FASB issues guidance for derecognition of nonfinancial assets. This addresses sales, partial sales and transfers between parties of nonfinancial assets. There are several standards that can impact transactions involving the derecognition of nonfinancial assets, including the new revenue standard and new definition of a business.
Hi, I’m John Wayne, a senior manager in PwC’s National Office.
In February, the FASB changed the guidance for derecognition of nonfinancial assets, such as buildings or ships. This guidance addresses sales, partial sales and transfers between parties of nonfinancial assets. There are several standards that can impact transactions involving the derecognition of nonfinancial assets, so the first step is to determine whether or not you are in the scope of the new guidance.
To assist you in applying the framework, the standard includes a helpful flowchart.
The first step in the flowchart is to determine, if the counterparty in the transaction is a customer and if the goods are sold in the ordinary course of business; that is, they are inventory. If this is the case, the transaction is within the scope of the new revenue recognition standard.
Step two indicates that if the assets in the transaction meet the definition of a business, the transaction is accounted for as a sale of a business.
In the third step, you look to see if the asset qualifies as a financial asset. If it does, then you derecognize the asset using the existing transfers and servicing guidance for those assets.
And lastly, if you don’t fall into those categories, and no other scope exceptions apply, then you apply the amended guidance for nonfinancial assets.
The guidance applies the transfer of control concepts from the new consolidation and revenue standards. So for derecognition to occur, the party that transfers the assets must have lost control of them under the new consolidation guidance, and the party that receives the assets must have gained control of them under the new revenue standard. Once both conditions are met, the gain/loss is calculated as the difference between the consideration allocated to each distinct nonfinancial asset and its carrying amount. This may result in significant differences in the timing of gain recognition resulting from the transaction..
As an example, in a partial sale of real estate the retained interest is recorded at carryover basis under current guidance. However, under new guidance the retained interest will be recorded at fair value resulting in gain now, rather than into the future.
A few points I’d like to note.
First, given the FASB’s new definition of a business, more transactions will be treated as dispositions of nonfinancial assets, and therefore be subject to this guidance.
Second, the prescriptive accounting rules adddressing sales of real estate and in substance real estate have been eliminated. As a result, real estate transactions will now be subject to the same guidance as all other nonfinancial assets. This means that going forward, real estate will be derecognized according to its character, as either the transfer of a business, Inventory sold to a customer, financial asset for equity method investments, or nonfinancial assets in the scope of 610-20.
And finally, the amended standard also specifically addresses partial sales transactions, contributions of assets to joint ventures, in substance nonfinancial assets and many other nonmonetary exchanges.
The amendments to the derecognition of nonfinancial asset guidance are effective at the same time an entity adopts the new revenue recognition standard.