The Financial Accounting Standards Board has issued a proposed accounting standards update on gains and losses from the derecognition of nonfinancial assets, clarifying the scope of FASB’s asset derecognition guidance and accounting for partial sales of nonfinancial assets.
The proposed changes stem from FASB’s 2014 revenue recognition standard and subsequent guidance it issued later that year on gains and losses from the derecognition of nonfinancial assets.
The current scope of the guidance includes the transfer of in-substance nonfinancial assets, but various stakeholders have informed FASB there is no uniform view of what constitutes an in-substance nonfinancial asset because the term is not currently defined. Thus, they said they are uncertain about what types of transactions should be within the scope of the nonfinancial asset guidance.
In addition, the nonfinancial asset guidance currently does not address partial sales of nonfinancial assets. Partial sales are common in the real estate industry and 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. Because the nonfinancial asset guidance does not specifically address partial sales transactions, stakeholders have indicated they are uncertain about how an entity would account for those transactions upon the effective date of the amendments.
FASB also received feedback that certain scope exceptions to the nonfinancial asset guidance have created complexity and confusion on which model entities should apply. Stakeholders have informed FASB that the lack of clear guidance on contributions of nonfinancial assets to form joint ventures and the accounting differences between transfers of assets and businesses to equity method investees (including joint ventures) creates additional complexity. FASB added a project to its agenda in 2013 on clarifying the definition of a business with the objective of adding guidance to help entities evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or acquisitions (or disposals) of businesses.
The amendments in the proposed accounting standards update would clarify the scope of the nonfinancial asset guidance. Entities would apply the guidance to the derecognition of all nonfinancial assets and in-substance nonfinancial assets unless other specific guidance applies. The proposed amendments would clarify that an in-substance nonfinancial asset is an asset of the reporting entity included in either of the following:
1. A contract in which substantially all of the fair value of the assets promised to a counterparty is concentrated in nonfinancial assets
2. A consolidated subsidiary in which substantially all of the fair value of the assets in the subsidiary is concentrated in nonfinancial assets. Furthermore, the proposed amendments would clarify that an in substance nonfinancial asset is neither of the following:
1. A group of assets or subsidiary that is a business or nonprofit activity
2. An investment of a reporting entity (for example , 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 the nonfinancial asset guidance. However, that conclusion does not determine the unit of account, which is each distinct nonfinancial asset.
As a result of those proposed amendments, the derecognition of all businesses (including real estate businesses) and nonprofit activities would be accounted for in accordance with the derecognition and deconsolidation guidance. In addition, the proposed amendments would eliminate the exception in the financial asset guidance for transfers of investments (including equity method investments) in real estate entities.
The amendments in the proposed update also specify that a distinct nonfinancial asset would be the unit of account for applying the nonfinancial asset derecognition guidance. At contract inception, an entity would identify the nonfinancial assets and in substance nonfinancial assets in the contract and apply the revenue recognition guidance on identifying performance obligations to identify the distinct nonfinancial assets. The proposed amendments also specify that entities would be required to allocate consideration to each distinct nonfinancial asset by applying the guidance from the revenue recognition standard on allocating the transaction price to performance obligations.
The amendments also would provide guidance on the accounting for what often are referred to as partial sales of nonfinancial assets. The main provisions would include the following:
1. A reporting entity would account for a decrease in ownership interest of a subsidiary while it retains a control ling financial interest as an equity transaction and would not recognize a gain or loss.
2. 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.
3. If an entity meets the above criteria to derecognize a distinct nonfinancial asset, the entity would measure any retained noncontrolling ownership interest in the former subsidiary at fair value. The proposed amendments would eliminate Section 845-10-30 of the FASB Codification on exchanges of nonfinancial assets to another entity in exchange for a noncontrolling ownership interest in that entity. FASB viewed those transactions as similar to partial sales of nonfinancial assets and decided that they should be accounted for under the same accounting model in Subtopic 610-20 of the FASB Codification.
The proposed amendments also would require that the guidance on partial sales of nonfinancial assets be applied to contributions of an asset to a joint venture and other investees. In addition, conforming amendments have been made to the equity method guidance that would require an entity to recognize a full gain or loss in a transfer of a nonfinancial asset to an investee.
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