FASB issued an exposure draft that would clarify that the guidance in Accounting Standard Codification (ASC) Subtopic 360-20 applies to a transaction in which the parent of an in substance real estate subsidiary ceases to have a controlling financial interest (as described in Subtopic 810-10) in the subsidiary because of a default by the subsidiary on its nonrecourse debt.
Subtopic 810-10, Consolidation—Overall, requires that a parent deconsolidate a subsidiary if the parent ceases to have a controlling financial interest in the subsidiary. However, the ED says differing views exist in practice on whether the parent of an in substance real estate subsidiary must satisfy the criteria in Subtopic 360-20, Property, Plant, and Equipment—Real Estate Sales, to derecognize the real estate. Among other changes, the Proposed Accounting Standards Update (ASU), Property, Plant, and Equipment (Topic 360), Derecognition of in Substance Real Estate—a Scope Clarification (a consensus of the FASB Emerging Issues Task Force) , would amend ASC Paragraph 360-20-15-3 to specifically require application of the guidance contained in Subtopic 360-20 to those transactions.
The proposal says it would affect entities that cease to have a controlling financial interest (as described in Subtopic 810-10) in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt. The proposed amendments do 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 amendments would be applied prospectively to deconsolidation events occurring after the effective date. Prior periods would not be adjusted even if the reporting entity has continuing involvement with previously derecognized in substance real estate entities. The effective date will be determined after FASB’s Emerging Issues Task Force considers feedback on the ED. Comments are due Oct. 3.
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