United States

Proposed 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 (ASC) Subtopic 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets. Further, neither Subtopic 610-20 nor Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), specifically addresses what often are referred to as partial sales of nonfinancial assets, so there is uncertainty about how an entity would account for those transactions upon the effective date of ASU 2014-09. To address these and other issues, the FASB recently issued a proposed ASU, 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.

Per the proposed ASU, the guidance in Subtopic 610-20 would be applied to the derecognition of all nonfinancial assets and in substance nonfinancial assets unless other specific guidance applies. The proposed ASU would clarify that an in substance nonfinancial asset is an asset of the reporting entity included in either (a) a contract in which substantially all of the fair value of the assets promised to a counterparty is concentrated in nonfinancial assets, or (b) a consolidated subsidiary in which substantially all of the fair value of the assets in the subsidiary is concentrated in nonfinancial assets. Also, the proposed ASU would clarify that an in substance nonfinancial asset is neither (a) a group of assets or subsidiary that is a business or nonprofit activity nor (b) an investment of a reporting entity (e.g., an equity-method investment) regardless of whether the assets underlying the investment would be considered in substance nonfinancial assets. A conclusion that a contract or subsidiary includes in substance nonfinancial assets means that each asset promised in the contract or in the subsidiary is within the scope of Subtopic 610-20. However, the unit of account for applying the nonfinancial asset derecognition guidance is each distinct nonfinancial asset.

The proposed ASU also would provide guidance on the accounting for partial sales of nonfinancial assets, which typically include transactions in which the seller retains an equity interest in the entity that owns the asset or has an equity interest in the buyer. The main provisions of this guidance would include:

  • A reporting entity would account for a decrease in ownership interest of a subsidiary while it retains a controlling financial interest as an equity transaction and would not recognize a gain or loss.
  • A reporting entity would derecognize a distinct nonfinancial asset in a partial sale transaction when it no longer has a controlling financial interest in the former subsidiary and has transferred control of the nonfinancial asset in accordance with Topic 606.
  • If an entity meets the criteria in the immediately preceding bullet point to derecognize a distinct nonfinancial asset, the entity would measure any retained noncontrolling ownership interest in the former subsidiary at fair value.

The proposed ASU is available for comment until August 5, 2016.