FASB Aims to Clarify Derecognition of Nonfinancial Assetsby
The Financial Accounting Standards Board (FASB) earlier this month released a proposed Accounting Standards Update to clarify the scope of guidance in 2014 on nonfinancial asset derecognition and partial sales of nonfinancial assets.
Comments on the proposal, Other Income—Gains and Losses From the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, will be accepted through Aug. 5 and can be submitted at the board’s website.
Both issues comprise the second phase of a three-phase project that FASB started in 2013 to clarify the definition of a business by adding guidance to help determine if transactions would be considered acquisitions or disposals of assets, or acquisitions or disposals of businesses.
In May 2014, the FASB issued its final accounting standard on revenue recognition – Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) – and this most recent proposal is in answer to concerns from stakeholders about the 2014 guidance and its subtopics 610-20 and 810-10.
Specifically, the FASB received the following concerns:
- The current nonfinancial asset guidance includes the transfer of “in-substance nonfinancial assets.” But there is no uniformity in what that includes because the term is not defined. That makes it unclear as to what types of transactions fall under the guidance.
- The guidance currently doesn’t address partial sales of nonfinancial assets. Yet, partial sales are common in real estate. Prior to Accounting Standards Update 2014-09, guidance was detailed on partial sales transactions. So, stakeholders were unclear about how to account for those transactions.
- Certain exceptions to the guidance have been confusing as to which model should be used.
- Additional complexity exists because of a 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).
The amendments in the proposed guidance would clarify the nonfinancial asset guidance in Subtopic 610-20, requiring entities to apply the guidance to the derecognition of all nonfinancial assets and in-substance nonfinancial assets unless other guidance applies.
The proposal seeks to clarify that an in-substance nonfinancial asset is an asset of the reporting entity included in one of the following: a contract in which substantially all of the fair value of the assets promised to a counterparty is concentrated in nonfinancial assets, or a consolidated subsidiary in which substantially all of the fair value of the assets in the subsidiary is concentrated in nonfinancial assets.
The proposal also seeks to clarify that an in-substance nonfinancial asset is neither a group of assets or subsidiary that is a business or nonprofit activity, nor an investment of a reporting entity (such as an equity method investment) regardless of whether the assets underlying the investment would be considered in-substance nonfinancial assets.
A determination 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 in Subtopic 610-20.
As a result of the proposal, the derecognition of all businesses (including real-estate businesses) and nonprofit activities would be accounted for according to Subtopic 810-10’s guidance on derecognition and deconsolidation.
The proposal also would eliminate the exception in the financial asset guidance for transfers of investments (including equity method investments) in real-estate entities.
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.