FASB Defines ‘In-Substance Nonfinancial Asset’ in New Standardby
In a move that simplifies GAAP, the Financial Accounting Standards Board (FASB) issued a new standard on Feb. 22 that clarifies existing guidance pertaining to the recognition of gains and losses from the derecognition of nonfinancial assets.
The new standard – Accounting Standards Update (ASU) No. 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 – amends Subtopic 610-20, which was originally issued in May 2014 as part of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606).
After the FASB issued its new revenue recognition standard, stakeholders told the board that it was unclear what type of transactions fell under the scope of Subtopic 610-20 because “in-substance nonfinancial asset” was not defined. They also said the guidance was confusing, leaving them unsure about how an entity should account for partial sales of nonfinancial assets after the revenue recognition standard takes effect.
Thus, the new standard issued on Wednesday defines an in-substance nonfinancial asset as “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. If substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets, then all of the financial assets promised to the counterparty are in-substance nonfinancial assets within the scope of Subtopic 610-20.”
Other changes include an exclusion of all businesses and nonprofit activities from the scope of Subtopic 610-20. Under the new guidance, all entities will be required to account for the derecognition of a business or nonprofit activity (except those related to conveyances of oil and gas mineral rights or contracts with customers) in accordance with FASB Accounting Standards Codification (ASC) Topic 810, Consolidation.
The new standard also includes guidance on the accounting for partial sales of nonfinancial assets, which are common in the real estate industry, and contributions of nonfinancial assets to a joint venture or other noncontrolled investee.
In addition, the amendments eliminate the exception in ASC Topic 860, Transfers and Servicing, for transfers of investments – including equity method investments – in real estate entities. The new standard also eliminates several accounting differences between transactions involving assets and those involving businesses.
The amendments in ASU 2017-05 differ from current GAAP primarily for the real estate industry but may affect other industries, such as power and utilities, alternative energy, life sciences, and shipping.
The amendments affect entities that:
- Enter into a contract to transfer to a noncustomer a nonfinancial asset, a group of nonfinancial assets, or an ownership interest in a consolidated subsidiary that is not a business or nonprofit activity.
- Historically had transactions within the scope of the real estate-specific derecognition guidance.
- Contribute nonfinancial assets that are not a business or a nonprofit activity to a joint venture or other noncontrolled investee.
For public entities, the standard takes effect for annual reporting periods beginning after Dec. 15, 2017, including interim reporting periods within that reporting period. For all other entities, the amendments take effect for annual reporting periods beginning after Dec. 15, 2018, and interim reporting periods within annual reporting periods beginning after Dec. 15, 2019.
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.