The Financial Accounting Standards Board (FASB) met on March 14, 2018 for the first time in 20 months to discuss Topic 832: Disclosures by Business Entities about Government Assistance. Given that so much time has passed between now and the last formal meeting and the Board turnover, the Board decided to make this an educational session where no formal decisions would be made. During the meeting, the Board had four (4) broad topics that they covered.
Confirm Decisions Reached to Date
During redeliberations the Board made a number of decisions to the proposed Accounting Standards Update (“Update”) including limiting the scope to legally enforceable agreements. There were also specific changes that came out of redeliberations that would be changes from the amendments in the proposed Update:
1. The scope of the final Update would exclude (i) government assistance that is provided to an entity in the form of benefits that are available in determining taxable income or that are determined or limited based on income tax liability, in accordance with Topic 740, Income Taxes, and (ii) employee benefit plans.
2. The Board removed the requirement to disclose the amount of government assistance received but not recognized directly in the financial statements.
3. The Board added a disclosure relating to restrictions. If an entity omits specific information required by the final Update because information is legally prohibited from being disclosed, the entity should disclose a description of the general nature of the information omitted and the specific source of legal prohibition.
A fairly robust discussion occurred around issue #2 above – in particular, why the Update doesn’t require quantitative disclosures for information that companies should have readily available. The conversation focused mainly around property tax abatements and the fact that government agencies themselves have this data and so should the companies. One Board member believed that taking a baby step of just disclosing an agreement was enough and felt there was too much of a burden to deal with quantitative disclosure. While another member strongly stated that a disclosure that a company just “got something” is not that useful and the FASB should be giving investors a better starting point. He also felt these disclosures are decision-useful. The Board agreed to consider different types of tax abatements at the next meeting but to leave out certain incentives like low interest rate loans. They also agreed to keep it as just a period amount and also look to GASB Statement 77 to help with quantitative disclosure language.
The conversation turned to talk about how pervasive these government incentives really are across companies and no one on the Board or the staff really had an answer. In fact, one of the newest Board members, Marsha Hunt, even stated that she doesn’t really understand the project. She wants to know how these disclosures will lead users to reach different conclusions about resource allocations. It’s pretty clear to me that she has never been exposed to government incentives in her career and doesn’t have an appreciation for their impact. Consider this fact pattern: a company receives a $100M per year property tax abatement that runs over 30 years and it has clawback provisions associated with it for non-compliance related to obligations made in the agreement. If I’m an investor, there are 2 major issues I have in today’s financial reporting environment: 1) I have no visibility into when that incentive will fall off the books – so if I decide to invest in year 30 and I find out the company has a $100M hit to the bottom line the following year, I’m going to look pretty stupid and probably lose my job; 2) there’s no transparency into that agreement so as an investor I have no clue about the potential liabilities there – what if the T&Cs require the company to pay back every cent it received over a 28 year period if it happens to drop the ball on compliance in year 29?
Do you want to know how “pervasive” government incentives are in the U.S.? Try $100B every single year…just in the U.S….and growing. To that point, Board member Marc Siegel provided some background for the newer Board members for context. Topic 832 was originally a recognition and measurement project, but they decided to dial it back to just a disclosure project to get a handle on just how pervasive these incentives are in the market. He also referenced the fact that there is currently no guidance in the U.S. and companies are typically confused on how to account for incentives – some apply IFRS, others do nothing, all of which leads to diversity in practice.
The issue of materiality reared its ugly head again. A lot of discussion happened around whether to re-introduce materiality into the project or let Topic 235: Assesing Whether Disclosures Are Material be the guide for everyone. Chairman Russ Golden said he struggles with the issue in this project but can see an argument where this project is different than the larger disclosure framework project. Ultimately, the Board is struggling with identifying individual incentives as material or material in the aggregate. There was enough discussion to agree to include it on the next agenda as a scope question and they may try and tie it in with the quantitative amounts required. While the Board has issues with companies predicting or forecasting the value, I personally do not. When companies perform site selection projects to build new facilities, they put very detailed proforma numbers together which include government incentives. In fact, government incentives are the one line item on a proforma analysis that usually tips the scale in the direction of one jurisdiction over another. So to say that companies do not have this information readily available is somewhat misleading.
Regarding issue #3 above, the staff confirmed that they found virtually no examples in the U.S. and maybe one foreign example of an agreement that had a confidentiality clause. They also spoke with the GASB who did a lot of research and were not able to find any agreements either. The Board agreed to look at defense contractors and how they disclose their projects as a potential example.
The staff proposed two alternatives for the Board to consider: 1) a modified prospective application; or 2) prospective application. In alternative 2, a company would only have to disclose agreements they enter into on or after the effective date. One of the Board members stated that alternative 2 was a “non-starter” for him after just a few minutes of discussion. I absolutely agree here. The spirit of this disclosure is for companies to actually disclose the agreements they current have in place so the Board can identify how prevalent these incentives are in the market. Alternative 1 would be counterintuitive to that notion. I cannot see a situation where the Board doesn’t adopt alternative 1.
Effective Date and Early Adoption
The Board briefly discussed the effective date in the context of the proposed Update. Since the Update does not specify a specific date the actual effective date is TBD, but staff believes it to be as follows: public companies will have 1 year to implement from the effective date & private companies will have 2 years. Staff also believes the project will be finalized in early Q3 of 2018. We believe that taxpayers should begin paying attention to the Update now given the proposed timing.
Private Company Considerations
There was some discussion around two topical areas regarding private companies. One is related to providing them more time, e.g., more than that proposed 2 years – especially if the same standards are applied across the board. The second area of conversation focused around whether the Board should exempt private companies from having to report any quantitative disclosures at all. Both of these issues will be brought up at the next meeting on this topic.
The next Board meeting on Topic 832 will like be on March 28th. It was originally scheduled for March 21st, but I believe they needed some extra time with the robust discussions that took place. Stay tuned…