Alert: FASB Accounting Standards Update No. 2017-05 - Other Income: Gains and Losses from the Derecognition of Non-financial Assets

Category: US GAAP

Alert: FASB Accounting Standards Update No. 2017-05 - Other Income: Gains and Losses from the Derecognition of Non-financial Assets

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 Non-financial Assets (Subtopic 610-20). The ASU seeks to clarify the scope of Subtopic 610-20 as well as provide guidance for partial sales of non-financial assets for the following types of entities:

  • Entities that enter into contracts with non-customers to transfer individual or groups of non-financial assets or ownership interests in a consolidated subsidiary that are not a business or non-profit activities.
  • Entities with historical transactions within the scope of the real-estate specific derecognition guidance.
  • Entities that contribute non-financial assets that are not a business or non-profit activities to a joint venture or another non-controlled investee.

Scope

The ASU explicitly excludes businesses and non-profit activities from the scope of Subtopic 610-20. The derecognition of all businesses and non-profit activities, except for those related to conveyances of oil and gas mineral rights or contracts with customers, should be accounted for in accordance with Subtopic 810-10 Consolidation – Overall. Further scope exclusions were included; refer to paragraph 610-20-15-4 for a complete list.

Lastly, the amendments clarify that the transfer of an ownership interest in a consolidated subsidiary falls within the scope of Subtopic 610-20 if all of the assets in the subsidiary are non-financial assets and/or in-substance non-financial assets.

Definition of In-substance Non-financial Asset

The ASU clarifies the definition of an ‘in-substance non-financial asset’ as a financial asset that is promised in a contract, or an individual consolidated subsidiary within a contract, in which substantially all of the fair value of the assets (recognized and unrecognized) promised in the contract is concentrated in non-financial assets.

Distinct Non-financial Assets

The amendments also clarify that each distinct non-financial asset or in-substance non-financial asset should be separately identified and derecognized when the entity loses control of it. The allocation of consideration related to each distinct asset should be consistent with the guidance on allocating the transaction price to performance obligations in Topic 606 Revenue from Contracts with Customers.

Partial Sales

The ASU requires an entity to derecognize a distinct non-financial asset or a distinct in-substance non-financial asset in a partial sale transaction when both of the following conditions are met:

  • The entity does not, or ceases to, have a controlling interest in the legal entity that holds the asset in accordance with Topic 810 Consolidations; and
  • The entity transfers control of the asset in accordance with Topic 606.

Once control is transferred, the entity must measure any non-controlling interest it receives or retains at fair value. If an entity retains the controlling financial interest of a subsidiary after a transfer of ownership interests, the transaction is accounted for as an equity transaction without the recognition of any gain or loss as the consolidated assets and liabilities are not derecognized.

The amendments also clarify that partial sales transactions within the scope of Subtopic 610-20 include contributions of non-financial assets to a joint venture or other non-controlled investee. In addition, the amendments require that an entity recognize a full gain or loss on transfers of non-financial assets within the scope of Subtopic 610-20 to equity method investees. The guidance in this ASU supersedes that found in the Exchanges of a Non-financial Asset for a Non-controlling Interest Subsection of Topic 845 Non-monetary Transactions due to their similarity.

Effective Date and Transition

The amendments are effective concurrently with ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606) as follows:

  • Public entities – annual reporting periods beginning after December 15, 2017, including interim periods therein.
  • All other entities – annual reporting periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019.

A public entity may be any one of the following:

  • A public business entity.
  • A not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed or quoted on an exchange or an over-the-counter market.
  • An employee benefit plan that files or furnishes financial statements with or to the Securities Exchange Commission (SEC).

Earlier adoption is allowed as follows:

  • Public entities – only as of annual reporting periods beginning after December 15, 2016, including interim periods therein.
  • All other entities:
    • As of annual reporting periods beginning after December 15, 2016, including interim periods therein; or
    • As of annual reporting periods beginning after December 15, 2016, including interim periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance.

If early adopting, the entity must apply the amendments in ASU No. 2014-09 at the same time.

An entity can elect to apply this ASU and ASU 2014-09 using the same, or different, transition methods. The entity may apply this ASU under one of the following two methods:

  • Retrospectively to each period presented in the financial statements in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 250-10-45-10 (i.e., the full retrospective approach); or
  • Retrospectively with a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption (i.e., the modified retrospective approach).

Regardless of the transition method selected, the amended definition of a business in ASU No. 2017-01 Business Combinations (Topic 805): Clarifying the Definition of a Business must be applied to the contracts.If a transaction previously recorded involving the disposal of a business no longer qualifies as a business, the entity should not reinstate amounts previously allocated to goodwill associated with that disposal.

To access the full script of ASU No. 2014-09, refer to Section A, Section B, and Section C. To access a summary of the ASU in MNP’s Financial Reporting Library, click here.

To access the full script of ASU No. 2017-01, click here. To access a summary of the ASU in MNP’s Financial Reporting Library, click here.

To access the full script of ASU No. 2017-05, click here.

This communication contains a general overview of the topic and is current as of February 22, 2017. The application of the principles addressed will depend upon the particular facts and circumstances of each individual case. Accordingly, this publication is not a substitute for professional advice and we recommend that any decisions you take about the application or not of any of the information presented be made in consultation with a qualified professional, who can address any variance that may be required to reflect your circumstances. Please contact your local MNP representative for customized assistance with the application of this material. MNP LLP accepts no responsibility or liability for any loss related to any person's use of or reliance upon this material. © MNP LLP 2017. All rights reserved.

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Michelle Balmer

Michelle Balmer CPA, CA

Vice President, Assurance

Michelle Balmer, CPA, CA, is a Senior Assurance Services Partner with MNP. With 14 years of experience in public practice, Michelle helps a broad range of public and privately held companies in a variety of industries. She also works on special projects, including costing studies, benchmarking and best-practice studies, operational analyses, litigation support and due diligence.

As a key member of MNP's Assurance team, Michelle has played an instrumental role in assurance policy development, implementing accounting and assurance standards firm-wide and educating assurance practitioners regarding methodologies and new pronouncements. She also provides technical advice and consultation on accounting and assurance issues, as well as on rules of professional conduct issues, to all MNP practitioners.

Michelle was certified a Chartered Accountant (CA) after obtaining a Bachelor of Commerce degree from the University of Alberta. She has been actively involved with the Institute of Chartered Accountants of Alberta, including the Chartered Accountants School of Business, in an instructional and marketing capacity. An avid volunteer, she has assisted numerous groups such as the Easter Seals of Alberta, Paralympic Sports Association and Junior Achievement of Northern Alberta.