Part 2 of a 3-Part Series

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The Financial Standards Accounting Board (FASB) is about to issue an Exposure Draft on its project “Disclosures by Business Entities about Government Assistance”. One of the primary objectives of the FASB’s project on new disclosure requirements for government incentives is to provide transparency where none exists today. With companies managing an estimated $100B in government incentives annually – just in the U.S., it’s amazing that it has taken this long for the issue to percolate to the top. And while some companies may argue about materiality, it’s hard to argue the need for increased transparency. Take Intel Corporation, for example – last year they negotiated a historic 30-year $3B property tax abatement in Hillsboro, OR. Do you think that shows up anywhere on their 10-K?

Disclosure Objectives

So with transparency in mind, the Board’s proposed disclosure requirements are designed to facilitate the reporting of information on existing government assistance programs by an entity, including:

1. The nature of the government assistance and the entity’s related accounting policies used to account for the assistance

2. The legally enforceable agreement’s significant terms and conditions

3. The effect of government assistance on an entity’s financial statements

4. Any assistance not recognized in the financial statements which may have an effect on the statements in future periods

                            “One of the primary objectives of the FASB’s project…is to                                        provide transparency where none exists today.”

Annual Disclosures

So here’s the “meat & potatoes”, if you will. The Board approved specific reporting parameters around the annual disclosures as well as items that comprise “significant terms and conditions”. At a high level, the disclosures must include:

1. A description of the government assistance and the major categories, e.g., tax incentives, loans, grants, etc.

2. The mechanisms used to obtain the government assistance

3. The accounting policies adopted to account for the assistance

4. The amounts recognized and the related line items on the balance sheet and income statement

5. Any amounts that affect cash flows in the current period that are not recognized in the financial statements

The Board has offered specificity around the T&Cs which include, but are not limited to:

1. The agreement’s duration period including any applicable tax or interest rates

2. Any commitments made by both the government agency and the entity

3. Any recapture provisions include in the agreement including the circumstances for recapture

4. Any other contingencies in the agreement

The Board also chose to limit the fuzzy areas by not requiring “quantitative disclosure of amounts of government assistance expected to affect future periods under existing agreements based on predictions, forecasts, or other similar assertions about uncertain or unknown future events that are beyond management’s control.”

Believe it or not, there are additional details to come…

— Part 3 of 3 coming next week

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