On February 22, 2017, the Financial Accounting Standards Board (FASB) issued 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.
The amendments in this Update are effective at the same time as the amendments in Update 2014-09, Revenue from Contracts with Customers (Topic 606). Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply ASU No. 2017-05 amendments to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. This content will become testable on the CPA exam January 1, 2018.
Who is affected?
The amendments in ASU No. 2017-05 primarily affect entities in the real estate industry, but may also affect other industries including power and utilities, alternative energy, life sciences, and shipping. ASU No. 2017-05 states that the following entities are affected:
- An entity that enters into a contract to transfer a nonfinancial asset to a noncustomer, a group of nonfinancial assets, or an ownership interest in a consolidated subsidiary that is not a business or nonprofit activity
- An entity that historically had transactions within the scope of the real estate-specific de-recognition guidance
- An entity that contributes nonfinancial assets that are not a business or a nonprofit activity to a joint venture or other noncontrolled investee
A contract can involve the transfer of both nonfinancial assets and financial assets (e.g., cash and receivables). ASU No. 2017-05 clarifies that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. If substantially all of the fair value of the assets 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, and are within the scope of Subtopic 610-20.
A contract that includes the transfer of ownership interests in one or more consolidated subsidiaries is within the scope of Subtopic 610-20 if substantially all of the fair value of the assets that are promised to the counterparty in the contract is concentrated in nonfinancial assets. To make that determination, an entity must evaluate the underlying assets in the consolidated subsidiaries to evaluate whether those assets are within the scope of Subtopic 610-20.
An in-substance nonfinancial asset can also include a financial asset that is held in an individual consolidated subsidiary within a contract if substantially all of the fair value of the assets (recognized and unrecognized) that are promised to the counterparty in that subsidiary is concentrated in nonfinancial assets.
An entity should identify each distinct nonfinancial asset or in-substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control of it. An entity should allocate consideration to each distinct asset by applying the guidance in Topic 606 on allocating the transaction price to performance obligations.
If an entity transfers ownership interests in a consolidated subsidiary and continues to have a controlling financial interest in that subsidiary, it does not derecognize the assets and liabilities of the subsidiary and accounts for the transaction as an equity transaction. Therefore, no gain or loss is recognized.
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Susan J. Cox, M.Acc., CPA is a Senior Technical Editor for Surgent CPA Review. Susan received her graduate and undergraduate degrees from Florida State University. Prior to joining Surgent, Susan worked as a technical editor for Thomson Reuters, an accounting instructor for the University of South Florida, a senior internal auditor for GTE, and an experienced senior auditor for Arthur Andersen & Co.