4.5 Other Nonreciprocal Transfers Other Than Spin-Offs
While other nonreciprocal transfers of long-lived assets (e.g.,
split-offs, dividends-in-kind, common-control transfers, or donations) are not
specifically addressed in U.S. GAAP, we believe that such transfers are also
disposals other than by sale, regardless of whether they are measured at historical
cost or fair value in the transferring entity’s books. Thus, we believe that, by
analogy to the guidance in ASC 845-10-30-10, the assets being distributed in a
nonreciprocal exchange should remain classified as held and used until the
distribution occurs.
4.5.1 Common-Control Transactions
As discussed in Appendix B.4.3 of Deloitte’s Roadmap
Business
Combinations, the transferring entity typically accounts
for the transfer of assets in a common-control transaction as a disposition in
accordance with ASC 360-10. We believe that, while not specifically addressed in
the guidance, the net assets to be disposed of in a common-control transaction
should be classified as held and used until they are exchanged or distributed in
the same manner as net assets to be distributed in a spin-off. Therefore, the
net assets to be transferred in a common-control transaction should be
considered disposed of “other than by sale” and should not be classified as held
for sale in the periods before they are exchanged or distributed, even if the
transferring entity will receive consideration as part of the exchange.
ASC 360-10-40-4 requires that a spinnor recognize an impairment
loss on the date on which long-lived assets are distributed in a spin-off if the
carrying amount of the assets (disposal group) exceeds their fair value. While a
common-control transaction is accounted for as a disposal other than by sale in
the same manner as a spin-off transaction, we do not believe that the
transferring entity is required to recognize an impairment loss if the carrying
amount of the assets to be distributed in a common-control transaction exceeds
their fair value. Rather, we believe that the FASB intended for the guidance in
ASC 360-10-40-4 to address the impairment guidance in ASC 845-10-30-10
explicitly referring to a distribution to owners in a spin-off transaction and
that this guidance should not be extended to transfers of assets under common
control of the same parent.
However, ASC 360-10-35-21 requires that an entity test a
long-lived asset (asset group) classified as held and used for impairment
whenever “events or changes in circumstances indicate that its carrying amount
may not be recoverable.” Therefore, the transferring entity should consider
whether the common-control transaction indicates that the long-lived assets
(asset group) to be transferred should be tested for impairment under the
held-and-used model before the disposal date. ASC 360-10-40-4 clarifies that
even if the entity intends to distribute assets in a spin-off transaction, the
assets should be tested for recoverability, if necessary, as if they are held
and used, and the estimates of future cash flows used in the recoverability test
should be based on the use of the assets for their remaining useful life,
provided that the disposal transaction will not occur. We believe that the same
approach should be applied to assets to be distributed in a common-control
transaction if the transferring entity determines that a triggering event has
occurred and that the assets should be tested for recoverability before they are
transferred.
4.5.2 Non–Pro Rata Split-Off of a Segment
Unlike a spin-off, which is a pro rata distribution of subsidiary stock, a
split-off may involve a non–pro rata distribution because some of the parent
shareholders may not participate in the exchange. As indicated in EITF Issue
01-2, “federal income tax law states that a split-off is a transaction in which
a parent company exchanges its stock in a subsidiary for parent company stock
held by its shareholders. For federal income tax purposes, the exchange of
shares need not be pro rata to all shareholders, or even include all
shareholders, in order to be considered a tax-free split-off.”
ASC 845-10
Accounting for
Reorganizations Involving a Non-Pro-Rata Split-Off
of Certain Nonmonetary Assets to
Owners
30-12 A
non-pro-rata split-off of a segment of a business in a
corporate plan of reorganization shall be accounted for
at fair value.
30-13 A
split-off of a targeted business, distributed on a pro
rata basis to the holders of the related targeted stock,
shall be accounted for at historical cost. If the
targeted stock was created in contemplation of the
subsequent split-off, the two steps (creation of the
targeted stock and the split-off) cannot be separated
and shall be viewed as one transaction with the
split-off being accounted for at fair value.
In a non–pro rata split-off of a component of an entity, fair value is determined
on the basis of either the stock received by the parent-entity shareholders or
the parent-entity stock, whichever is more clearly determinable. Thus, any gain
or loss on the distribution will be determined on the basis of the difference
between the carrying amount of the segment and the fair value of either (1) the
stock of the component received by the parent-entity shareholders or (2) the
parent-entity stock reacquired by the parent from the parent-entity
shareholders. The gain or loss should be included in the income statement. If
the split-off results in a full divestiture of the segment (or a component of an
entity) and the divestiture qualifies as a discontinued operation under ASC
205-20, the gain or loss should be reflected in discontinued operations.
Example 4-4
Entity A, a closely held nonpublic company, has four
operating segments. Entity A's shareholders, X, Y, and
Z, each own one-third of the voting common stock. In a
plan of reorganization, A will split off Segment 1 in
exchange for all the voting common stock in A held by X.
Because the distribution by A of Segment 1 to an owner
is not made on a pro rata basis to all shareholders of
record, A will account for the exchange at fair
value.