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FASB’s New Framework for Government Grants: What Business Entities Need to Know

Starting in November 2021, the Financial Accounting Standards Board (FASB) undertook a project to improve the guidance addressing a business entity’s accounting for government grants. The project has culminated in an exposure draft, which is expected in Q4 2024. The following summarizes historical trends and expected implications of the FASB’s efforts to codify accounting principles for business entities receiving government assistance.

Business entities (i.e., for-profit entities) often receive government assistance in the form of cash grants, tax credits, or grants of other assets. Often, these grants are designed to encourage the recipient to undertake certain objectives (e.g., fund research targeting certain diseases, develop vaccines targeting certain viruses, etc.) or to assist in times of hardship (e.g., natural disaster relief).

Certain industries, such as life sciences, biotechnology, and pharmaceuticals, rely on government grants and assistance programs to finance early-stage operations. Funding from organizations such as the National Institutes of Health (NIH), National Science Foundation (NSF), and Biomedical Advanced Research and Development Authority (BARDA) may be attractive as it is often non-dilutive and enables recipients to fund research focused on de-risking intellectual property portfolios prior to seeking financing from institutional investors.

Unfortunately, the accounting for these government grants is challenging due to a lack of specific accounting guidance. While ASC 958, Not for profit entities, provides accounting and presentation guidance for grants received by not-for-profit entities, there is a lack of guidance for business entities in accounting for such government grants. In the absence of specific guidance, there is a diversity in practice as to how business entities account for government assistance. Many entities are forced to analogize to other accounting guidance, often IAS 20, Government grants and government assistance, under IFRS Accounting Standards, while others apply ASC 958-605 to determine a reasonable accounting model. This diversity in practice results in variation in timing and pattern of recognition as well as presentation of grant income (e.g., grant revenue, other income, or reduction of expense).

In its April 2024 meeting, the FASB indicated that it would focus on an accounting model that largely aligns with the framework in IAS 20, with targeted improvements to scope based on previous decisions and feedback received from constituents. This will include certain deviations from IAS 20. In its June 2024 meeting, the FASB focused on financial statement disclosures, accounting for government grants in business combinations and transition. Looking ahead, the FASB directed the staff to proceed with drafting a proposed ASU, with an exposure draft expected imminently.

The following highlights the tentative conclusions reached to date:

• Model: The FASB will develop an accounting framework using the core principles in IAS 20.

• Scope: The new framework will apply to both public and private entities and will include government assistance in the form of transfers of monetary and tangible nonmonetary assets to a business entity, including forgivable loans. The project scope will exclude transactions in the scope of ASC 606 and ASC 610-20, transactions in the scope of ASC 740, below-market interest rate loans, and government guarantees.

• Recognition: The threshold for recognition will be “probable”, consistent with ASC 606 and ASC 450-20, with such probability assessment contemplating both (i) receipt of the grant and (ii) the entity’s compliance with the conditions of the grant.

• Transition: The new guidance will be adopted either (i) prospectively to grants that are not completed as of the effective date or are entered into after the effective date or (ii) retrospectively. Entities adopting the new guidance will be required to disclose the nature of and reason for the change in accounting principle. Entities electing to adopt the new guidance retrospectively will be required to provide the disclosures in ASC 250, Accounting for changes and error corrections, in the period of adoption.

How Centri Can Help

At Centri, we understand the complexities and challenges faced when accounting for transactions where US GAAP lacks explicit guidance. Until the FASB finalizes the active project and publishes an ASU, entities will need to carefully consider whether to apply ASC 958-20, analogize to IAS 20, or apply other guidance (e.g., ASC 606, ASC 740, etc.). Centri’s team of experienced professionals has deep technical accounting expertise to assist in not only making the appropriate determinations, but also assist in transition to the new framework once the ongoing project is finalized. Contact us to learn how we can help your company.

Dave Iles

Managing Director | CPA

Dave is a Managing Director at Centri Business Consulting. He has more than 11 years of public accounting and accounting advisory experience. View Dave Iles's Full Bio

Ryan Starkes

Partner | Life Sciences Practice Leader & Raleigh Market Leader | CPA

Ryan is a Partner at Centri Business Consulting, leader of the firm’s Life Sciences Practice & Raleigh Market Leader. He has more than 25 years of public and private accounting experience. View Ryan Starkes's Full Bio