The Financial Accounting Standards Board recently issued a new Accounting Standards Update (ASU) that brings clarity to accounting for government grants – ASU 2025-10, Government Grants (Topic 832): Accounting for Government Grants Received by Business Entities (ASU 2025-10).
ASU 2025-10 represents a significant development in U.S. Generally Accepted Accounting Principles (U.S. GAAP) by introducing authoritative guidance for recognition, measurement, presentation and disclosure for government grants received by business entities. As an area that previously lacked explicit guidance within U.S. GAAP, entities were historically permitted to apply principles from other U.S. GAAP topics that addressed similar transactions or events. ASU 2025-10 eliminates reliance on other topics by codifying a consistent framework.
Key Changes Under Topic 832
The most consequential change in ASU 2025-10 is the establishment of Topic 832 as a full accounting guidance model, rather than a disclosure-only topic. The update defines a government grant as a non-exchange transfer of a monetary asset or a tangible nonmonetary asset from a government to a business entity. Importantly, the scope excludes income taxes, below-market interest rate loans, government guarantees and exchange transactions. Forgivable loans are explicitly addressed and treated as government grants once forgiveness is probable.
ASU 2025-10 also introduces a required distinction between grants related to assets and grants related to income. Asset-related grants are those conditioned on the acquisition or construction of an asset, while income-related grants encompass all other forms of assistance, such as operating cost reimbursements. Recognition of any government grant is prohibited until it is probable that the entity will comply with the grant’s conditions and that the grant will be received. This “probable” threshold aligns with existing U.S. GAAP terminology and replaces the “reasonable assurance” concept commonly applied under previous methods. While many existing accounting outcomes may remain unchanged, this update formalizes policy elections, introduces clearer recognition thresholds, and standardizes terminology and presentation within U.S. GAAP.
Effective Date and Implementation Considerations
The ASU is effective for public business entities for annual periods beginning after December 15, 2028, and for other business entities one year later, with early adoption permitted. Adoption is permitted using a modified prospective, modified retrospective, or full retrospective approach, allowing entities to balance comparability with implementation cost.
ASU 2025-10 addresses a long-standing absence in U.S. GAAP by introducing authoritative guidance in accounting for government grants. While the standard provides some flexibility in application, it significantly reduces diversity in practice and enhances consistency and transparency in financial reporting. Entities that receive government grants should begin evaluating existing policy elections and disclosure processes ahead of adoption to ensure a smooth transition and clear communication with financial statement users.
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