Chapter 17 — Sales of Nonfinancial Assets Within the Scope of ASC 610-20

17.2 Scope of ASC 610-20

ASC 610-20

15-2 Except as described in paragraph 610-20-15-4, the guidance in this Subtopic applies to gains or losses recognized upon the derecognition of nonfinancial assets and in substance nonfinancial assets. Nonfinancial assets within the scope of this Subtopic include intangible assets, land, buildings, or materials and supplies and may have a zero carrying value. In substance nonfinancial assets are described in paragraphs 610-20-15-5 through 15-8.

Subparagraph superseded by Accounting Standards Update No. 2017-05.
Subparagraph superseded by Accounting Standards Update No. 2017-05.

15-3 The guidance in this Subtopic applies to a transfer of an ownership interest (or a variable interest) in a consolidated subsidiary (that is not a business or nonprofit activity) only if all of the assets in the subsidiary are nonfinancial assets and/or in substance nonfinancial assets.

Subparagraph superseded by Accounting Standards Update No. 2017-05.
Subparagraph superseded by Accounting Standards Update No. 2017-05.
Subparagraph superseded by Accounting Standards Update No. 2017-05.
Subparagraph superseded by Accounting Standards Update No. 2017-05.
Subparagraph superseded by Accounting Standards Update No. 2017-05.

15-4 The guidance in this Subtopic does not apply to the following:

A transfer of a nonfinancial asset or an in substance nonfinancial asset in a contract with a customer, see Topic 606 on revenue from contracts with customers
A transfer of a subsidiary or group of assets that constitutes a business or nonprofit activity, see Section 810-10-40 on consolidation
Sale and leaseback transactions within the scope of Subtopic 842-40 on leases
A conveyance of oil and gas mineral rights within the scope of Subtopic 932-360 on extractive activities — oil and gas
A transaction that is entirely accounted for in accordance with Topic 860 on transfers and servicing (for example, a transfer of investments accounted for under Topic 320 on investments — debt securities, Topic 321 on investments — equity securities, Topic 323 on investments — equity method and joint ventures, Topic 325 on investments — other, Topic 815 on derivatives and hedging, and Topic 825 on financial instruments)
A transfer of nonfinancial assets that is part of the consideration in a business combination within the scope of Topic 805 on business combinations, see paragraph 805-30-30-8
A nonmonetary transaction within the scope of Topic 845 on nonmonetary transactions
A lease contract within the scope of Topic 842 on leases
An exchange of takeoff and landing slots within the scope of Subtopic 908-350 on airlines — intangibles
A contribution of cash and other assets, including a promise to give, within the scope of Subtopic 720-25 on other expenses — contributions made or within the scope of Subtopic 958-605 on not-for-profit entities — revenue recognition
A transfer of an investment in a venture that is accounted for by proportionately consolidating the assets, liabilities, revenues, and expenses of the venture as described in paragraph 810-10-45-14
A transfer of nonfinancial assets or in substance nonfinancial assets solely between entities or persons under common control, such as between a parent and its subsidiaries or between two subsidiaries of the same parent.

ASC 610-20 (as amended by ASU 2017-05) applies to all nonfinancial assets, not only to those within the scope of ASC 350 and ASC 360, if there is no other applicable guidance. For each nonfinancial asset, an entity would first determine whether the transfer of the nonfinancial asset is within the scope of ASC 606, ASC 810, or any other U.S. GAAP. For example, if the nonfinancial asset is an output of the entity’s ordinary business activities (e.g., a home builder’s sale of real estate), the arrangement would be accounted for under ASC 606. However, if the nonfinancial asset is not an output of the entity’s ordinary business activities (e.g., a financial services company’s sale of its headquarters), and not within the scope of other applicable guidance, ASC 610-20 would apply.

Connecting the Dots

ASU 2014-09 replaces all of the real estate sales guidance in ASC 360-20 (formerly FASB Statement 66).

In their analysis of whether control has been transferred under the revenue standard, entities need to critically evaluate (1) whether it is “probable” that they will collect the consideration to which they will be entitled in exchange for transferring the real estate and (2) whether a seller’s postsale involvement should be accounted for as a separate performance obligation (i.e., whether the postsale involvement is distinct from the real estate).

An entity would continue to apply the derecognition guidance in ASC 810-10-40 when transfers or sales are not “in-substance nonfinancial assets” (see Section 17.2.1) and the nonfinancial assets are held within a subsidiary or are a group of assets that meets the definition of a business. Various types of transactions are subject to the scope exception in ASC 610-20-15-4. Among the most common of these transactions are sale-and-leaseback transactions (e.g., real estate sale-and-leaseback transactions), in which an owner of an asset sells the asset and then leases it back from the buyer. Sale-and-leaseback transactions should be accounted for under ASC 842-40, which indicates that an entity should refer to the guidance in ASC 606-10-25-30 to assess whether and, if so, when control of an in-substance nonfinancial asset has been transferred to a buyer-lessor. Further, ASC 610-20 does not apply to certain arrangements related to oil and gas mineral rights (i.e., those within the scope of ASC 932-360) or nonmonetary transactions (i.e., those within the scope of ASC 845-10).

The decision tree below, which is adapted from ASU 2017-05, can help an entity determine whether assets promised to a counterparty are within the scope of ASC 610-20.

17.2.1 In-Substance Nonfinancial Assets

In addition to nonfinancial assets, ASC 610-20 (as amended by ASU 2017-05) applies to the derecognition of in-substance nonfinancial assets. The FASB added the definition of an in-substance nonfinancial asset to the ASC master glossary.

ASC 610-20

In Substance Nonfinancial Assets

15-5 An in substance nonfinancial asset is a financial asset (for example, a receivable) promised to a counterparty in a contract if substantially all of the fair value of the assets (recognized and unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial assets. If substantially all of the fair value of the assets that are promised to a counterparty in a contract is concentrated in nonfinancial assets, then all of the financial assets promised to the counterparty in the contract are in substance nonfinancial assets. For purposes of this evaluation, when a contract includes the transfer of ownership interests in one or more consolidated subsidiaries that is not a business, an entity shall evaluate the underlying assets in those subsidiaries.

15-6 When a contract includes the transfer of ownership interests in one or more consolidated subsidiaries that is not a business, and substantially all of the fair value of the assets promised to a counterparty in the contract is not concentrated in nonfinancial assets, an entity shall evaluate whether substantially all of the fair value of the assets promised to the counterparty in an individual subsidiary within the contract is concentrated in nonfinancial assets. If substantially all of the fair value of the assets in an individual subsidiary is concentrated in nonfinancial assets, then the financial assets in that subsidiary are in substance nonfinancial assets. (See Case C of Example 1 in paragraphs 610-20-55-9 through 55-10.)

15-7 When determining whether substantially all of the fair value of the assets promised to a counterparty in a contract (or an individual consolidated subsidiary within a contract) is concentrated in nonfinancial assets, cash or cash equivalents promised to the counterparty shall be excluded. Also, any liabilities assumed or relieved by the counterparty shall not affect the determination of whether substantially all of the fair value of the assets transferred is concentrated in nonfinancial assets.

15-8 If all of the assets promised to a counterparty in an individual consolidated subsidiary within a contract are not nonfinancial assets and/or in substance nonfinancial assets, an entity shall apply the guidance in paragraph 810-10-40-3A(c) or 810-10-45-21A(b)(2) to determine the guidance applicable to that subsidiary.

On the basis of the above definition of an in-substance nonfinancial asset, all business or nonprofit activities are excluded from the scope of ASC 610-20 and should be accounted for under the consolidation guidance in ASC 810-10. Further, all investments should be accounted for under the guidance in ASC 860 on transfers and servicing transactions, regardless of whether they are business or nonprofit activities or are in-substance nonfinancial assets.

The examples below illustrate how an entity would determine whether a contract includes an in-substance nonfinancial asset.

Example 17-1

An entity enters into a contract with a counterparty (not a customer) to transfer a piece of equipment subject to a lease agreement (i.e., the equipment is presently being leased and used by an independent third party). As of the sale date, the equipment has a fair value of $8 million. In addition, the sale contract transfers the outstanding receivable balance of the lease (i.e., a financial asset) with a fair value of $250,000.

The assets transferred do not meet the definition of a business under ASU 2017-01. Since the entity concludes that substantially all of the fair value of the assets promised in the contract is concentrated in nonfinancial assets, the receivables promised in the contract meet the definition of in-substance nonfinancial assets. Thus, the contract, including both assets (the equipment and the receivables), is within the scope of ASC 610-20 and therefore should be accounted for in accordance with the derecognition guidance of that subtopic.

Example 17-2

Assume the same facts as in the example above, except that the fair value of the receivables is $1.5 million. In this example, the entity concludes that substantially all of the fair value of the assets promised in the contract is not concentrated in nonfinancial assets and that as a result, the financial assets in the contract do not meet the definition of in-substance nonfinancial assets. Therefore, as further discussed in Section 17.2.2, the entity should apply the guidance in ASC 606-10-15-4 in determining the separation and measurement of the assets in the contract. The equipment (a nonfinancial asset) is within the scope of ASC 610-20 and therefore should be accounted for in accordance with the derecognition guidance of that subtopic, and the receivables should be accounted for under ASC 860 or other U.S. GAAP, if applicable.

17.2.2 Contracts Partially Within the Scope of Other U.S. GAAP

ASC 610-20

Contracts Partially Within the Scope of Other Topics

15-9 If the promises to a counterparty in a contract are not all nonfinancial assets or all nonfinancial assets and in substance nonfinancial assets, a contract may be partially within the scope of this Subtopic and partially within the scope of other Topics. For example, in addition to transferring nonfinancial assets and in substance nonfinancial assets that are within the scope of this Subtopic, an entity may issue a guarantee to the counterparty that is within the scope of Topic 460 on guarantees. An entity shall apply the guidance in paragraph 606-10-15-4 to determine how to separate and measure one or more parts of a contract that are within the scope of other Topics. (See also Case A of Example 1 in paragraphs 610-20-55-2 through 55-5 and Case C of Example 1 in paragraphs 610-20-55-9 through 55-10.)

Assets in a legal contract or in a consolidated subsidiary can be transferred to a counterparty. The form of the transaction affects which guidance an entity should apply when determining how to account for a transaction in which not all assets promised to a counterparty are nonfinancial assets or in-substance nonfinancial assets.

17.2.2.1 Sale or Transfer Through a Legal Contract

If assets are transferred to a counterparty in a legal contract and the contract is partially within the scope of ASC 610-20 and partially within the scope of other guidance (i.e., not all assets promised in the contract are nonfinancial and in-substance nonfinancial assets), an entity should identify each unit of account and apply the separation and allocation guidance in ASC 606. Cases A and B of Example 1 in ASC 610-20, which are reproduced below, illustrate the application of this guidance.

ASC 610-20

Example 1 — Scope

Case A — Nonfinancial Assets, In Substance Nonfinancial Assets, and a Guarantee

55-2 Seller enters into a contract to transfer real estate, the related operating leases, and accounts receivable to Buyer. Seller guarantees Buyer that the cash flows of the property will be sufficient to meet all of the operating needs of the property for two years after the sale. In the event that the cash flows are not sufficient, Seller is required to make a payment in the amount of the shortfall.

55-3 Seller concludes that the assets promised in the contract are not a business within the scope of Topic 810 on consolidation and are not an output of Seller’s ordinary activities within the scope of Topic 606 on revenue from contracts with customers. In addition, assume that Seller concludes that substantially all of the fair value of the assets promised in the contract is concentrated in nonfinancial assets (that is, substantially all of the fair value is concentrated in the real estate and in-place lease intangible assets). Therefore, the accounts receivable promised in the contract are in substance nonfinancial assets. In accordance with the guidance in this Subtopic, all of the assets in the contract, including the accounts receivable, are within the scope of this Subtopic.

55-4 Seller concludes that the guarantee, which is a liability of Seller, is within the scope of Topic 460 on guarantees. Therefore, Seller would apply the guidance in paragraph 606-10-15-4 to separate and measure the guarantee as described in paragraph 610-20-15-9.

55-5 Seller’s conclusions would be the same if it transferred the real estate, leases, and receivables by transferring ownership interests in a consolidated subsidiary. That is, Seller would still conclude that all of the assets in the subsidiary are nonfinancial assets and in substance nonfinancial assets within the scope of this Subtopic and that the guarantee is within the scope of Topic 460.

Case B — Nonfinancial Assets and Financial Assets

55-6 Entity X enters into a contract to transfer machinery and financial assets, both of which have significant fair value. Entity X concludes that the assets promised in the contract are not a business within the scope of Topic 810 and are not an output of the entity’s ordinary activities within the scope of Topic 606. Entity X also concludes that substantially all of the fair value of the assets promised in the contract is not concentrated in nonfinancial assets. Therefore, the financial assets promised in the contract are not in substance nonfinancial assets.

55-7 In accordance with the guidance in paragraph 610-20-15-9, Entity X should derecognize only the machinery in accordance with this Subtopic. Entity X should apply the guidance in paragraph 606-10-15-4 to separate and measure the financial assets. . . .

17.2.2.2 Sale or Transfer Through One or More Subsidiaries

Unlike assets sold or transferred through a legal contract, the transferred assets of an individual subsidiary should not be separated. For example, when all or substantially all of the fair value of the transferred assets is not concentrated in nonfinancial assets, in-substance nonfinancial assets, or both, a transaction involving the transfer of ownership interests in a subsidiary is entirely excluded from the scope of ASC 610-20 and should be accounted for as an equity transaction in accordance with ASC 810. The Codification excerpt below, which is a continuation of Example 1, Case B, in ASC 610-20 as reproduced in the previous section, illustrates the application of this guidance.

ASC 610-20

Example 1 — Scope . . .

Case B — Nonfinancial Assets and Financial Assets . . .

55-8 If Entity X transfers the machinery and financial assets by transferring ownership interests in a consolidated subsidiary, it would still conclude that the financial assets are not in substance nonfinancial assets. As described in paragraph 610-20-15-8, if all of the assets promised to the counterparty in an individual consolidated subsidiary within a contract are not nonfinancial assets and/or in substance nonfinancial assets, those assets should not be derecognized in accordance with this Subtopic. Instead, Entity X should apply the guidance in paragraph 810-10-40-3A(c) or 810-10-45-21A(b)(2) to determine the guidance applicable to that subsidiary.

Assets held in more than one subsidiary can also be transferred to a counterparty under a contract. To determine the accounting, an entity should first assess whether substantially all of the fair value of all assets under the contract is concentrated in nonfinancial assets. If it is not, the entity should evaluate whether substantially all of the fair value of the assets in any individual subsidiary under the contract is concentrated in nonfinancial assets, in which case the financial assets of that subsidiary are, in substance, nonfinancial assets within the scope of ASC 610-20. Example 1, Case C, in ASC 610-20, which is reproduced below, illustrates the application of this guidance.

ASC 610-20

Example 1 — Scope . . .

Case C — One Subsidiary That Holds Nonfinancial Assets and One Subsidiary That Holds Financial Assets

55-9 Entity A enters into a contract to transfer ownership interests in two consolidated subsidiaries to a single counterparty. Subsidiary 1 consists entirely of nonfinancial assets, and Subsidiary 2 consists entirely of financial assets. Assume that the assets in Subsidiary 1 and Subsidiary 2 have an equal amount of fair value. Entity A concludes that the transaction is not the transfer of a business within the scope of Topic 810 and that the subsidiaries are not outputs of the entity’s ordinary activities within the scope of Topic 606.

55-10 Entity A first considers whether substantially all of the fair value of the assets promised to the counterparty in the contract is concentrated in nonfinancial assets. Because the contract includes the transfer of ownership interests in one or more consolidated subsidiaries, Entity A evaluates the underlying assets in those subsidiaries. Entity A concludes that because both the financial assets and nonfinancial assets have an equal amount of fair value, substantially all of the fair value of the assets promised to the counterparty in the contract is not concentrated in nonfinancial assets. Entity A next considers whether substantially all of the fair value of the assets within Subsidiary 1 or Subsidiary 2 is concentrated in nonfinancial assets. Because the assets transferred within Subsidiary 1 are entirely nonfinancial assets, Entity A concludes that those assets are within the scope of this Subtopic. Entity A also concludes that the financial assets in Subsidiary 2 are not in substance nonfinancial assets and, therefore, are not within the scope of this Subtopic. Entity A should apply the guidance in paragraph 606-10-15-4 to separate and measure the financial assets in Subsidiary 2 from the nonfinancial assets in Subsidiary 1 that are derecognized within the scope of this Subtopic.

17.2.3 Partial Sales

As noted in Section 17.1, ASU 2017-05 clarifies the accounting for partial sales of nonfinancial assets. Partial sales include sales or transfers of a nonfinancial asset to another entity in exchange for a noncontrolling ownership interest in that entity. Such sales are common in the real estate industry (e.g., a seller transfers a building [or an asset] to a buyer but either retains an interest in the building [or the asset] or has an interest in the buyer).

Any transfer of a nonfinancial asset in exchange for a noncontrolling ownership interest in another entity (including a noncontrolling ownership interest in a joint venture or other equity method investment) should be accounted for in accordance with ASC 610-20.

17.2.4 Transferable Tax Credits

Legislation enacted in 2022 has created opportunities for entities to generate transferable tax credits (see Section 18.6). Entities that generate these credits can either (1) use them to reduce their federal income tax obligations or (2) sell them to third parties. The considerations related to the accounting for the sale of these credits might be similar to considerations required for the sale of other nonfinancial assets and in-substance nonfinancial assets (e.g., the sale of intangible assets). Accordingly, we believe that entitles should consider the guidance in ASC 610-20 (which refers to measurement and transfer-of-control concepts in ASC 606) when (1) measuring the consideration they expect to receive in exchange for transferable tax credits sold to third parties and (2) determining when control of the transferable tax credits is transferred to third parties.

Confidential and Proprietary — for Use Solely by Authorized Personnel

This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.