FASB clarifies scope of asset derecognition guidance

By Ken Tysiac

FASB issued a standard Wednesday that clarifies the scope of its asset derecognition guidance and adds accounting guidance for partial sales of nonfinancial assets.

The guidance is included in Accounting Standards Update 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.

The amendments differ from current GAAP primarily for the real estate industry but may also affect other industries such as power and utilities, alternative energy, life sciences, and shipping.

Under the new guidance, all entities will be required to account for the derecognition of a business or not-for-profit activity (except those related to conveyances of oil and gas mineral rights or contracts with customers) in accordance with consolidation guidance in FASB Accounting Standards Codification (ASC) Topic 810. The amendments eliminate the scope exception in current GAAP that exempts investments that are considered in-substance real estate from the requirement that an entity derecognize an equity method investment in accordance with ASC Topic 860, Transfers and Servicing.

The amendments also eliminate several accounting differences between transactions involving assets and transactions involving businesses. In addition, the new guidance is intended to reduce the potential for further diversity in practice by defining an “in-substance nonfinancial asset.”

The standard defines an “in-substance nonfinancial asset” as a financial asset held in an individual consolidated subsidiary within a contract if substantially all the fair value of the assets (recognized and unrecognized) that are promised to the counterparty in that subsidiary is concentrated in nonfinancial assets.

The amendments affect:

  • An entity that enters 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 not-for-profit activity.
  • An entity that historically had transactions within the scope of the real estate-specific derecognition guidance.
  • An entity that contributes nonfinancial assets that are not a business or a not-for-profit activity to a joint venture or other noncontrolled investee.

The standard takes effect for public entities 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.

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is a JofA editorial director.

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