Companies Must Do Better at Disclosing Government Assistance

The federal government announced last month that it will grant up to $8.5 billion to Intel Corp., one of the first of the $39 billion in grants it will make under the CHIPS and Science Act.

But the CHIPS and Science Act is just the tip of the fiscal iceberg. In 2023, state and federal governments made direct grants to more than 2,200 businesses, according to a database compiled from government records by the watchdog group Good Jobs First.

Although taxpayers are the ones ultimately paying for these grants, they often have a hard time finding out what they’re paying for. But transparency for taxpayers and other stakeholders is coming, thanks to the Financial Accounting Standards Board, which is developing a new rule on disclosing government assistance in financial reports.

The new rule would be welcome news. In published research, I and co-author Ryan Hess of Oklahoma State University looked at the 50 largest assistance packages between 2003 and 2019, as tallied by Good Jobs First. We found 28 of the companies didn’t mention government assistance at all in their financial statements, and only five disclosed any details about assistance received and commitments made in exchange.

FASB is building its new rule another rule it issued in 2021. The Accounting Standards Update 2021-10 requires companies to disclose—for fiscal years starting after Dec. 15, 2021—information about the transactions’ nature, their terms and conditions, and line items on the financials affected by the transactions.

While ASU 2021-10 merely requires companies to disclose government aid, the rule under development would set uniform standards for how they account for it in financial reports. It would enable investors to compare one company’s financials to another, apples to apples.

FASB Chair Richard Jones, in speaking about the potential rule, has noted that government grants “may become more prevalent in the future, and it makes sense for us to define a model on accounting for government grants to reduce diversity and increase transparency.”

In the meantime, taxpayers and other stakeholders have other ways to learn about what grants government may be giving to businesses and what strings have been attached.

Good Jobs First is an excellent first stop. Its Subsidy Tracker is searchable by company, state, year, and subsidy type. From there, a stakeholder can search local media and ask local officials for more details about specific assistance packages.

Disclosing Aid

Why is disclosure important? Companies say it’s costly, because revealing government assistance can generate both political pushback and demands for aid from other businesses.

But lack of disclosure carries potential costs to taxpayers when they don’t know where their dollars are going or to what conditions their city’s major employers have agreed.

To get a grant, a company often must make measurable commitments. It might agree to hire a certain number of new employees locally or to set wages at a certain level. And it may suffer penalties if it doesn’t hit targets—up to and including giving the money back.

If a company fails to meet an obligation and loses its grant, it might not be able to stay in the community. Closing its operations could remove both investment and jobs from the local economy.

Nondisclosure can cost shareholders and prospective investors, too. If they aren’t informed about government assistance, they don’t have a complete picture of a company’s finances.

Such aid can have tangible impacts on company balance sheets. Our research found that corporations that receive government cash infusions have debt that’s 2 to 3 percentage points lower than companies that haven’t received them.

A likely reason is that the companies factor the grants into their financing upfront. Government aid reduces the need to borrow elsewhere for capital investments.

Concealing government grants prevents investors from fully understanding a company’s risk profile. If it fails to meet all its commitments, it might have to repay all or part of the assistance at some point, dragging down its stock price. It also might have to borrow to make up for the lost money, increasing its debt-to-equity ratio and its cost of capital.

In the big picture, government grants to corporations can bring substantial benefits to taxpayers. They can directly create jobs and, even more importantly, they can leverage larger amounts of private investment into emerging industries such as electric vehicles.

FASB’s new and upcoming rules acknowledge the public’s right to know about such grants. Markets run most efficiently when financial information is transparent and everyone has equal access. When companies benefit from government assistance, their stakeholders will, too.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Lillian Mills is dean at the University of Texas at Austin’s McCombs School of Business.

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