COVID-19-related government assistance: To report or not to report?

Investors, lenders and market analysts rely on accounting rules published by the Financial Accounting Standards Board (FASB) to get the insight they need about companies, especially when rare events take place. Some stakeholders worry that — because the FASB never completed its 2015 proposal on government assistance disclosures — companies may fail to report COVID-19-related financial relief in a transparent and consistent manner. This information could prove material to stakeholders’ investment and lending decisions.

At a recent meeting, FASB members discussed how companies should disclose COVID-19-related financial relief measures. Here’s some background and recent developments on this issue.

Unfinished work

Policymakers use tax credits and exemptions, along with other financial incentives, to encourage companies to expand or set up shop in their locality. The goal is to drive economic growth by boosting jobs for residents. The Securities and Exchange Commission first identified government assistance disclosures in 2012 as an area where U.S. Generally Accepted Accounting Principles (GAAP) was lagging behind international standards. The FASB added the project to its technical agenda in early 2014.

The FASB issued Proposed Accounting Standards Update (ASU) No. 2015-340, Government Assistance: Disclosures by Business Entities about Government Assistance, to bring more transparency about government incentives. The 2015 proposal would give investors a clearer picture about such issues as whether a company’s tax abatement is going to stop and, if so, whether they’ll have to pay out lump sums of money the following year. Investors use this kind of detail to make comparisons among companies.

During the proposal’s comment period, some public companies told the FASB they were worried about potential implementation costs of the rules. Therefore, the FASB has been moving cautiously on the project. In 2019, the FASB decided to study whether the benefits of the disclosure requirements would justify the costs companies would incur to comply with them.

FASB guidance

Existing GAAP doesn’t provide explicit rules for reporting government assistance. But it does provide general note disclosure requirements that would reveal how much and where such funds are presented in financial statements.

During discussions at a May 20 FASB meeting, acting technical director Shayne Kuhaneck advised companies to look to Accounting Standards Codification (ASC) Topic 235, Notes to Financial Statements, to report material government assistance figures. It states that, “Disclosure of accounting policies shall identify and describe the accounting principles followed by the entity and the methods of applying those principles that materially affect the determination of financial position, cash flows, or results of operations.”

In particular, disclosures should encompass those accounting principles or methods that involve any of the following:

  • A selection from existing acceptable alternatives,
  • Principles or methods peculiar to the industry in which the entity operates, and
  • Unusual or innovative applications of GAAP.

“In general, the disclosure should encompass important judgments as to the appropriateness of principles relating to recognition of revenue and allocation of asset costs in current and future periods,” said Kuhaneck.

Response from the trenches

The COVID-19 pandemic has resurrected the issue of government assistance disclosures. Stakeholders have expressed frustration at the lack of explicit rules for these disclosures under existing GAAP.

Market analysts said they are interested in gleaning more insight about how much government support a company is including within its core operations or in its income statement. They also want to understand what accounting policy was applied.

Moody’s Investors Service issued a report on May 13 indicating that investors are especially curious about financial relief received under the Coronavirus Aid, Relief, and Economic Security (CARES) Act and any sort of government support as a result of the COVID-19 crisis that would have a material impact. The CARES Act offers forgivable loans, payroll tax credits and payroll tax deferrals to companies that qualify. The measures include funding for an unemployment program offered through employers.

According to Moody’s, the FASB hasn’t focused on mandating disclosures or uniformity. “I’m not optimistic that we’re going to get decision-useful information in hindsight,” said David Gonzales, vice president and senior accounting analyst at Moody’s. “Generally, a lack of required disclosures leads to variability in the information that’s passed on to investors, and we believe this variability in disclosure will make it difficult for the users to understand companies’ performance both with and without government assistance for this 2020 reporting year.”

Stay tuned

After discussing the matter with FASB members, Gonzales isn’t optimistic that any formal guidance on government assistance disclosures will be issued in 2020 — or even in 2021. In the meantime, stakeholders will have to rely on companies to be transparent and consistent when disclosing the COVID-19 relief measures that they’re benefiting from.

If your company has received financial relief under the CARES Act, please reach out to your trusted Hood & Strong advisor as they can help draft the necessary disclosures.