The Financial Accounting Standards Board (FASB) met on November 14, 2018 to make some meaningful progress and decisions on Topic 832: Disclosures by Business Entities about Government Assistance. The Board’s tentative decisions are finally providing some light at the end of this tunnel. Staff came to this meeting with background information and options to help facilitate the Board’s redeliberation and decisions on four primary issues: 1) scope; 2) transition; 3) effective date and early adoption; and 4) private company consideration.
A few comments at the last Board meeting on April 5, 2018 from some members suggested that staff consider additional refinements the scope in order to narrow it. As a result, staff came to this meeting with three scope alternatives for the Board to consider:
a. Alternative A: Principles-based approach and current proposed scope—provide additional clarification that the scope of the government assistance disclosures is based on whether an entity has entered into a legally enforceable agreement with the government to receive either (i) assets or (ii) other assistance that reduces or eliminates an entity’s expenditures. Examples include grants, tax assistance, low-interest-rate loans, and loan guarantees.
Alternative A’: (i) Assets or (ii) other assistance that reduces or eliminates an entity’s tax- or debt-related expenditures.
b. Alternative B: Rules-based approach—limit the scope to include grants, tax assistance, low-interest-rate loans, and loan guarantees.
A fair amount of discussion ensued around these alternatives. In the overall interest of getting to clarifying language the Board mulled over the exact verbiage to use. Everyone seemed to lean toward Alternative B with some modified language like “grants of assets” and “repayment of obligations”. The basis for all the discussion seemed to be linked to how a company can actually tie a benefit to a line item on the balance sheet and/or the income statement.
Ultimately the Board decided that the scope of the amendments would apply to grants of assets, tax assistance, low-interest-rate loans, loan guarantees, and forgiveness of liabilities. They directed the staff to draft clarifying language on this new scope.
The original Update when exposed asked respondents whether the proposed amendments should be applied to all agreements (a) existing at the effective date and (b) entered into after the effective date with retrospective application permitted. Most of the respondents agreed with this proposed transition. Some respondents disagreed and only want the proposed amendments to be applied to agreements on a prospective basis.
The staff offered two alternatives:
a. Alternative 1: Modified prospective application—The Board would affirm its decision that the final amendments would be applied on a modified prospective basis in the first set of financial statements following the effective date to agreements that are either (i) not completed as of the effective date or (ii) entered into after the effective date.
b. Alternative 2: Prospective application—An entity would be required to apply the disclosures only to new agreements entered into on or after the effective date.
The Board agreed on Alternative 1 with some clarifying language that the application applies to all agreements that are still existing at the time of the effective date. A majority agreed that the objective of this disclosure is to uncover how pervasive these incentives really are and allowing just a prospective application would be counterintuitive to this goal.
Effective Date and Early Adoption
The Board decided that the amendments in the final Update would be effective for fiscal years ending after December 15, 2020, for public business entities and fiscal years ending after December 15, 2021, for nonpublic business entities (private companies). Early adoption is permitted.
Private Company Considerations
In accordance with the exposure document, the staff recommended no changes to the disclosure standard and one additional year to implement. The Board agreed with this recommendation.
The Board directed staff to draft the final ASU
Staff will share the ASU with public companies, private companies, and auditors for external review
Staff will coordinate with the Private Company Council
Staff to bring the results of the external review, any sweep issues, costs & benefits to the Board for a final decision in a Q1 meeting
After nearly 4 long years the FASB is finally ready to finalize Topic 832. With no other roadblocks in the way, the pronouncement appears to be headed for a final vote in Q1 2019. The Board’s decision at this meeting to agree on an implementation date made this very clear. All public companies should be on notice – especially calendar year-end taxpayers who will need to be in compliance for their 2020 fiscal year.