United States

Clarification of derecognition guidance for nonfinancial assets

FINANCIAL REPORTING INSIGHTS  | 

Questions have been raised about which types of transactions fall within the scope of the guidance in Financial Accounting Standards Board (FASB) Accounting Standards Codification Subtopic 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets, as originally issued in Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). Also, there is uncertainty about how an entity would account for partial sales of nonfinancial assets upon the effective date of ASU 2014-09. To address these and other issues, the FASB recently issued ASU 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.

As to the scope of the asset derecognition guidance in Subtopic 610-20, the guidance in ASU 2017-05:

  • Excludes all businesses and nonprofit activities from the scope of Subtopic 610-20. Therefore, the derecognition of all businesses and nonprofit activities (except those related to conveyances of oil and gas mineral rights or contracts with customers) should be accounted for in accordance with Subtopic 810-10, Consolidation—Overall.
  • Eliminates the scope exception in Subtopic 610-20 (as originally issued in ASU 2014-09), which would have required an entity to apply the guidance in Topic 860, Transfers and Servicing, to a transfer of an equity method investment unless the equity method investment is considered an in substance nonfinancial asset.
  • Includes contributions to joint ventures within the scope of Subtopic 610-20.
  • Defines an in substance nonfinancial asset to further clarify the scope of Subtopic 610-20. An in substance nonfinancial asset is a financial asset promised to a counterparty in a contract if substantially all of the fair value of the assets (recognized and unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial assets. The ASU also defines an in substance nonfinancial asset as a financial asset that is held in an individual consolidated subsidiary within a contract if substantially all the fair value of the assets (recognized and unrecognized) that are promised to the counterparty in that subsidiary is concentrated in nonfinancial assets.

ASU 2017-05 also provides guidance on the accounting for partial sales of nonfinancial assets. The ASU requires an entity to derecognize a distinct nonfinancial asset or distinct in substance nonfinancial asset in a partial sale transaction when it (a) does not have (or ceases to have) a controlling financial interest in the legal entity that holds the asset in accordance with Topic 810 and (b) transfers control of the asset in accordance with Topic 606. Once an entity transfers control of a distinct nonfinancial asset or distinct in substance nonfinancial asset, it is required to measure any noncontrolling interest it receives (or retains) at fair value. If an entity transfers ownership interests in a consolidated subsidiary and continues to have a controlling financial interest in that subsidiary, it does not derecognize the assets and liabilities of the subsidiary and accounts for the transaction as an equity transaction.

For public entities, ASU 2017-05 is effective for annual reporting periods beginning after December 15, 2017. For all other entities, the ASU is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019.