4.4 Spin-Offs and Other Nonmonetary Exchanges Recorded at Carrying Amount
ASC 360-10
Long-Lived Assets to Be
Exchanged or to Be Distributed to Owners in a
Spinoff
40-4 For purposes of this Subtopic,
a long-lived asset to be disposed of in an exchange measured
based on the recorded amount of the nonmonetary asset
relinquished or to be distributed to owners in a spinoff is
disposed of when it is exchanged or distributed. If the
asset (asset group) is tested for recoverability while it is
classified as held and used, the estimates of future cash
flows used in that test shall be based on the use of the
asset for its remaining useful life, assuming that the
disposal transaction will not occur. In such a case, an
undiscounted cash flows recoverability test shall apply
prior to the disposal date. In addition to any impairment
losses required to be recognized while the asset is
classified as held and used, an impairment loss, if any,
shall be recognized when the asset is disposed of if the
carrying amount of the asset (disposal group) exceeds its
fair value. The provisions of this Section apply to
nonmonetary exchanges that are not recorded at fair value
under the provisions of Topic 845.
The glossary in ASC 845-10-20 defines a nonreciprocal transfer as “a
transfer of assets or services in one direction, either from an entity to its owners
(whether or not in exchange for their ownership interests) or to another entity, or
from owners or another entity to the entity. An entity’s reacquisition of its
outstanding stock is an example of a nonreciprocal transfer.” By contrast, a
reciprocal exchange involves an exchange of assets (or liabilities) or services with
another entity. One example of a nonreciprocal transfer is a spin-off.
The ASC master glossary defines a spin-off as “[t]he transfer of
assets that constitute a business by an entity (the spinnor) into a new legal
spun-off entity (the spinnee), followed by a distribution of the shares of the
spinnee to its shareholders, without the surrender by the shareholders of any stock
of the spinnor.”
ASC 845-10
Nonreciprocal Transfers With Owners
30-10 Accounting for the
distribution of nonmonetary assets to owners of an entity in
a spinoff or other form of reorganization or liquidation or
in a plan that is in substance the rescission of a prior
business combination shall be based on the recorded amount
(after reduction, if appropriate, for an indicated
impairment of value) (see paragraph 360-10-40-4) of the
nonmonetary assets distributed. Subtopic 505-60 provides
additional guidance on the distribution of nonmonetary
assets that constitute a business to owners of an entity in
transactions commonly referred to as spinoffs. A pro rata
distribution to owners of an entity of shares of a
subsidiary or other investee entity that has been or is
being consolidated or that has been or is being accounted
for under the equity method is to be considered to be
equivalent to a spinoff. Other nonreciprocal transfers of
nonmonetary assets to owners shall be accounted for at fair
value if the fair value of the nonmonetary asset distributed
is objectively measurable and would be clearly realizable to
the distributing entity in an outright sale at or near the
time of the distribution.
According to ASC 845-10-30-10 above, if a company spins off a business to its
shareholders, the assets transferred are recorded at their carrying amount (after
any necessary impairment adjustments). However, if the assets transferred do not
constitute a business, the transaction is not considered a spin-off, even if the
distribution is pro rata. Instead, it is considered a dividend-in-kind, which is
generally recorded at the fair value of the assets transferred.
The assets being distributed to owners in a spin-off (i.e., the
spinnee) must remain classified as held and used until the spin-off occurs. However,
because a plan to dispose of assets before the end of their previously estimated
useful life may be an indicator of impairment, an entity would be expected to
consider whether the long-lived assets of the spinnee are impaired on a
held-and-used basis. Because a spin-off is a nonreciprocal transfer (i.e., no
consideration is received in exchange), ASC 360-10-40-4 provides specific guidance
on testing the recoverability of the spinnee and explains that “the estimates of
future cash flows used in that test shall be based on the use of the asset for its
remaining useful life, assuming that the disposal transaction will not occur.”
Connecting the Dots
ASC 505-60-25-8 addresses whether a spin-off should be
accounted for in accordance with its legal form (a “forward spin”) or as a
“reverse spin” when the substance of the transactions differs from its legal
form. There is a rebuttable presumption that a spin-off should be accounted
for on the basis of its legal form (i.e., the legal spinnor is also the
accounting spinnor). However, ASC 505-60-25-8 provides several indicators
for an entity to consider when deciding whether the presumption to account
for the transaction on the basis of its legal form should be overcome. No
one factor should be considered determinative, so when the indicators are
mixed, the entity will need to use judgment to determine which entity is the
accounting spinnee. See Section 1.2.3
of Deloitte’s Roadmap Carve-Out Financial
Statements for more information.
ASC 360-10-40-4 requires that an impairment loss be recognized if
the carrying amount of the spinnee exceeds its fair value as of the date of the
spin-off. After recognizing any impairment, the spinnor should derecognize the
spinnee’s assets and liabilities on the date of the spin-off at their carrying
amounts in the spinnor’s financial statements. However, there is no U.S. GAAP
guidance on recognizing an impairment loss as of the distribution date for other
nonreciprocal transfers that are not spin-offs.
Bridging the GAAP
Under IFRS 5, a long-lived asset to be distributed to owners is measured at
fair value less costs to sell in a manner similar to assets held for sale.
Questions have arisen about situations in which a spinnor disposes of a business in a
spin-off before an initial public offering of the spinnor. In such cases, the
spinnor should reflect the disposal as either (1) a disposal to which
discontinued-operations reporting may or may not apply or, in limited circumstances,
(2) a change in the reporting entity. If the disposal is reflected as a change in
the reporting entity, the spinnee’s operations would be removed from the spinnor’s
financial statements as if the spinnor never held the business. SAB Topic 5.Z.7
provides the SEC staff’s views on this topic.
SEC Staff Accounting Bulletins
SAB Topic 5.Z.7,
Accounting for the Spin-Off of a Subsidiary
[Reproduced in ASC 505-60-S99-1]
Facts: A Company disposes of a business through the
distribution of a subsidiary’s stock to the Company’s
shareholders on a pro rata basis in a transaction that is
referred to as a spin-off.
Question: May the Company elect to characterize the
spin-off transaction as resulting in a change in the
reporting entity and restate its historical financial
statements as if the Company never had an investment in the
subsidiary, in the manner specified by FASB ASC Topic 250,
Accounting Changes and Error Corrections?
Interpretive Response: Not ordinarily. If the Company
was required to file periodic reports under the Exchange Act
within one year prior to the spin-off, the staff believes
the Company should reflect the disposition in conformity
with FASB ASC Topic 360. This presentation most fairly and
completely depicts for investors the effects of the previous
and current organization of the Company. However, in limited
circumstances involving the initial registration of a
company under the Exchange Act or Securities Act, the staff
has not objected to financial statements that retroactively
reflect the reorganization of the business as a change in
the reporting entity if the spin-off transaction occurs
prior to effectiveness of the registration statement. This
presentation may be acceptable in an initial registration if
the Company and the subsidiary are in dissimilar businesses,
have been managed and financed historically as if they were
autonomous, have no more than incidental common facilities
and costs, will be operated and financed autonomously after
the spin-off, and will not have material financial
commitments, guarantees, or contingent liabilities to each
other after the spin-off. This exception to the prohibition
against retroactive omission of the subsidiary is intended
for companies that have not distributed widely financial
statements that include the spun-off subsidiary. Also,
dissimilarity contemplates substantially greater differences
in the nature of the businesses than those that would
ordinarily distinguish reportable segments as defined by
FASB ASC paragraph 280-10-50-10 (Segment Reporting Topic).
All requirements in SAB Topic 5.Z.7 must be met for the spinnor to reflect the
transaction as a change in the reporting entity. Depending on the extent of judgment
an entity needs to use in applying SAB Topic 5.Z.7, as well as the significance of
the judgment applied to the spinnor’s financial statements, an entity contemplating
an initial public offering may consider consulting with the SEC staff on a prefiling
basis.
If the spinnor presents a spin-off as a disposal, it must also
assess whether the spin-off should be presented as a discontinued operation. Because
the spinnee must be classified as held and used until the spin-off occurs, even if
the spinnee is expected to meet the discontinued-operations reporting criteria, the
spinnor cannot present the spinnee’s operations, including the direct costs of the
spin-off, in discontinued operations until the shares are distributed to the owners.
Example 4-2
Company B, a public company, announced its
intent to spin off one of its segments, Segment H, into a
separate public company. Before its calendar year ending
December 31, 20X8, B filed a Form 10 with the SEC and
received approval from its board of directors and
shareholders to distribute H to its shareholders in a
spin-off. On December 27, 20X8, shares of B were traded as
“ex-dividend.” The record date of distribution was January
2, 20X9, and the distribution date was January 6, 20X9.
Under ASC 360-10-40-4, the asset group that
is to be distributed to owners in a spin-off is disposed of
when it is distributed. Until the shares are distributed to
the shareholders on January 6, 20X9, the asset group should
continue to be classified as held and used and continue to
be reported in continuing operations.