Topic 99-10: Accounting for Government Assistance
Learn how for-profit entities account for government aid under Topic 99-10, from selecting an accounting model to its impact on financial reporting.
U.S. Generally Accepted Accounting Principles (GAAP) lack specific instructions for for-profit businesses on how to account for government assistance. This gap became relevant with past programs like the Employee Retention Credit (ERC), a refundable payroll tax credit. The ERC was available for wages paid through September 2021 and is no longer an active program for current expenses. In response, businesses must select an appropriate accounting framework by analogy to report these funds, and new disclosure rules have been established to ensure transparency.
The Core Accounting Decision
In the absence of specific guidance for for-profit entities, a business must make an accounting policy choice. This flexibility acknowledges that while a credit like the ERC was a payroll tax credit, it functioned like a government grant. A business must decide which accounting model most accurately reflects the substance of the transaction.
The most common approaches involve analogizing to other established standards. One option is to follow an income-based approach, similar to International Accounting Standard (IAS) 20, which centers on matching income from the assistance with the expenses it is intended to offset. The alternative is to account for the funds by analogy to income tax guidance. This decision impacts how and where the credit appears on the income statement, influencing financial metrics.
Accounting as a Government Grant
When a business accounts for government assistance using an income-based approach, it applies a framework like IAS 20 or Accounting Standards Codification (ASC) 958-605 by analogy. The principle of this model is that income is recognized only when the entity has substantially met the conditions for its receipt. For the ERC, this meant the credit was earned as qualifying employee wages were incurred, recording the financial benefit in the same period as the related payroll costs.
Once the recognition criteria are met, the business has flexibility in presenting the credit on its income statement. One method is to report the amount as “Other Income,” separate from the main operating activities. A second method allows the credit to be recorded as a direct reduction of related expenses, such as salaries and wages, which illustrates the subsidy’s effect on those specific costs.
Accounting as an Income Tax Credit
Choosing to account for government assistance as an income tax credit involves a different conceptual basis. Under this model, the entity would analogize to the guidance in ASC 740. This approach treats the assistance similarly to other tax credits that reduce a company’s income tax liability, even though the assistance may be a payroll tax credit or other type of grant.
The presentation on the income statement under this method is straightforward. The credit is recorded as a reduction of the income tax provision, directly lowering the overall income tax expense for the period. This method is often seen as less complex, as it aligns the accounting with familiar tax accounting procedures.
Financial Statement Disclosures
To address inconsistencies in reporting, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2021-10, which created Topic 832. This guidance requires specific disclosures in the notes to the financial statements to ensure transparency into the company’s handling of the government assistance.
The disclosures must clearly state the accounting policy chosen to account for the funds. The company must also identify the specific line items on the financial statements that are affected by the assistance and the amounts recorded in each. This includes detailing where the funds are presented on the income statement and balance sheet. Finally, the total amount of assistance recognized in the financial statements must be disclosed.