Financial assistance from governments to companies may be a widespread phenomenon, but investors don’t usually consider it- until it’s brought to their attention. Perhaps the most lucid example of governmental assistance was the Troubled Asset Relief Program – TARP. Yet financial assistance from governments may abound. For example, a municipality may grant tax relief to a company that invests in a new storefront in a particular city location. A state agency may guarantee a loan for a fledgling company that the state considers important for attracting more companies of its ilk – perhaps to create a hot spot for attracting more biotechnology companies. The agriculture industry famously receives subsidies from the federal government.
The problem is that there are no standards of disclosure which will bring investor attention to the level of governmental assistance given to companies. A company might be very dependent upon governmental assistance for its viability, and investors might not ever know it – until it runs out. Two companies may be very similar, operating in the same industry, but one could be significantly more profitable than the other due to governmental assistance. Investors might chalk up the superior performance of one company to its superior management, when in reality the incremental profitability is attributable to governmental assistance.
The FASB has proposed a new disclosure standard that will bring governmental assistance information to the surface for investors. Here’s what companies would disclose annually, straight from the proposal:
1. Information about the nature of the assistance, including a general description of the significant categories and the related accounting policies adopted or the method applied to account for government assistance
2. Which line items on the balance sheet and income statement are affected by government assistance from the amounts applicable to each line item
3. Significant terms and conditions of the agreement, including commitments and contingencies
4. Unless impracticable, the amount of government assistance received but not recognized directly in the financial statements. The amount of government assistance received but not recognized includes value that was received by an entity for which no amount has been recorded directly in any financial statement line item (for example, a benefit of a loan guarantee, a benefit of a below-market rate loan, or a benefit from tax or other expenses that have been abated).
Many companies probably have a very good handle on the total amount of governmental assistance they receive. To be sure, it might be very difficult for some companies to tally all of it. Defense contractors come to mind, and multinationals that receive governmental assistance from a great number of countries. Whether it’s easy or difficult to capture all of the information, companies are not likely to welcome this proposal with open arms. The information that would be disclosed might have a profound effect on a corporate image in investors’ minds. Comments on the proposal are due February 10; only 15 responses so far. One of them is ours. More as developments occur.