FASB Clarifies Scope of Derecognition of In Substance Real Estate


FASB on Wednesday issued Accounting Standards Update (ASU) no. 2011-10, Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate—a Scope Clarification (a consensus of the FASB Emerging Issues Task Force).

The ASU clarifies that the guidance in Accounting Standard Codification (ASC) Subtopic 360-20, Property, Plant, and Equipment—Real Estate Sales, applies to a parent that ceases to have a controlling financial interest, as described in ASC Subtopic 810-10, Consolidation, in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt. 

As a result, the parent (reporting entity) would not satisfy the requirements to derecognize the in substance real estate before the legal transfer of the real estate to the lender and the extinguishment of the related nonrecourse debt. Even if the reporting entity ceases to have a controlling financial interest under Subtopic 810-10, the reporting entity would continue to include the real estate, debt and the results of the subsidiary’s operations in its consolidated financial statements until the legal title to the real estate is transferred to legally satisfy the debt.

The guidance is intended to emphasize that accounting for such transactions “is based on their substance rather than their form,” FASB says in the ASU. The ASU includes examples illustrating the changes.

The ASU does not address whether the guidance in Subtopic 360-20 would apply to other circumstances when a parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate.

The ASU’s amendments should be applied on a prospective basis to deconsolidation events occurring after the effective date. Prior periods are not to be adjusted even if the reporting entity has a continuing involvement with previously derecognized in substance real estate entities.

For public entities, the amendments are effective for fiscal years and interim periods within those years, beginning on or after June 15, 2012. The amendments take effect for nonpublic entities for fiscal years ending after Dec. 15, 2013, and interim and annual periods after that date.

Early adoption is permitted.

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