Chapter 17 — Sales of Nonfinancial Assets Within the Scope of ASC 610-20
Chapter 17 — Sales of Nonfinancial Assets Within the Scope of ASC 610-20
17.1 Overview and Background
ASC 610-20
05-1 This Subtopic provides
guidance on the recognition of gains and losses on transfers
of nonfinancial assets and in substance nonfinancial assets
to counterparties that are not customers. Although the
guidance in this Subtopic applies to contracts with
noncustomers, it refers to revenue recognition principles in
Topic 606 on revenue from contracts with customers.
ASU
2014-09 provides guidance on the
recognition and measurement of transfers of
nonfinancial assets, which is codified in ASC
610-20. The revenue standard amends or supersedes
the guidance in ASC 350 and ASC 360 on determining
the gain or loss recognized upon the derecognition
of nonfinancial assets, including in-substance
nonfinancial assets, that are not an output of an
entity’s ordinary activities, such as sales of (1)
property, plant, and equipment; (2) real estate;
or (3) intangible assets. ASC 610-20 does not
amend or supersede guidance that addresses how to
determine the gain or loss on the derecognition of
a subsidiary or group of assets that meets the
definition of a business. Gains or losses
associated with these transactions will continue
to be determined in accordance with ASC
810-10-40.
In response to stakeholder feedback indicating that (1) the meaning of the term
“in-substance nonfinancial asset” is unclear
because the revenue standard does not define it
and (2) the scope of the guidance on nonfinancial
assets is confusing and complex and does not
specify how a partial sales transaction should be
accounted for or which model entities should
apply, the FASB issued ASU
2017-05, which clarifies the scope
of ASC 610-20 as well as the accounting for
partial sales of nonfinancial assets. The newly
established guidance in ASC 610-20 (which consists
of guidance in ASU 2014-09, as amended by ASU
2017-05) conforms the derecognition guidance on
nonfinancial assets with the revenue model in ASC
606.
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.
17.3 Unit of Account
ASU 2017-05 clarifies that the unit of account is defined as a distinct
nonfinancial asset.1 At the inception of a contract, an entity should therefore identify each
distinct nonfinancial and in-substance nonfinancial asset in accordance with the
guidance on identifying distinct performance obligations in ASC 606 (see Chapter 5). The entity should
then, in a manner consistent with the approach outlined in ASC 606 (see Chapters 7 and 8), allocate consideration to
each distinct asset and derecognize the asset when a counterparty obtains control of
it.
Footnotes
1
In paragraph BC53 of ASU 2017-05, the FASB clarified that
for a partial sales transaction structured as the sale of an ownership
interest in a consolidated subsidiary, “an entity should evaluate whether it
transfers control of the distinct underlying asset and not the ownership
interest” in the legal entity that holds the asset.
17.4 Gain or Loss Recognition for Nonfinancial Assets
ASC 610-20 applies many of the same principles as ASC 606 for determining the
gain or loss to recognize when a nonfinancial asset or in-substance nonfinancial
asset is derecognized. Specifically, ASC 610-20 incorporates the requirements for
determining:
- When a contract exists (i.e., step 1).
- Which nonfinancial assets or in-substance nonfinancial assets are distinct (i.e., step 2).
- The amount of consideration to be included in the determination of the gain or loss recognized, including an estimate of variable consideration and the application of the “constraint” (i.e., step 3).
- How to allocate the amount of consideration determined in step 3 to each distinct nonfinancial asset or in-substance nonfinancial asset (i.e., step 4).
- When control of any nonfinancial asset or in-substance nonfinancial asset is transferred and results in the recognition of a gain or loss (i.e., step 5).
In a manner similar to the accounting for a contract with a customer, an entity would
apply the guidance in ASC 606-10-25-6 through 25-8 if an arrangement fails to meet
the criteria in ASC 606-10-25-1 for determining the existence of a contract (see
Sections 4.5 and
4.6). In this
situation, the nonfinancial asset would be (1) recognized in the statement of
financial position, (2) amortized through its useful life (except for
indefinite-lived intangible assets and property, plant, and equipment classified as
held for sale), and (3) assessed for impairment.
Substantially all sales of nonfinancial assets and in-substance
nonfinancial assets (that are not contracts with customers) will be recorded at a
point in time.2 If control is transferred at a point in time, a gain or loss is recognized
when the good or service is transferred to the customer. (See Section 8.6 for a discussion
of the requirements for recognizing revenue at a point in time.) Under the revenue
standard, entities determine whether they can derecognize nonfinancial assets such
as real estate by using a control-based model. However, the FASB decided to include
in ASC 606-10-25-30 “significant risks and rewards” as a factor for entities to
consider in evaluating the point in time at which control of a good or service is
transferred to a customer. Accordingly, although a seller of a nonfinancial asset
such as real estate would evaluate legal title and physical possession to determine
whether control has been transferred, it should also consider its exposure to the
risks and rewards of ownership of the property as part of its “control” analysis
under ASU 2014-09.
Connecting the Dots
Real estate sales in most jurisdictions (including the
United States) will typically not meet the criteria to be recognized over
time because it is uncommon for the seller to either (1) have an enforceable
right to payment for its cost plus a reasonable margin if the contract were
to be canceled at any point during the construction period or (2) be legally
restricted from transferring the asset to another customer even if the
contract were canceled at any point during the construction period. The
revenue standard contains an example (see Section 8.4.5.2) in which a real
estate developer enters into a contract to sell a specified condominium unit
in a multifamily residential complex once construction is complete.
17.4.1 Derecognition of Nonfinancial Assets or In-Substance Nonfinancial Assets
ASC 610-20
25-1 To recognize a gain or loss from the transfer of nonfinancial assets or in substance nonfinancial assets
within the scope of this Subtopic, an entity shall apply the guidance in Topic 810 on consolidation and in Topic
606 on revenue from contracts with customers as described in paragraphs 610-20-25-2 through 25-7.
Determining Whether an Entity Has a Controlling Financial Interest
25-2 An entity shall first evaluate whether it has (or continues to have) a controlling financial interest in the legal
entity that holds the nonfinancial assets and/or in substance nonfinancial assets by applying the guidance in
Topic 810 on consolidation. For example, if a parent transfers ownership interests in a consolidated subsidiary,
the parent shall evaluate whether it continues to have a controlling financial interest in that subsidiary. Similarly,
when an entity transfers assets directly to a counterparty (or a legal entity formed by the counterparty), the
entity shall evaluate whether it has a controlling financial interest in the counterparty (or the legal entity formed
by the counterparty).
25-3 If an entity determines it has (or continues to have) a controlling financial interest in the legal entity that
holds the nonfinancial assets or in substance nonfinancial assets, it shall not derecognize those assets and shall
apply the guidance in paragraphs 810-10-45-21A through 45-24.
25-4 Any nonfinancial assets or in substance nonfinancial assets transferred that are held in a legal entity in
which the entity does not have (or ceases to have) a controlling financial interest shall be further evaluated in
accordance with the guidance in paragraphs 610-20-25-5 through 25-7.
Applying Revenue Recognition Guidance
25-5 After applying the guidance in paragraphs 610-20-25-2 through 25-4, an entity shall next evaluate a
contract in accordance with the guidance in paragraphs 606-10-25-1 through 25-8. If a contract does not
meet all of the criteria in paragraph 606-10-25-1, an entity shall not derecognize the nonfinancial assets or in
substance nonfinancial assets transferred, and it shall apply the guidance in paragraph 350-10-40-3 to any
intangible assets and the guidance in paragraph 360-10-40-3C to any property, plant, and equipment. An
entity shall follow the guidance in paragraphs 606-10-25-6 through 25-8 to determine if and when a contract
subsequently meets all of the criteria in paragraph 606-10-25-1.
25-6 Once a contract meets all of the criteria in paragraph 606-10-25-1, an entity shall identify each distinct
nonfinancial asset and distinct in substance nonfinancial asset promised to a counterparty in accordance with
the guidance in paragraphs 606-10-25-19 through 25-22. An entity shall derecognize each distinct asset when
it transfers control of the asset in accordance with paragraph 606-10-25-30. In some cases, control of each
asset may transfer at the same time such that an entity may not need to separate and allocate consideration
to each distinct nonfinancial asset and in substance nonfinancial asset. That may be the case, for example,
when a parent transfers ownership interests in a consolidated subsidiary that holds nonfinancial assets (or
nonfinancial assets and in substance nonfinancial assets) and ceases to have a controlling financial interest
in the subsidiary in accordance with Topic 810. However, control of each asset may not transfer at the same
time if the parent has control of some of the assets in accordance with paragraph 606-10-25-30 (for example,
through repurchase agreements).
25-7 For purposes of evaluating the indicators of the transfer of control in paragraph 606-10-25-30, if an entity
has (or continues to have) a noncontrolling interest in the legal entity that holds the nonfinancial assets or in
substance nonfinancial assets as a result of the transaction, the entity shall evaluate the point in time at which
the legal entity holding the assets obtains (or has) control (for example, by evaluating whether the legal entity
can direct the use of, and obtain substantially all of the benefits from, each distinct nonfinancial asset or in
substance nonfinancial asset within it). (See Case A of Example 2 in paragraphs 610-20-55-11 through 55-14.)
If the entity does not have a noncontrolling interest in the legal entity that holds the nonfinancial assets or
in substance nonfinancial assets as a result of the transaction, it shall evaluate the point in time at which a
counterparty (or counterparties, collectively) obtains control of the assets in the legal entity (for example, by
evaluating whether a counterparty [or counterparties, collectively] can direct the use of, and obtain substantially
all of the benefits from, each distinct nonfinancial asset or in substance nonfinancial asset within the legal
entity).
To determine when to derecognize a nonfinancial asset or in-substance
nonfinancial asset, an entity should first assess whether it has lost a
controlling financial interest in the subsidiary (i.e., the legal entity that
holds the asset). If the entity obtains a controlling financial interest in a
new subsidiary that holds the nonfinancial asset after the transaction, or if
the entity retains a controlling financial interest in an existing subsidiary
that holds the asset (e.g., because the entity sold a noncontrolling ownership
interest in a consolidated subsidiary), the entity should not derecognize the
nonfinancial asset or in-substance nonfinancial asset. Instead, the entity
should account for the transaction as an equity transaction in accordance with
ASC 810.
However, if the entity has not obtained or retained a controlling financial
interest in such legal entity that holds the asset, it should derecognize the
nonfinancial asset or in-substance nonfinancial asset when it transfers control
of the asset in a manner consistent with the principles in ASC 606 (see
Chapter 8).
That is, when evaluating whether or in what circumstances it is appropriate to
derecognize the nonfinancial asset or in-substance nonfinancial asset, the
entity should first evaluate whether it has lost a controlling financial
interest in the legal entity by applying the guidance in ASC 810. If the entity
determines that it has lost a controlling financial interest in the legal entity
under ASC 810, it should then evaluate whether it has lost control of the
nonfinancial asset or in-substance nonfinancial asset by applying the guidance
in ASC 606. When evaluating whether control of the asset has been transferred
under ASC 606, the entity has to consider any repurchase agreements (e.g., a
call option to repurchase the ownership interest in the legal entity) and may
not be able to derecognize the nonfinancial asset, even though it no longer has
a controlling financial interest in a subsidiary in accordance with ASC 810.
Cases A and B of Example 2 in ASC 610-20, which are reproduced below, illustrate
the application of this guidance.
ASC 610-20
Example 2 — Transfer of Control
Case A — Control Transfers Under Topics 810 and 606
55-11 Entity A owns 100 percent of Entity B, a consolidated subsidiary. Entity B holds title to land with a carrying
amount of $5 million. Entity A concludes that the land is not an output of its ordinary activities within the scope
of Topic 606 and that Entity B does not meet the definition of a business within the scope of Topic 810.
55-12 Entity A enters into a contract to transfer 60 percent of Entity B to Entity X for $6 million cash due at
contract inception. For ease of illustration, assume that at contract inception the fair value of the 40 percent
interest retained by Entity A is $4 million. Because all of the assets (the land) promised to Entity X in the contract
are nonfinancial assets, Entity A concludes that it should derecognize the land in accordance with this Subtopic.
55-13 As described in paragraphs 610-20-25-2 through 25-7, Entity A first considers the guidance in Topic 810
and concludes that it no longer has a controlling financial interest in Entity B or in Entity X (the buyer). Entity A
then determines that the contract meets the criteria in paragraph 606-10-25-1 and that control of the land has
been transferred in accordance with the guidance in paragraph 606-10-25-30. Because Entity A continues to
have a noncontrolling interest in Entity B, it evaluates the point in time at which Entity B, its former subsidiary,
has control of the distinct nonfinancial asset as described in paragraph 610-20-25-7. Entity A concludes that
it has transferred control of the distinct nonfinancial asset because Entity B controls the distinct nonfinancial
asset. When evaluating the indicators of control in paragraph 606-10-25-30, Entity A concludes the following:
- It has the present right to payment.
- Entity B has legal title to the land.
- It does not have physical possession of the asset because it cannot restrict or prevent other entities from accessing the land.
- Entity B has the significant risks and rewards of ownership.
- There is no acceptance clause (assumption). . . .
Case B — Control Transfers Under Topic 810 but Not Under Topic 606
55-15 Assume the same facts as in Case A, except that Entity A has the right but not the obligation to
repurchase the 60 percent ownership interest in Entity B that it transferred to Entity X (that is, Entity A has a call
option). The call option gives Entity A the right to repurchase the 60 percent ownership interest in 2 years for
$7 million.
55-16 Entity A concludes that although the call option represents a variable interest in Entity B, it does not
have a controlling financial interest in Entity B in accordance with the guidance in Topic 810. However, when
evaluating whether control of the land has been transferred in accordance with the guidance in paragraph
606-10-25-30, Entity A considers the guidance on repurchase features in paragraphs 606-10-25-30(c) and
606-10-55-68 and concludes that it does not transfer control of the land. In addition, because the exercise
price on the call option is an amount that is greater than the original selling price, the transaction is considered
a financing agreement in accordance with the guidance in paragraph 606-10-55-68(b). Entity A does not
derecognize the land and records a financial liability of $6 million in accordance with the guidance in paragraph
606-10-55-70. Entity A does not recognize an investment for its retained 40 percent ownership interest until it
derecognizes the land.
Connecting the Dots
If the seller has an obligation or option to repurchase
a property it has sold (a forward or call option), it should account for
the sale as (1) a lease if the repurchase amount is less than the
original selling price or (2) a financing arrangement if the repurchase
price is more than the original selling price.
If the buyer has an option to require the seller to
repurchase the property (a put option), the seller would determine
whether to account for the transaction as a lease, a sale with a right
of return, or a financing arrangement by performing the following
analysis:
- If the repurchase price under the option is lower than the original selling price, the seller would need to consider at contract inception whether the buyer has a significant economic incentive to exercise its option. If the buyer has such an incentive, the contract should be treated as a lease (unless the transaction involves a leaseback and would result in a lease-leaseback transaction, in which case the entire transaction should be treated as a financing). Otherwise, the transaction should be accounted for as a sale with a right of return.
- If the repurchase price under the option is equal to or greater than the original selling price, the seller should treat the contract as a financing arrangement unless the expected fair value of the asset is greater than the repurchase price and the buyer does not have a significant economic incentive to exercise the option, in which case the transaction should be accounted for as a sale with a right of return.
If the seller of real estate is required to treat a
transaction as a financing arrangement, it would continue to recognize
the property (and associated depreciation) and record a liability for
the consideration received from the buyer. The difference between the
amount of consideration received from the buyer and the amount paid
under the repurchase agreement should be recorded as interest over the
term of the arrangement. If the seller is required to treat the
transaction as a lease, it would account for the arrangement in
accordance with ASC 842.
See Section 8.7 for further discussion of repurchase
agreements and their impact on transferring control.
17.4.2 Gain or Loss Measurement
ASC 610-20
32-2 When an entity meets the
criteria to derecognize a distinct nonfinancial asset or
a distinct in substance nonfinancial asset, it shall
recognize a gain or loss for the difference between the
amount of consideration measured and allocated to that
distinct asset in accordance with paragraphs 610-20-32-3
through 32-6 and the carrying amount of the distinct
asset. The amount of consideration promised in a
contract that is included in the calculation of a gain
or loss includes both the transaction price and the
carrying amount of liabilities assumed or relieved by a
counterparty.
32-3 To determine the
transaction price, an entity shall apply the following
paragraphs in Topic 606 on revenue from contracts with
customers:
-
Paragraphs 606-10-32-2 through 32-27 on determining the transaction price, including all of the following:
-
Estimating variable consideration
-
Constraining estimates of variable consideration
-
The existence of a significant financing component
-
Noncash consideration
-
Consideration payable to a customer.
-
-
Paragraphs 606-10-32-42 through 32-45 on accounting for changes in the transaction price.
32-4 If an entity transfers
control of a distinct nonfinancial asset or distinct in
substance nonfinancial asset in exchange for a
noncontrolling interest, the entity shall consider the
noncontrolling interest received from the counterparty
as noncash consideration and shall measure it in
accordance with the guidance in paragraphs 606-10-32-21
through 32-24. Similarly, if a parent transfers control
of a distinct nonfinancial asset or in substance
nonfinancial asset by transferring ownership interests
in a consolidated subsidiary but retains a
noncontrolling interest in its former subsidiary, the
entity shall consider the noncontrolling interest
retained as noncash consideration and shall measure it
in accordance with the guidance in paragraphs
606-10-32-21 through 32-24. (See Case A of Example 2 in
paragraphs 610-20-55-11 through 55-14.)
32-5 If a counterparty promises
to assume or relieve a liability of an entity in
exchange for a transfer of nonfinancial assets or in
substance nonfinancial assets within the scope of this
Subtopic, the transferring entity shall include the
carrying amount of the liability in the consideration
used to calculate the gain or loss. Although a liability
assumed or relieved by a counterparty shall be included
in the consideration used to calculate a gain or loss,
an entity shall not derecognize the liability until it
has been extinguished in accordance with the guidance in
paragraph 405-20-40-1 (see paragraph 610-20-45-3 on how
to present the liability if it is extinguished before or
after the entity transfers control of the nonfinancial
assets or in substance nonfinancial assets). If an
entity transfers control of the nonfinancial assets or
in substance nonfinancial assets before a liability is
extinguished, it shall apply the guidance on
constraining estimates of variable consideration in
paragraph 606-10-32-11 to determine the carrying amount
of the liability to be included in the gain or loss
calculation.
32-6 An entity shall allocate
the consideration calculated in accordance with the
guidance in paragraphs 610-20-32-2 through 32-5 to each
distinct nonfinancial asset or in substance nonfinancial
asset by applying the guidance in paragraphs
606-10-32-28 through 32-41.
If the derecognition criteria are met (see Section 17.4.1), an
entity should recognize a full gain or loss on derecognition of any nonfinancial
or in-substance nonfinancial assets. The entity should include in the
consideration received any liability assumed (or relieved) by the counterparty
(e.g., mortgage loan on the building) when determining the gain or loss on the
derecognition. In a manner consistent with the discussion in paragraph BC35 of
ASU 2017-05, the entity should account for the derecognition of the asset and
assumption of the liability together and accordingly recognize a single gain or
loss inclusive of any liability assumed by the counterparty. Further, the entity
should account for any noncontrolling ownership interest as noncash
consideration, which should be measured at fair value in a manner consistent
with the guidance on noncash consideration in ASC 606-10-32-21 through 32-24
(see Section 6.5).
Example 2, Case A, in ASC 610-20, which is reproduced below and is also
discussed in Section
17.4.1, illustrates the application of this guidance.
ASC 610-20
Example 2 —
Transfer of Control
Case A — Control Transfers Under Topics
810 and 606
55-11 Entity A owns 100 percent
of Entity B, a consolidated subsidiary. Entity B holds
title to land with a carrying amount of $5 million.
Entity A concludes that the land is not an output of its
ordinary activities within the scope of Topic 606 and
that Entity B does not meet the definition of a business
within the scope of Topic 810.
55-12 Entity A enters into a
contract to transfer 60 percent of Entity B to Entity X
for $6 million cash due at contract inception. For ease
of illustration, assume that at contract inception the
fair value of the 40 percent interest retained by Entity
A is $4 million. Because all of the assets (the land)
promised to Entity X in the contract are nonfinancial
assets, Entity A concludes that it should derecognize
the land in accordance with this Subtopic. . . .
55-14 Entity A derecognizes the
land and calculates the gain or loss as the difference
between the amount of consideration measured in
accordance with the guidance in paragraphs 610-20-32-2
and 610-20-32-6 and the carrying amount of the land. The
amount of the consideration is $10 million, which
includes $6 million in cash plus $4 million for the fair
value of the noncontrolling interest in Entity B. Entity
A recognizes a gain of $5 million ($10 million
consideration – $5 million carrying amount of the
assets) and presents the gain in the income statement in
accordance with the guidance in paragraph 360-10-45-5.
In accordance with the guidance in paragraph
610-20-32-4, Entity A records the noncontrolling
interest in Entity B at $4 million and subsequently
accounts for that interest in accordance with other
Topics.
17.4.2.1 Accounting for the Sale of a Nonfinancial Asset Within the Scope of ASC 610-20 That Involves a Guarantee
When a seller has entered into a contract to sell property and guarantee the
buyer’s return on the property, the seller must first identify all of the
elements in the contract to determine whether the contract is (1) within the
scope of ASC 610-20, (2) within the scope of other topics, or (3) partially
within the scope of both ASC 610-20 and other topics. A contract to sell
property to a counterparty that includes a guarantee of the buyer’s return
on the property contains both a nonfinancial asset within the scope of ASC
610-20 and a guarantee within the scope of ASC 460-10.
ASC 610-20-15-9 refers entities to ASC 606-10-15-4 for guidance on
determining how to separate and measure elements in a contract that is
within the scope of other topics. ASC 606-10-15-4(a) states, in part:
If
the other Topics specify how to separate and/or initially measure one or
more parts of the contract, then an entity shall first apply the
separation and/or measurement guidance in those Topics. An entity shall
exclude from the transaction price the amount of the part (or parts) of
the contract that are initially measured in accordance with other
Topics.
Accordingly, the seller would initially measure the guarantee at fair value
as required under ASC 460-10. The difference between the transaction price
and the guarantee’s fair value would be allocated to the identified
element(s) — which may include other assets or services in addition to the
property being sold — and any gain or loss would be recognized when (or as)
control of each element is transferred to the buyer.
However, if the seller determines that the contract (which
includes the guarantee) will result in a loss and if control of the
underlying nonfinancial asset has not yet been transferred to the
counterparty, the seller should evaluate whether an impairment has occurred
under relevant impairment guidance (e.g., ASC 330 on inventory, ASC 350 on
intangibles, or ASC 360 on property, plant, and equipment).
Example 17-3
Company X sells an office building
with a cost basis of $40,000 to Company Y for
$100,000. As part of the sales contract, X
guarantees that it will make payments of up to
$40,000 each year for two years based on the
proportion of the building that remains unleased at
the end of each year. Since X expects all space to
be rented within two months, it has determined that
its guarantee to Y has a fair value of $15,000.
Company X should separate and
initially measure the guarantee in accordance with
ASC 460-10 and then deduct the fair value of the
guarantee ($15,000) from the transaction price of
$100,000. After allocating the remaining $85,000 to
the sole nonfinancial asset (i.e., the building), X
would recognize a $45,000 gain ($85,000 allocated to
the building less X’s cost basis of $40,000) upon
transferring control of the building to Y.
Example 17-4
Assume the same facts as in the
example above, except that Company X (1) determines
on the basis of the current rental market that the
space will not be leased for the foreseeable future
and (2) calculates that the fair value of the
guarantee is $70,000.
Company X should separate and
initially measure the guarantee in accordance with
ASC 460-10 and then deduct the fair value of the
guarantee ($70,000) from the transaction price of
$100,000. Company X would allocate the remaining
$30,000 to the building. Since this allocation is
less than the building’s book value, if control of
the building has not yet been transferred to Company
Y, X should assess whether the building is impaired
on the basis of the requirements in ASC 360.
17.4.2.2 Variable or Contingent Consideration
Any contingent consideration included in the transaction price
should be estimated and constrained in a manner consistent with ASC 606, as
further discussed in Section
6.3.
Example 3 in ASC 610-20, which is reproduced below, illustrates
how an entity would account for a sale of a nonfinancial asset in exchange for
variable consideration.
ASC 610-20
Example 3 — Sale
of a Nonfinancial Asset for Variable
Consideration
55-17 An entity sells (that is,
does not out license) the rights to in-process research
and development that it recently acquired in a business
combination and measured at fair value of $50 million in
accordance with Topic 805 on business combinations. The
entity concludes that the transferred in-process
research and development is not a business. The buyer of
the in-process research and development agrees to pay a
nonrefundable amount of $5 million at inception plus 2
percent of sales of any products derived from the
in-process research and development over the next 20
years. The entity concludes that the sale of in-process
research and development is not a good or service that
is an output of the entity’s ordinary activities.
55-18 Topic 350 on goodwill and
other intangibles requires the entity to apply the
guidance in this Subtopic to determine the amount and
timing of income to be recognized. Therefore, the entity
applies the derecognition guidance in this Subtopic as
follows:
-
The entity concludes that it does not have a controlling financial interest in the buyer.
-
The entity concludes that the contract meets the criteria in paragraph 606-10-25-1.
-
The entity also concludes that on the basis of the guidance in paragraph 606-10-25-30, it has transferred control of the in-process research and development asset to the buyer. This is because the buyer can use the in-process research and development’s records, patents, and supporting documentation to develop potential products and the entity has relinquished all substantive rights to the in-process research and development asset.
-
In estimating the consideration received, the entity applies the guidance in Topic 606 on determining the transaction price, including estimating and constraining variable consideration. The entity estimates that the amount of consideration that it will receive from the sales-based royalty is $100 million over the 20-year royalty period. However, the entity cannot assert that it is probable that recognizing all of the estimated variable consideration in other income would not result in a significant reversal of that consideration. The entity reaches this conclusion on the basis of its assessment of factors in paragraph 606-10-32-12. In particular, the entity is aware that the variable consideration is highly susceptible to the actions and judgments of third parties, because it is based on the buyer completing the in-process research and development asset, obtaining regulatory approval for the output of the in-process research and development asset, and marketing and selling the output. For the same reasons, the entity also concludes that it could not include any amount, even a minimum amount, in the estimate of the consideration. Consequently, the entity concludes that the estimate of the consideration to be used in the calculation of the gain or loss upon the derecognition of the in-process research and development asset is limited to the $5 million fixed upfront payment.
55-19 At inception of the
contract, the entity recognizes a net loss of $45
million ($5 million of consideration, less the
in-process research and development asset of $50
million). The entity reassesses the transaction price at
each reporting period to determine whether it is
probable that a significant reversal would not occur
from recognizing the estimate as other income and, if
so, recognizes that amount as other income in accordance
with paragraphs 606-10-32-14 and 606-10-32-42 through
32-45.
17.4.2.3 Like-Kind Exchanges of Nonfinancial Assets
Entities may also enter into like-kind exchanges in which a
nonfinancial asset owned by one entity is exchanged for a nonfinancial asset
owned by another entity. These types of transactions may include the exchange of
real estate and are typically structured for tax purposes. Under the revenue
standard, a nonmonetary exchange of a nonfinancial asset is accounted for as a
sale of the nonfinancial asset for noncash consideration (i.e., the nonfinancial
asset received from another entity). Accordingly, if the transaction meets the
criteria to be accounted for as a sale (i.e., the existence of a contract and
the transfer of control of the nonfinancial asset), the entity would measure the
noncash consideration received in the transaction at fair value.3 The entity would recognize a gain or loss on the sale and record the
acquired nonmonetary consideration (i.e., the nonfinancial asset received) at
its fair value. Further, ASU 2017-05 eliminates the guidance in ASC 845 on
exchanges of nonfinancial assets for a noncontrolling interest. As a result, if
the derecognition criteria are met (see Section 17.4.1), the noncontrolling interest
received in connection with the partial sale is measured at fair value and
included in the transaction price (see Section 17.5).
However, the entity would continue to apply the guidance on
nonmonetary exchanges in ASC 845 if the exchange is between entities in the same
line of business to help facilitate sales to potential customers.
Footnotes
2
When recognizing a gain or loss on sales of nonfinancial
assets or in-substance nonfinancial assets that are not contracts with
customers, an entity must first consider whether, under ASC 810, it ceases
to have a controlling financial interest in the legal entity that holds the
nonfinancial assets or in-substance nonfinancial assets. If the controlling
financial interest is lost, the entity should then consider whether control
of the nonfinancial assets or in-substance nonfinancial assets is
transferred in accordance with ASC 606 (see Section 17.4.1).
3
As noted in Section 6.5, ASU 2016-12
clarifies that the measurement date for noncash consideration is the
contract inception date.
17.5 Exchanges of Nonfinancial Assets for Noncontrolling Interests
An entity should apply the guidance in ASC 610-20 to account for the
contribution of a nonfinancial asset in exchange for a noncontrolling ownership
interest in an investee.
In accordance with ASC 610-20-32-4, “the entity shall consider the
noncontrolling interest received from the counterparty as noncash consideration and
shall measure it in accordance with the guidance in paragraphs 606-10-32-21 through
32-24.” In a manner consistent with the guidance in ASC 606-10-32-21 through 32-24,
the entity would measure the noncontrolling interest at fair value at contract
inception. Any gain or loss resulting from the sale or transfer of the nonfinancial
asset should be recognized when the legal entity receiving the nonfinancial asset
obtains control of the asset (as determined on the basis of an evaluation of the
indicators in ASC 606-10-25-30). For additional information about recognizing gains
or losses on the sale (or contribution) of nonfinancial assets, see Section 17.4.
Example 17-5
Investor A and Investor B form a real estate venture.
Investor A contributes cash in exchange for a 50 percent
interest in the venture; B contributes real estate in
exchange for the other 50 percent of the venture and
receives the cash contribution made by A. Since the real
estate is neither a business nor a nonprofit activity, the
transaction is within the scope of ASC 610-20. First, B
considers whether, after the transaction, it retains a
controlling interest in the joint venture under ASC 810 and
concludes that it does not. Next, B determines that control
of the real estate has been transferred under ASC 606.
Accordingly, B derecognizes the real estate, recognizes the
full gain or loss for the difference between the
consideration received (i.e., both the cash consideration
and the fair value of the 50 percent interest in the
venture) and the carrying amount of the assets sold, and
records its investment in the real estate venture at fair
value.