that grant income is going to be recognized in the income statement, in the same period or periods as you're making R&D expenditures. And I suppose that's one where it's probably important to really make sure you understand whether that's a grant or whether you just have a contract to perform R&D for the government. Yeah, exactly. Yeah, and I guess, maybe in that vein, you could also have grants that we talked about a grant and something else. You can also have a grant that contains both types of grant related to an asset and a grant related to income. Or maybe it's a little bit unclear, maybe it's judgmental, so you could have either of those flavors. Yeah, and I think that's going to come up fairly often where a grant might include something related to both an asset and something else. For example, we've seen grants where you get funding to build a factory, but you're also supposed to employ local employees. So maybe it relates to just the factory or maybe the factory and the wages of the people you're hiring. It's really going to depend on the terms of the grant and really just applying judgment as far as what do you think the grant is intended to fund? Yeah, and perhaps in that case, it might depend if it's a lot of money and it's largely tied to the cost of the building, but there's some nominal employment requirements. Maybe it's say, well, that really still feels like an asset grant versus if it's there's a more significant hurdle around future employment, future wage rates, etc. I think you mentioned a couple of things, but probably focusing on just the actual communication of what the grant was really intended to be for. There's usually something from the government that describes why they think they're giving you the money. Certainly how the amount of the grant was determined was it more based on the cost of an asset or some other expenses. And then really as we talked already about the nature of the conditions that the company needs to satisfy or sort of the challenging how challenging some of those conditions are, I might point you in one direction or another number of employees, etc. Yeah, but like the standard does not include prescriptive approach. So companies are going to be able to apply judgment and be looking at what was the, what are really the economics here? What was this grant supposed to be for and reflect that? Yeah, I think we've talked about a couple of different examples now, but all in the context of cash from the government. I think we said at the outset that the standard also applies to grants of tangible non-monitory assets. So what's an example of that? Yeah, so the example that the standard is really contemplating here is that instead of getting cash to buy a building or build a building, the government just gives the company a building straight out. So then the accounting model is then similar to other grants related to assets. And you also still have both that gross or net option for the balance sheet. So if you're applying the cost accumulation method, you would put this building or this non-monitory asset on your books basically at zero because you have no has no cost to you. Or you could apply the deferred grant approach or deferred liability approach and set up that building or that asset at fair value and then have an offsetting deferred grant liability that's recognized as the asset is depreciated. So again, a similar gross or net decision there. But again, as I mentioned, the scope is only tangible non-monitory assets. It doesn't address intangibles. So it's probably a good spot to go back to. We were talking about transferable tax credits. These aren't in the scope. They're not exactly like cash. They're not exactly like tangible non-monitory assets. So I will throw this back to you Pat. How would you navigate applying this new guidance by analogy? Unfortunately, you're unfortunately for me, I sort of sit a little bit in our income tax base as well as our team that does government grant accounting. So I'm sort of lucky winner on these transferable tax credit questions. So, and we alluded to this earlier, I mean, they're not really in any gap explicitly there. They could be accounted for under ASC 740, maybe just one clarification here. A lot of the tax credits that are out there are either never transferable or they could be transferable or they could be refundable. If fully refundable, they would be in our view, not in the scope of ASC 740 and would likely then be directly in the scope of the government grant standard. It's these transferable ones that are a little bit more ambiguous because they're on the one hand, you could use them on a tax return, you could account for them under 740 or you could sell them to somebody and then it feels like the government gave you something valuable. We are seeing a lot of companies choose to account for these transferable tax credits as government grants. And so then the question is, okay, they're not cash, as you mentioned, they're not a tangible asset. So how should we apply this model to them? They certainly feel maybe closer to cash than a building. So we probably looked like they're closer to that model and thinking about them more like a monetary grant rather than a non-monitory grant. But I would say it's definitely an area that's not fully settled and definitely requires some judgment. But in general, we would say that's a valuable asset that government gave you. And from there, you would just apply the same model or same framework we've been discussing. Where to come, I'm sure. Yes. So I guess getting back to the general model, we talked about this recognition threshold of probable. And so maybe we start out thinking something's probable and then I don't know, circumstances change and we have a change in judgment. Do we have any guidance on how to deal with that? Well, the period before you get the grant, you know, get the cash, if you will, the standard doesn't directly address changes in the probability assessment. Although we would expect you would basically true that up under like a cumulative catch up approach, any changes in your in your judgment similar to how we might think about changes to variable consideration in the revenue standard. Or if there's a variable amount of the grant and you're chewing up like an estimate of the amount that you consider to be probable. The standard does specifically talk about repayments of grants. So like where you get the cash or you get the grant and then subsequently have to pay it back. And similarly, that model is essentially unwinding the impact of the grant on a cumulative catch up basis. So even if you had offset an asset on the balance sheet and you ended up having to repay the grant, you would reinstate the asset and do a true up of all the accounting that you would have done, including depreciation to date, etc. as if you had never received the grant. So that's in the situation where either either we haven't yet received it and we've been assuming we're going to get it or if we have to pay it back sort of the same unwind model. That's how we've thought about it. I mean I think the standard is specifically only talking about repayments, but I think you would do it in a similar way. Do the accounting in a similar way. makes sense. So we've talked about recognition, we've talked about the types of grants, we've talked about the timing of the income recognition. I guess the other big aspect of the accounting really would be then where it actually shows up on the income statement, the presentation. Yeah, and here the standard also has more optionality. So another accounting policy to make, which is consistent with the policies that you can make under IS-20. And broadly, again, you have both a gross or a net option for presentation and the income statement. So for grants related to an asset, as we mentioned before, if you're using the cost accumulation approach and offsetting the asset on the balance sheet, there's not going to be any further income statement accounting directly, that's just going to fall out as that assets depreciated. But if you're using the deferred income approach and setting up a liability on the balance sheet, you're going to subsequently recognize that income in the income statement. And you can either do that separately as other income, for example, so on a gross basis, or you can recognize it as a presented, I guess, as a reduction of the related expense, which is generally going to be the depreciation expense if we're talking about an asset grants. So that would be the net presentation. For grants related to income, similarly, in that case, you're going to be similar to the deferred income approach for asset grants where you're going to have the two choices. You either recognize the grant income separately in the income statement, such as in another income section of the income statement on a gross basis, or you can present as a reduction of the related expense on a net basis. So in my earlier example, with the R&D expenditures, you could be presenting that as a reduction of the R&D expense. And I think you said this choice is similar to the deferred income approach for the asset grants, but obviously we're just talking about the income statement here. We probably wouldn't expect to see an income grant sitting on a balance sheet waiting for amortization or-- I mean, usually not. I mean, you could potentially get the cash in advance, but that's not typically how grants work. You know, usually get the money upfront, but it could happen in summer arrangements. That's fair. And I guess you talked about this being a policy choice. I think my read is that the FASB didn't really give a steer that one or the other is preferable. So you really do have the choice there. And I think there was some commentary probably from some of the board members who thought maybe the FASB should have gone a little further with the standard, but the question really about what's maybe better for the users of the financial statements if that's important. I mean, to be fair, it is sort of a free choice. But you might think about whether a gross presentation is perhaps more transparent, provides the visibility into actually how much grant income you really receive versus the companies costs. On the other hand, you can say maybe a net presentation is really a better picture of the companies, net economic cost or true cost, right? If they were subsidized by the government, they never incurred those costs essentially. So maybe that's the better presentation. Again, those are probably depends on your perspective, I guess, in terms of how you think about that. You just need to be consistent in applying that policy to similar types of grants. And you can't sort of pick and choose or go back and forth between the accounting for similar grants. Obviously, like any other change in accounting, if you decided later down the road that you wanted to change that policy, you'd have to go through the accounting change process and justify the changes as preferable. And that would come down to just the specific facts and circumstances and play. Yeah, so companies definitely want to be thoughtful when they're setting their policies here. Not that you can't change in the future, necessarily, but it's much more of a pain to change for it down the road than making an election at the time when you're adopted. Yeah, I think that's a good reminder. And I said it's sort of a free choice, but you should be thoughtful about your choice because to your point, you're going to be stuck with it. You can justify the other one as being better later on. Maybe let's move on to disclosures. I don't think there's too much that's incremental to what's already required about government assistance, but maybe just to recap that for our listeners. Yeah, that's right. And I mentioned that there was a standard that required additional disclosures about government grants that went into effect in 2022. So this standard just kind of builds on those requirements, those requirements are retained, includes discussion about the nature of the grant policies, significant terms and conditions. You also need to disclose the line items being impacted and amounts. Primarily, the new things they added for grants related to an asset. If you're using the cost accumulation approach, so you're really offsetting that carrying balance of the asset, you also have to disclose the useful life of that related asset. So someone has a sense of the period over which it's going to impact the income statement through less depreciation. And then for tangible non-monetary assets, you do have to disclose the fair value in the period that the grant is recognized. Because it may not be recognized of fair value. Again, if you're using that cost accumulation approach. I guess it just occurs to me. We were talking a little bit about the policy choice on where to present it in the income statement. And I was thinking another one of your favorite topics is the upcoming disaggregated income statement expense disclosure. I guess that could have some implications. If you put it in other income presumably, it's kind of outside of that realm. But I suppose if you put it in the line item, it gets captured as one of the reimbursement items, is that where it gets captured? Well, they baked it into the standard to actually amend dice to say that when you put it in an expense line item, so a reduction of an expense line item, then it will need to be separately disclosed in the dice table. So one way or another people are going to figure out where the grant income is in the income statement. That's true. All right, so we got all the recognition measurement, disclosures, I guess maybe just to wrap up the effective date. We talked about the effect of being a little ways off, but anything in particular to be thinking about in that context. So transition, they left pretty flexible. There's lots of options. You can do full retrospective. You can do a modified retrospective approach, or you can do a modified prospective approach. So there's lots of different choices in how you adopt the new standard. And just then sort of maybe more plain English, I mean full retro is pretty understandable. Modified retro is kind of like cumulative effect as of the beginning of the period in which you adopt, I guess. And then I suppose the modified prospective is just sort of picking up with new grants in the period of adoption. Or grants that haven't yet been fully completed. And there's some definition around what that means in this context. Well, that's super helpful. Maybe just some sort of practical takeaways here before we wrap up. Well, I think we kind of touched on all these, but again, if you're a company that's impacted by the standard because you receive government grants, if you apply I as 20 today, the standard is probably not going to have a big impact because the model is very similar. But as I mentioned, there are a lot of policy elections to make. So this could be or would be a opportunity to take a fresh look at your policies that you could make new policies upon adoption of this new standard. And then lastly, it is a fairly principles-based standard. You know, it's coming from our for us, which tends to be more principles-based. So, you know, for grants with multiple conditions, the more complexity, there's going to be judgment to apply. And it's going back to those principles around both the threshold of when you recognize and then the concept of reflecting the grant income in the period that the related expenses are being recognized in income statement. Those are good reminders. Maybe just one final question. We have some resources if people want to get some more information on how to account for government grants. Yes, we have an in-depth publication that we put out in December when the standard came out. And so more information, if you Q&As in there to go check out. And plenty of time to read up on that. It's in sort five years away. Get early adopt. Yeah. All right. Well, thanks a lot, Angela. I really appreciate you helping me out today. Sure. Happy to be here. That's our show for today. Tune in next week for more fresh episodes. So that you never miss any of our audio content. Follow the PWC County podcast where every listen to your podcasts. And to stay up to date on all our latest accounting and reporting news, sign up for our newsletter at viewpoint.pwc.com. From thought leadership at PWC, I'm Heather Horn. Thanks for tuning in. This podcast is brought to you by PWC. All rights reserved. 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