other income gains and losses from the derecognition of ... · proposed accounting standards update...

Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets

(Subtopic 610-20)

Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets

The Board issued this Exposure Draft to solicit public comment on proposed changes

to Subtopic 610-20 of the FASB Accounting Standards Codification®. Individuals can

submit comments in one of three ways: using the electronic feedback form on the FASB

website, emailing comments to [email protected], or sending a letter to

“Technical Director, File Reference No. 2016-250, FASB, 401 Merritt 7, PO Box 5116,

Norwalk, CT 06856-5116.”

Proposed Accounting Standards Update

Issued: June 6, 2016 Comments Due: August 5, 2016

mailto:[email protected]

Notice to Recipients of This Exposure Draft of a Proposed Accounting Standards Update

The Board invites comments on all matters in this Exposure Draft until August 5, 2016. Interested parties may submit comments in one of three ways:

Using the electronic feedback form available on the FASB website at Exposure Documents Open for Comment

Emailing comments to [email protected], File Reference No. 2016-250

Sending a letter to “Technical Director, File Reference No. 2016-250, FASB, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116.”

All comments received are part of the FASB’s public file and are available at www.fasb.org. The FASB Accounting Standards Codification® is the source of authoritative

generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. An Accounting Standards Update is not authoritative; rather, it is a document that communicates how the Accounting Standards Codification is being amended. It also provides other information to help a user of GAAP understand how and why GAAP is changing and when the changes will be effective. A copy of this Exposure Draft is available at www.fasb.org.

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Proposed Accounting Standards Update

Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20)

Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets

June 6, 2016

Comment Deadline: August 5, 2016

CONTENTS

Page Numbers

Summary and Questions for Respondents ........................................................ 1–7 Amendments to the FASB Accounting Standards Codification® ..................... 9–47 Background Information and Basis for Conclusions .................................. …48–68 Amendments to the XBRL Taxonomy ................................................................. 69

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Summary and Questions for Respondents

Why Is the FASB Issuing This Proposed Accounting Standards Update (Update)?

On May 28, 2014, the Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in that Update require that an entity apply the guidance from Topic 606 on the existence of a contract, transfer of control, and measurement to the accounting for transfers of nonfinancial assets that are not an output of the entity’s ordinary activities. The Board added that guidance, which was codified in Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets, to address the absence of general accounting guidance on transfers of nonfinancial assets in nonrevenue transactions. Additionally, that guidance replaced the industry- and transaction-specific guidance in Subtopic 360-20, Property, Plant, and Equipment—Real Estate Sales.

As a result of the amendments in Update 2014-09 (and before the effective date of the amendments in this proposed Update), the primary asset derecognition models in GAAP for transactions that are not with customers would include:1

1. Subtopic 610-20 on the derecognition of nonfinancial assets and in substance nonfinancial assets

2. Subtopic 810-10, Consolidation—Overall, on the derecognition of businesses and nonprofit activities (unless the business is an in substance nonfinancial asset)

3. Topic 845, Nonmonetary Transactions, on certain nonmonetary transactions including the exchange of a nonfinancial asset for a noncontrolling ownership interest in another entity

4. Topic 860, Transfers and Servicing, on transfers of financial assets.

The current scope of the nonfinancial asset guidance includes the transfer of in substance nonfinancial assets. Stakeholders have informed the Board that there is not a uniform view on what constitutes an in substance nonfinancial asset because the term is not currently defined. As such, some stakeholders are uncertain about what types of transactions should be within the scope of the nonfinancial asset guidance.

Currently, the nonfinancial asset guidance does not address partial sales of nonfinancial assets. Partial sales are common in the real estate industry and typically include transactions in which the seller retains an equity interest in the entity that owns the asset or has an equity interest in the buyer. The historical real-

1See the Scope Sections of each Topic for explicit guidance on what transactions are included in and excluded from those Topics.

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estate-specific guidance, which was replaced by the amendments in Update 2014-09, included detailed guidance on partial sales transactions. Because the nonfinancial asset guidance in Update 2014-09 does not specifically address partial sales transactions, stakeholders have indicated that they are uncertain about how an entity would account for those transactions upon the effective date of the amendments in Update 2014-09.

The Board also received feedback that certain scope exceptions to the nonfinancial asset guidance have created complexity and confusion on which model entities should apply. For example, a transfer of a nonfinancial asset in exchange for a noncontrolling interest in another entity would be accounted for in the nonmonetary transaction guidance in Topic 845 rather than in the nonfinancial asset guidance. Furthermore, stakeholders have informed the Board that the lack of clear guidance on contributions of nonfinancial assets to form joint ventures and the accounting differences between transfers of assets and businesses to equity method investees (including joint ventures) creates additional complexity.

The Board added a project to its agenda in 2013 on clarifying the definition of a business with the objective of adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or acquisitions (or disposals) of businesses. When the Board added the project, it anticipated clarifying the reference to in substance nonfinancial assets and the accounting for partial sales of nonfinancial assets. The Board decided to address the issues associated with the project in three phases:

1. Phase 1: The Board proposed guidance to assist entities in applying the definition of a business. Proposed Accounting Standards Update, Business Combinations (Topic 805): Clarifying the Definition of a Business, was issued in November 2015. The comment period ended on January 22, 2016.

2. Phase 2: The Board decided to address (a) the scope of the nonfinancial asset derecognition guidance and clarifying the reference to in substance nonfinancial assets and (b) the guidance on partial sales of nonfinancial assets.

3. Phase 3: In a future phase of this project, the Board will discuss whether there are differences in the accounting for the acquisition and derecognition of assets and businesses that could be removed.

This proposed Update includes amendments relating to Phase 2.

Who Would Be Affected by the Amendments in This Proposed Update?

The amendments in this proposed Update would affect any entity that enters into a contract to transfer a nonfinancial asset, a group of nonfinancial assets, or an ownership interest in a consolidated subsidiary that does not meet the definition of

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a business or a nonprofit activity. In addition, the proposed amendments would affect any entity that has historically had transactions within the scope of the real-estate-specific derecognition guidance. The scope of the proposed amendments also includes contributions of nonfinancial assets that are not a business or nonprofit activity to a joint venture or another noncontrolled investee.

What Are the Main Provisions?

Scope of the Nonfinancial Asset Derecognition Guidance

The amendments in this proposed Update would clarify the scope of the nonfinancial asset guidance in Subtopic 610-20. Under the clarified scope, entities would apply the guidance to the derecognition of all nonfinancial assets and in substance nonfinancial assets unless other specific guidance applies. The proposed amendments would clarify that an in substance nonfinancial asset is an asset of the reporting entity included in either of the following:

1. A contract in which substantially all of the fair value of the assets promised to a counterparty is concentrated in nonfinancial assets

2. A consolidated subsidiary in which substantially all of the fair value of the assets in the subsidiary is concentrated in nonfinancial assets.

Furthermore, the proposed amendments would clarify that an in substance nonfinancial asset is neither of the following:

1. A group of assets or subsidiary that is a business or nonprofit activity 2. An investment of a reporting entity (for example, an equity method

investment) regardless of whether the assets underlying the investment would be considered in substance nonfinancial assets.

A conclusion that a contract or subsidiary includes in substance nonfinancial assets means that each asset promised in the contract or in the subsidiary is within the scope of the nonfinancial asset guidance in Subtopic 610-20. However, that conclusion does not determine the unit of account, which is each distinct nonfinancial asset (see below for further details).

As a result of those proposed amendments, the derecognition of all businesses (including real estate businesses) and nonprofit activities would be accounted for in accordance with the derecognition and deconsolidation guidance in Subtopic 810-10. Additionally, the proposed amendments would eliminate the exception in the financial asset guidance for transfers of investments (including equity method investments) in real estate entities.

Distinct Nonfinancial Assets

The amendments in this proposed Update specify that a distinct nonfinancial asset would be the unit of account for applying the nonfinancial asset derecognition

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guidance. At contract inception, an entity would identify the nonfinancial assets and in substance nonfinancial assets in the contract and apply the guidance from Topic 606 on identifying performance obligations to identify the distinct nonfinancial assets. The proposed amendments also specify that entities would be required to allocate consideration to each distinct nonfinancial asset by applying the guidance from Topic 606 on allocating the transaction price to performance obligations.

Partial Sales

The amendments in this proposed Update also would provide guidance on the accounting for what often are referred to as partial sales of nonfinancial assets within Subtopic 610-20. The main provisions would include the following:

1. A reporting entity would account for a decrease in ownership interest of a subsidiary while it retains a controlling financial interest as an equity transaction and would not recognize a gain or loss.

2. A reporting entity would derecognize a distinct nonfinancial asset in a partial sale transaction when it no longer has a controlling financial interest in the former subsidiary and has transferred control of the nonfinancial asset in accordance with Topic 606.

3. If an entity meets the criteria in (2) above to derecognize a distinct nonfinancial asset, the entity would measure any retained noncontrolling ownership interest in the former subsidiary at fair value.

The proposed amendments would eliminate Section 845-10-30 on exchanges of nonfinancial assets to another entity in exchange for a noncontrolling ownership interest in that entity. The Board viewed those transactions as similar to partial sales of nonfinancial assets and decided that they should be accounted for under the same accounting model in Subtopic 610-20.

The proposed amendments also would require that the guidance on partial sales of nonfinancial assets be applied to contributions of an asset to a joint venture and other investees. In addition, conforming amendments have been made to the equity method guidance that would require an entity to recognize a full gain or loss in a transfer of a nonfinancial asset to an investee.

How Would the Main Provisions Differ from Current Generally Accepted Accounting Principles (GAAP) and Why Would They Be an Improvement?

The amendments in this proposed Update would:

1. Clarify the scope of Subtopic 610-20 and partial sales of nonfinancial assets

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2. Improve consistency in determining what constitutes an in substance nonfinancial asset

3. Simplify GAAP by conforming several accounting differences between transactions involving assets and businesses related to the measurement of retained noncontrolling ownership interests, the measurement of the gain or loss recognized upon transferring a nonfinancial asset to an equity method investee, the gain or loss recognized upon contributions to joint ventures, and transfers of noncontrolling ownership interests

4. Streamline GAAP by eliminating Section 845-10-30 and removing exceptions to the financial asset derecognition model

5. Clarify the accounting for contributions of nonfinancial assets to joint ventures.

The proposed amendments differ from current GAAP, especially in the real estate industry. Historically, transfers of real estate (including investments in real estate entities) have been accounted for in accordance with industry- and transaction-specific guidance on real estate sales regardless of whether the transaction was considered a business. The proposed amendments would require that all entities determine whether the transfer of real estate involves a business, nonprofit activity, or a nonfinancial asset to determine the appropriate guidance. Furthermore, the proposed amendments would eliminate the exception in the financial asset guidance for transfers of investments in real estate entities, which were historically accounted for under the real estate derecognition guidance.

The proposed amendments also differ from current GAAP on partial sales of real estate, contributions to form joint ventures, and transfers of nonfinancial assets that would have been accounted for in accordance with Topic 845. For example, in many of those transactions an entity currently measures a retained ownership interest at carryover basis. The proposed amendments would require that an entity initially measure the investment at fair value, which would eliminate a significant difference between the accounting for the derecognition of nonfinancial assets and businesses.

When Would the Amendments Be Effective?

The amendments in this proposed Update would be effective at the same time as the amendments in Update 2014-09. That is, a public business entity, a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, and an employee benefit plan that files or furnishes financial statements with or to the U.S. Securities and Exchange Commission (SEC) would apply the proposed amendments in annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. All other entities would apply the proposed amendments in annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019.

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The guidance in Update 2014-09 allows entities to adopt the amendments utilizing a full retrospective approach or a modified retrospective approach. The Board decided to amend the transition guidance so that entities could elect to apply different transition methods to transactions with customers and noncustomers. For example, the proposed amendments would allow an entity to apply the full retrospective approach to transactions with customers, and the entity also could choose to apply the modified retrospective approach to transfers of nonfinancial assets that are not an output of the entity’s ordinary activities.

Questions for Respondents

The Board invites individuals and organizations to comment on all matters in this proposed Update, particularly on the issues and questions below. Comments are requested from those who agree with the proposed guidance as well as from those who do not agree. Comments are most helpful if they identify and clearly explain the issue or question to which they relate. Those who disagree with the proposed guidance are asked to describe their suggested alternatives, supported by specific reasoning.

Question 1: Is the list of transactions that are excluded from Subtopic 610-20 in

paragraph 610-20-15-3 complete? If not, please describe what is missing.

Question 2: Do you agree that transfers of all businesses (including real estate

businesses) or nonprofit activities should be excluded from the scope of Subtopic 610-20? If not, please describe the types of businesses that should be included in Subtopic 610-20 and how you would define them.

Question 3: Given that the amendments in this proposed Update would require

all businesses to be excluded from Subtopic 610-20, do you have any further comments on the appropriateness or operability of the amendments in the proposed Accounting Standards Update, Business Combinations (Topic 805): Clarifying the Definition of a Business?

Question 4: The scope of Subtopic 610-20 includes in substance nonfinancial

assets, which are defined in the Master Glossary and described in paragraphs 610-20-15-4 through 15-10 in this proposed Update. Is it appropriate to include those transactions within the scope of Subtopic 610-20, and would the guidance be operable? If not, why and what other alternatives would you suggest?

Question 5: Paragraph 610-20-15-3(k) in this proposed Update excludes

subsidiaries that do not have in substance nonfinancial assets entirely from the scope of Subtopic 610-20. Alternatively, the Board could have decided to apply the guidance in paragraph 606-10-15-4 and separate each asset in a subsidiary that is not a business into different derecognition models. Would this alternative approach be operable for partial sales in which the seller retains an interest in the former subsidiary (see also paragraph BC34)? If yes, please provide examples of how this would be applied. If operable, do you support such an approach?

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Question 6: When transferring an ownership interest in a subsidiary that is an in

substance nonfinancial asset, do you agree that the unit of account should be each distinct nonfinancial asset in the subsidiary?

Question 7: Do you agree that an entity should measure a retained interest in a

nonfinancial asset at fair value? If not, why?

Question 8: Paragraphs 610-20-40-3 through 40-10 provide guidance that would

assist an entity in determining when it transfers control of distinct nonfinancial assets in a subsidiary. Would this guidance be operable? If not, why?

Question 9: Do you agree with providing an entity with the option to apply different

transition methods to Subtopic 610-20 and Topic 606? If not, why?

Question 10: The proposed amendments on clarifying the definition of a business

would require prospective adoption. If those proposed amendments are finalized before Subtopic 610-20 becomes effective, should an entity utilize either:

a. The definition of a business effective at the time of the transaction b. The revised definition of a business when implementing Subtopic 610-

20?

Question 11: Do you agree with the proposed amendments to eliminate the

exception in Topic 860 for transfers of equity method investees that were formerly considered in substance nonfinancial assets or in substance real estate? If not, please describe the consequences of applying the guidance in Topic 860 instead of Subtopic 610-20.

Question 12: Overall, do you agree that the proposed amendments would reduce

the cost and complexity of evaluating the derecognition of nonfinancial assets? Why or why not?

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Amendments to the FASB Accounting Standards Codification®

Introduction

1. The Accounting Standards Codification is amended as described in paragraphs 3–33. In some cases, to put the change in context, not only are the amended paragraphs shown but also the preceding and following paragraphs. Terms from the Master Glossary are in bold type. Added text is underlined, and

deleted text is struck out.

2. The amendments in this proposed Update are divided into two sections:

a. Amendments clarifying the scope of Subtopic 610-20 and partial sales of nonfinancial assets (paragraphs 3–11)

b. Conforming amendments to other Topics (paragraphs 13–33).

Amendments to the Master Glossary

3. Add the new Master Glossary term In Substance Nonfinancial Asset, with a link to transition paragraph 606-10-65-1, as follows:

In Substance Nonfinancial Asset

An asset of a reporting entity that is included in either of the following:

a. A contract in which substantially all the fair value of the assets

(recognized and unrecognized) promised to a counterparty is concentrated in nonfinancial assets

b. A consolidated subsidiary in which substantially all the fair value of the assets (recognized and unrecognized) in the subsidiary is concentrated in nonfinancial assets.

An in substance nonfinancial asset does not include:

a. A group of assets or a subsidiary that is a business or nonprofit activity

b. An investment of a reporting entity that is being accounted for within the scope of Topic 320 on investments—debt securities, Topic 321 on investments—equity securities, Topic 323 on investments—equity method and joint ventures, or Topic 325 on other investments regardless of whether the assets underlying the investment would be considered in substance nonfinancial assets.

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See paragraphs 610-20-15-4 through 15-10 for further details.

Amendments to Subtopic 610-20

4. Amend paragraph 610-20-05-1, with a link to transition paragraph 606-10-65-1, as follows:

Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets

Overview and Background

610-20-05-1 This Subtopic provides guidance on a gain or loss recognized upon

the derecognition of a nonfinancial asset within the scope of Topic 350 on intangibles and Topic 360 on property, plant, and equipment (including {add glossary link}in substance nonfinancial assets{add glossary link}) if those assets are not in a contract with a customer within the scope of Topic 606 on revenue from contracts with customers.

5. Amend paragraphs 610-20-15-2 through 15-3 and add paragraphs 610-20-15-4 through 15-11 and their related headings, with a link to transition paragraph 606-10-65-1, as follows:

Scope and Scope Exceptions

> Transactions

610-20-15-2 The guidance in this Subtopic applies to the following events and

transactions: the gain or loss recognized upon the derecognition of a nonfinancial asset (including nonfinancial assets with zero carrying value) or an in substance nonfinancial asset except as noted in paragraph 610-20-15-3.

a. Subparagraph superseded by Accounting Standards Update No. 201X-XX.The gain or loss recognized upon the derecognition of a nonfinancial asset within the scope of Topic 350 on intangibles or Topic 360 on property, plant, and equipment, unless the entity sells or transfers the nonfinancial asset in a contract with a customer

b. Subparagraph superseded by Accounting Standards Update No. 201X-XX.The gain or loss recognized upon the transfer of financial assets that are in substance nonfinancial assets within the scope of Topic 350 or Topic 360 (for example, the sale of a subsidiary that only consists of an asset [for example, a machine or piece of equipment]).

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> Other Considerations 610-20-15-3 The guidance in this Subtopic does not apply to the following:

a. The derecognition of a nonfinancial asset, including an {add glossary link}in substance nonfinancial asset{add glossary link}, in a contract with a customer, see Topic 606 on revenue from contracts with

customers b. The derecognition of a subsidiary or group of assets that constitutes a

business or nonprofit activity (excluding an in substance nonfinancial

asset), see Section 810-10-40 on consolidation c. Real estate sale-leaseback transactions, see Subtopics 360-20 and 840-

40 on leases d. A conveyance of oil and gas mineral rights, see Subtopic 932-360 on

extractive activities e. Subparagraph superseded by Accounting Standards Update No. 201X-

XX.A transfer of a nonfinancial asset to another entity in exchange for a noncontrolling ownership interest in that entity, see the guidance on exchanges of a nonfinancial asset for a noncontrolling ownership interest in Section 845-10-30.

f. A transaction that would be entirely accounted for under Topic 860 on transfers and servicing

g. A transfer of a nonfinancial asset that is part of the consideration in a business combination, see paragraph 805-30-30-8

h. Nonmonetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers, see Topic 845 on nonmonetary transactions

i. Nonreciprocal transfers, see Topic 845 j. The exchange of takeoff and landing slots for entities in the airline

industry, see Subtopic 908-350 on airlines—intangibles—takeoff and landing slots

k. The derecognition of a subsidiary that does not have an in substance nonfinancial asset, see paragraph 810-10-40-3A(c).

In addition, amend the following pending content for paragraph 610-20-15-3, with no additional link to transition:

Pending Content:

Transition Date: (P) December 16, 2018; (N) December 16, 2019 | Transition Guidance: 842-10-65-1

610-20-15-3 The guidance in this Subtopic does not apply to the following:

a. The derecognition of a nonfinancial asset, including an {add glossary link}in substance nonfinancial asset{add glossary link}, in a contract

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with a customer, see Topic 606 on revenue from contracts with

customers b. The derecognition of a subsidiary or group of assets that constitutes a

business or nonprofit activity (excluding an in substance nonfinancial

asset), see Section 810-10-40 on consolidation c. Sale and leaseback transactions, see Subtopic 842-40 on leases d. A conveyance of oil and gas mineral rights, see Subtopic 932-360 on

extractive activities e. Subparagraph superseded by Accounting Standards Update No. 201X-

XX.A transfer of a nonfinancial asset to another entity in exchange for a noncontrolling ownership interest in that entity, see the guidance on exchanges of a nonfinancial asset for a noncontrolling ownership interest in Section 845-10-30.

f. A transaction that would be entirely accounted for under Topic 860 on transfers and servicing

g. A transfer of a nonfinancial asset that is part of the consideration in a business combination, see paragraph 805-30-30-8

h. Nonmonetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers, see Topic 845 on nonmonetary transactions

i. Nonreciprocal transfers, see Topic 845 j. The exchange of takeoff and landing slots for entities in the airline

industry, see Subtopic 908-350 on airlines—intangibles—takeoff and landing slots

k. The derecognition of a subsidiary that does not have an in substance nonfinancial asset, see paragraph 810-10-40-3A(c).

> > In Substance Nonfinancial Assets

610-20-15-4 The objective in assessing whether assets to be derecognized are in substance nonfinancial assets is to determine whether the assets being

derecognized are within the scope of this Subtopic. Paragraphs 610-20-15-5 through 15-10 further describe how an entity shall apply the definition. See the decision tree in paragraph 610-20-55-5 and Example 2 in paragraphs 610-20-55-6 through 55-15 for further details.

610-20-15-5 An entity shall first evaluate whether all of the assets promised in a contract (regardless of whether the assets are transferred within or outside a

subsidiary) are in substance nonfinancial assets. If an entity concludes that all of the assets in a contract are in substance nonfinancial assets, all of the assets promised in that contract shall be within the scope of this Subtopic.

610-20-15-6 If all of the assets promised in a contract do not meet the definition of

in substance nonfinancial assets, an entity shall next evaluate whether assets in an individual subsidiary within that contract (for example, a contract that includes

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a promise to transfer multiple subsidiaries or a subsidiary and other assets) are in substance nonfinancial assets. If the assets in an individual subsidiary within the contract are in substance nonfinancial assets, all of the assets in that subsidiary shall be within the scope of this Subtopic. The entity shall apply the guidance in paragraph 610-20-15-11 to separate the in substance nonfinancial assets in a subsidiary that are within the scope of this Subtopic from other parts of the contract that are within the scope of other Topics.

610-20-15-7 If an entity concludes that the assets in a subsidiary do not meet the

definition of in substance nonfinancial assets, the entity shall consider the guidance in paragraph 810-10-40-3A(c) to determine the derecognition guidance applicable to that subsidiary.

610-20-15-8 If an entity enters into a contract to transfer individual assets (that are

not in a subsidiary) that do not all meet the definition of in substance nonfinancial assets, the entity shall consider the guidance in paragraph 606-10-15-4 to separate nonfinancial assets, if any, within the scope of this Subtopic from the other parts of the contract that are within the scope of other Topics.

610-20-15-9 An entity’s conclusion that all of the assets promised in a contract are

in substance nonfinancial assets shall not affect the scope of parts of a contract that are not assets of the entity to be derecognized (for example, issuing guarantees within the scope of Topic 460) or parts of a contract within the scope of Topic 606 on revenue from contracts with customers. In addition, a counterparty’s promise to assume a liability of an entity in exchange for an asset (for example, the transfer of a building subject to a mortgage loan that is assumed by the counterparty) shall not affect the determination of whether an asset to be derecognized is within the scope of this Subtopic because it is a part of the consideration used to calculate the gain or loss upon derecognition of an asset (see paragraphs 610-20-32-1 through 32-3).

610-20-15-10 For purposes of evaluating whether the assets promised in a

contract or a consolidated subsidiary meet the definition of an in substance nonfinancial asset, cash or cash equivalents shall be excluded from total assets when determining whether substantially all of the fair value is concentrated in nonfinancial assets. In some cases, a qualitative assessment will be conclusive in determining that substantially all of the fair value is concentrated in nonfinancial assets (for example, when there are no financial assets in the transaction or when the financial assets are measured at fair value and are insignificant as compared with the purchase price).

> > Contracts Partially within the Scope of Other Topics

610-20-15-11 A contract may be partially within the scope of this Subtopic and

partially within the scope of other Topics. An entity shall apply paragraph 606-10-15-4 to determine how to separate and measure one or more parts of the contract that is within the scope of other Topics.

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6. Amend paragraph 610-20-25-1 and add paragraph 610-20-25-2, with a link to transition paragraph 606-10-65-1, as follows:

Recognition

610-20-25-1 At contract inception, an entity shall identify the nonfinancial assets and in substance nonfinancial assets promised in the contract to determine

whether the contract contains distinct nonfinancial assets. An entity shall recognize a gain or loss for each distinct nonfinancial asset transferred in accordance with the derecognition guidance in Section 610-20-40.

610-20-25-2 To determine whether a nonfinancial asset or an in substance

nonfinancial asset is a distinct nonfinancial asset, an entity shall apply the guidance on revenue from contracts with customers on identifying distinct goods

or services in paragraphs 606-10-25-19 through 25-22.

7. Amend paragraph 610-20-32-1 and add paragraphs 610-20-32-2 through 32-5 and the related heading, with a link to transition paragraph 606-10-65-1, as follows:

Measurement

610-20-32-1 To determine theAn entity shall include both of the following in the

amount of consideration to be included in the calculation of a gain or loss recognized upon the derecognition of a distinct nonfinancial asset, an entity shall apply the following paragraphs in Topic 606 on revenue from contracts with customers:

a. Paragraphs 606-10-32-2 through 32-27 on determining theThe transaction price, including all of the following: as determined in Topic 606 on revenue from contracts with customers

1. Estimating variable consideration 2. Constraining estimates of variable consideration 3. The existence of a significant financing component 4. Noncash consideration 5. Consideration payable to a customer.

b. The carrying amount of liabilities assumed by the counterparty.Paragraphs 606-10-32-42 through 32-45 on accounting for changes in the transaction price. [Content amended and moved to paragraph 610-20-32-2]

610-20-32-2 To determine the transaction price amount of consideration to be

included in the calculation of a gain or loss recognized upon the derecognition of a nonfinancial asset, an entity shall apply the following paragraphs in Topic 606 on revenue from contracts with customers:

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a. Paragraphs 606-10-32-2 through 32-27 on determining the {remove glossary link}transaction price{remove glossary link}, including all of

the following: 1. Estimating variable consideration 2. Constraining estimates of variable consideration 3. The existence of a significant financing component 4. Noncash consideration 5. Consideration payable to a customer.

b. Paragraphs 606-10-32-42 through 32-45 on accounting for changes in the transaction price. [Content amended as shown and moved from paragraph 610-20-32-1]

610-20-32-3 A promise by a counterparty to assume or relieve a liability in

exchange for an asset within the scope of this Subtopic shall be included in the consideration used to calculate the gain or loss upon derecognition of the distinct nonfinancial asset. An entity 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. However, the entity shall not derecognize the liability until it meets the criteria in Subtopic 405-20 on extinguishments of liabilities.

610-20-32-4 To determine the allocation of consideration (which has been

calculated in accordance with paragraphs 610-20-32-1 through 32-3) to each distinct nonfinancial asset, an entity shall apply the guidance on allocating the transaction price in paragraphs 606-10-32-28 through 32-41.

> Transfer of a Distinct Nonfinancial Asset for a Noncontrolling Ownership Interest in the Counterparty

610-20-32-5 An entity may transfer a distinct nonfinancial asset in exchange for

consideration in the form of a noncontrolling ownership interest in the counterparty. Those transactions also could include other forms of consideration. The entity shall consider the noncontrolling ownership interest received from the counterparty as noncash consideration that shall be measured consistent with paragraphs 606-10-32-21 through 32-24.

8. Amend paragraphs 610-20-40-1 through 40-2 and add paragraphs 610-20-40-3 through 40-10 and their related headings, with a link to transition paragraph 606-10-65-1, as follows:

Derecognition

610-20-40-1 To determine when a distinct nonfinancial asset shall be

derecognized, an entity shall apply the following paragraphs in Topic 606 on revenue from contracts with customers:

a. Paragraphs 606-10-25-1 through 25-8 on the existence of a contract

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b. Paragraph 606-10-25-30 on when an entity satisfies a performance obligation by transferring control of an asset.

610-20-40-2 When the guidance in paragraph 610-20-40-1 is met, an entity shall

derecognize the distinct nonfinancial asset and recognize as a gain or loss the difference between the amount of consideration measured and allocated to the distinct nonfinancial asset in accordance with paragraphparagraphs 610-20-32-1 through 32-5 and the carrying amount of the distinct nonfinancial asset. When the guidance in paragraph 610-20-40-1 is not met, an entity shall apply the guidance in paragraphs 350-10-40-3 to intangible assets and 360-10-40-3C to property, plant, and equipment.

> Transfer of an Ownership Interest in a Subsidiary

610-20-40-3 The guidance in paragraphs 610-20-40-4 through 40-10 applies to the transfer of an ownership interest in a subsidiary when the assets in the subsidiary are in substance nonfinancial assets within the scope of this

Subtopic.

610-20-40-4 To determine the point in time at which an entity transfers control of

a distinct nonfinancial asset in a subsidiary, the reporting entity first must determine whether it retains a controlling financial interest in the subsidiary in accordance with the guidance in Topic 810 on consolidation. If the reporting entity retains a controlling financial interest in the subsidiary, the distinct nonfinancial assets shall not be derecognized and the transaction shall be accounted for as an equity transaction in accordance with the guidance in paragraphs 810-10-45-23 through 45-24.

610-20-40-5 If the reporting entity no longer has a controlling financial interest in

the former subsidiary, the reporting entity shall apply the guidance in paragraph 606-10-25-30 to determine the point in time at which another party or parties obtain control of a distinct nonfinancial asset in the former subsidiary. See paragraphs 610-20-40-6 through 40-10 for additional guidance on the application of paragraph 606-10-25-30 when the parent no longer has a controlling financial interest in the former subsidiary.

> > A Reporting Entity Does Not Retain an Ownership Interest in the Former Subsidiary

610-20-40-6 When a reporting entity transfers ownership interests in a wholly owned subsidiary to the counterparty in a contract, the reporting entity shall apply

the guidance in paragraph 606-10-25-30 to determine the point in time at which the counterparty obtains control of a distinct nonfinancial asset in the former subsidiary.

610-20-40-7 When a reporting entity transfers ownership interests in a subsidiary

so that more than one unrelated party has or obtains an ownership interest in the subsidiary (for example, a 50 percent interest is transferred to Party A and a 50 percent interest is transferred to Party B), the reporting entity shall apply the

17

guidance in paragraph 606-10-25-30 to determine the point in time at which the other parties collectively are deemed to have obtained control of a distinct nonfinancial asset in the former subsidiary.

> > A Reporting Entity Retains an Ownership Interest in the Former Subsidiary

610-20-40-8 To determine whether a reporting entity has transferred control of a

distinct nonfinancial asset in the former subsidiary, the reporting entity shall apply the guidance in paragraph 606-10-25-30 to determine if (or when) the former subsidiary has (or obtains) control of the distinct nonfinancial asset. That is, the reporting entity transfers control of the distinct nonfinancial asset when it no longer has a controlling financial interest in the former subsidiary and that former subsidiary controls the distinct nonfinancial asset.

610-20-40-9 When a reporting entity transfers control of a distinct nonfinancial

asset but retains a noncontrolling ownership interest in the former subsidiary, the reporting entity shall measure the gain or loss consistent with a transfer of a distinct nonfinancial asset in exchange for a noncontrolling ownership interest in the counterparty (see paragraph 610-20-32-5). The reporting entity shall account for the retained investment as noncash consideration that is included in the calculation of the gain or loss and measured at fair value consistent with the guidance in paragraphs 606-10-32-21 through 32-24.

610-20-40-10 Upon derecognition of the distinct nonfinancial asset, the reporting

entity shall recognize the retained investment, which is initially measured at fair value as described in paragraph 610-20-40-9. See Example 3 in paragraphs 610-20-55-16 through 55-21.

9. Add paragraphs 610-20-45-2 through 45-3, with a link to transition paragraph 606-10-65-1, as follows:

Other Presentation Matters

610-20-45-1 See paragraph 360-10-45-5 for guidance on presentation of a gain or loss recognized on the sale of a long-lived asset (disposal group).

610-20-45-2 When either party to a contract has performed, an entity shall apply

paragraphs 606-10-45-1 through 45-5 to present the relationship between the entity’s performance and the counterparty’s payment.

610-20-45-3 If an entity meets the criteria in Subtopic 405-20 to derecognize a

liability assumed by the counterparty before transferring control of a distinct nonfinancial asset, the liability shall be derecognized but no gain or loss shall be recognized. Instead, the entity shall record a contract liability as consideration

received before the entity transfers the asset. If the entity transfers control of a distinct nonfinancial asset before meeting the criteria to derecognize a liability assumed by the counterparty, the entity shall recognize a contract asset to the

18

extent the carrying amount of the liability is included in the calculation of the gain or loss.

10. Add Section 610-20-50, with a link to transition paragraph 606-10-65-1, as follows:

Disclosure

General

610-20-50-1 See paragraphs 360-10-50-3 through 50-3A for guidance on

disclosure of a gain or loss recognized upon the derecognition of a long-lived asset (disposal group).

11. Amend paragraph 610-20-55-3 and add paragraphs 610-20-55-5 through 55-21 and their related headings, with a link to transition paragraph 606-10-65-1, as follows:

Implementation Guidance and Illustrations

> Illustrations

> > Sale of a Nonfinancial Asset

> > > Example 1—Sale of a Nonfinancial Asset for Variable Consideration

610-20-55-2 An entity sells 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 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.

610-20-55-3 Topic 350 on goodwill and other intangibles requires the entity to apply the guidance on existence of a contract, control, and measurement in Topic 606 on revenue from contracts with customersin this Subtopic to determine the

amount and timing of income to be recognized. The entity should apply the derecognition guidance in paragraph 610-20-40-1 as follows:

a. The entity concludes that the criteria for identifying a {add glossary link}contract{add glossary link} in paragraph 606-10-25-1 are met.

b. 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 as of contract inception. This is because as of contract inception the buyer can use the in-process research and development’s records, patents, and supporting documentation to

19

develop potential products and the entity has relinquished all substantive rights to the in-process research and development asset.

c. 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.

610-20-55-4 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.

> > Scope

610-20-55-5 The following decision tree depicts the process for evaluating whether a contract or portions of a contract is within the scope of this Subtopic. The

decision tree does not include all of the guidance on determining the scope of this Subtopic and is not intended as a substitute for the guidance in this Subtopic.

[For ease of readability, the new decision tree is not underlined.]

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> > > Example 2—In Substance Nonfinancial Assets

> > > > Case A: In Substance Nonfinancial Assets and a Guarantee

610-20-55-6 Seller enters into a contract to transfer real estate, the related

operating leases, and a minor amount of 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, the entity is required to make a payment in the amount of the shortfall.

610-20-55-7 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 the Seller concludes that substantially all of the fair value of the assets promised in the contract are concentrated in nonfinancial assets (that is, substantially all of the fair value is concentrated in the real estate and in place lease intangible assets). As such, all of the assets

22

promised in the contract are in substance nonfinancial assets. In accordance with paragraph 610-20-15-5, all of the assets in the contract (including the accounts receivable) are within the scope of this Subtopic.

610-20-55-8 In accordance with paragraph 610-20-15-9, Seller also concludes that

the guarantee (which is not an asset of Seller) is within the scope of Topic 460. Seller applies the guidance in paragraph 606-10-15-4 to separate and measure parts of the contract within the scope of this Subtopic (the in substance assets) and parts of the contract within the scope of Topic 460 (the guarantee).

610-20-55-9 Seller’s conclusions would be the same if Seller transfers the real

estate, leases, and receivables in a subsidiary. Seller would similarly conclude that all of the assets in the subsidiary are in substance nonfinancial assets within the scope of this Subtopic and that the guarantee is within the scope of Topic 460.

> > > > Case B: Assets That Are Not In Substance Nonfinancial Assets

610-20-55-10 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 are not concentrated in nonfinancial assets. As such, the assets promised in the contract are not in substance nonfinancial assets.

610-20-55-11 In accordance with paragraph 610-20-15-11, Entity X applies the

guidance in paragraph 606-10-15-4 to separate and measure the parts of the contract within the scope of this Subtopic (the machinery) and the parts of the contract within the scope of other Topics (the financial assets).

610-20-55-12 If Entity X transfers a subsidiary that holds the machinery and

financial assets, it would still conclude that the assets in the subsidiary are not in substance nonfinancial assets. However, a subsidiary that does not have in substance nonfinancial assets is excluded in its entirety from the scope of this Subtopic in accordance with paragraph 610-20-15-3(k). As such, Entity X would consider paragraph 810-10-40-3A(c) to determine the applicable derecognition guidance.

> > > > Case C: Subsidiary with In Substance Nonfinancial Assets

610-20-55-13 Entity A enters into a contract to transfer ownership interests in two

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 subsidiaries 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.

23

610-20-55-14 Entity A first considers whether all of the assets in the contract are

in substance nonfinancial assets. Entity A concludes that because both the financial assets and nonfinancial assets have an equal amount of fair value, all of the assets in the contract are not in substance nonfinancial assets. However, in accordance with paragraph 610-20-15-6, Entity A then considers whether the assets in the individual subsidiaries meet the definition of in substance nonfinancial assets. Entity A concludes that the assets in Subsidiary 1 meet the definition of in substance nonfinancial assets and the assets in that subsidiary are within the scope of this Subtopic. In addition, Entity A concludes that the assets in Subsidiary 2 are not in substance nonfinancial assets.

610-20-55-15 In accordance with paragraph 610-20-15-11, Entity A applies the

guidance in paragraph 606-10-15-4 to separate and measure the parts of the contract within the scope of this Subtopic (the in substance nonfinancial assets in Subsidiary 1) and the parts of the contract within the scope of other Topics (Subsidiary 2).

> > Transfers of an Ownership Interest in a Subsidiary with In Substance Nonfinancial Assets

> > > Example 3—Transfer of an Ownership Interest in a Subsidiary with a Retained Interest

610-20-55-16 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 and that Entity B does not meet the definition of a business. Entity A qualitatively concludes that the land in the subsidiary is an in substance nonfinancial asset.

> > > > Case A: Control Transfers

610-20-55-17 Entity A enters into a contract to transfer 60 percent of Entity B to

Entity X, an unrelated third party, for $6 million 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. Assume that Entity A concludes that it no longer has a controlling financial interest in Entity B and that the criteria for identifying a contract in paragraph 606-10-25-1 are met.

610-20-55-18 Entity A considers paragraphs 610-20-40-8 through 40-10 and

applies the guidance in paragraph 606-10-25-30 to determine if Entity B, the former subsidiary, has control of the distinct nonfinancial asset. Entity A concludes that at contract inception it has transferred control of the distinct nonfinancial asset because it does not control Entity B and Entity B controls the distinct nonfinancial asset. When evaluating the indicators in paragraph 606-10-25-30:

a. Entity A concludes that it has the present right to payment. b. Entity B has legal title to the land. c. Entity A does not have physical possession of the asset because it cannot

restrict or prevent other entities from accessing the land.

24

d. Entity B has the significant risks and rewards of ownership. e. Assume that there is no acceptance clause.

610-20-55-19 Entity A derecognizes the land and calculates the gain or loss as the

difference between the amount of consideration measured in accordance with paragraphs 610-20-32-1 and 610-20-40-9 and the carrying amount of the land. The amount of the consideration is $10 million, which includes $6 million cash plus $4 million fair value of the noncontrolling ownership 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 paragraph 360-10-45-5. In accordance with paragraph 610-20-40-10, Entity A records the noncontrolling investment in Entity B at $4 million, and the investment is subsequently accounted for under other Topics.

> > > > Case B: Control Does Not Transfer

610-20-55-20 Assume the same facts as in Case A, except that Entity A has the

right but not the obligation to repurchase (a call option) the 60 percent ownership interest transferred to Entity X in 2 years for $7 million.

610-20-55-21 Because Entity A has the right to repurchase the land (that is, the

call option provides Entity A with the right to repurchase the land by repurchasing a controlling financial interest in the entity that holds the land), it considers the guidance on repurchase features in paragraphs 606-10-55-66 through 55-78. In accordance with paragraph 606-10-55-68, Entity A 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 paragraph 606-10-55-68(b). In accordance with paragraph 606-10-55-70, Entity A does not derecognize the land and records a financial liability of $6 million.

Conforming Amendments

12. The amendments described in paragraphs 13–33 conform the guidance in other Topics throughout the Accounting Standards Codification.



Receivables—Overall

Derecognition

25

Acquisition, Development, and Construction Arrangements

310-10-40-4 If an acquisition, development, and construction arrangement is

accounted for as an investment in real estate or joint venture and the expected residual profit is sold, the entity shall apply the guidance in paragraphs 360-10-40-3A through 40-3BTopic 860 on transfers and servicing.



Investments—Equity Method and Joint Ventures—Overall

Initial Measurement

> The Equity Method—Overall Guidance

323-10-30-2 Except as provided in the following sentence, an investor shall

measure an investment in the common stock of an investee (including a joint venture) initially at cost in accordance with the guidance in Section 805-50-30. An investor shall initially measure, at fair value, the following:

a. aA retained investment in the common stock of an investee (including a joint venture) in a deconsolidation transaction in accordance with paragraphs 810-10-40-3A through 40-5.40-5

b. An investment in the common stock of an investee (including a joint venture) recognized upon the derecognition of a distinct nonfinancial asset in accordance with Subtopic 610-20.


Subsequent Measurement

> The Equity Method—Overall Guidance

> > Intra-entity Gains and Losses

323-10-35-7 Intra-entity profits and losses shall be eliminated until realized by the

investor or investee as if the investee were consolidated. Specifically, intra-entity profits or losses on assets still remaining with an investor or investee shall be

26

eliminated, giving effect to any income taxes on the intra-entity transactions, except for bothany of the following:

a. A transaction with an investee (including a joint venture investee) that is accounted for as a deconsolidation of a subsidiary or a derecognition of a group of assets in accordance with paragraphs 810-10-40-3A through 40-5

b. A transaction with an investee (including a joint venture investee) that is accounted for as a change in ownership transaction in accordance with paragraphs 810-10-45-21A through 45-24.

c. A transaction with an investee (including a joint venture investee) that is accounted for as the derecognition of an asset in accordance with Subtopic 610-20 on other income—gains and losses from the derecognition of nonfinancial assets.



> Illustrations

> > Example 3: Elimination of Intra-entity Profit

323-10-55-27 The following Cases illustrate how eliminations of intra-entity profits

might be made in accordance with paragraph 323-10-35-7. Both Cases assume that an investor owns 30 percent of the common stock of an investee, the investment is accounted for under the equity method, and the income tax rate to both the investor and the investee is 40 percent, the inventory is a good that is an output of the entity’s ordinary activities, and the contract is with a customer that is within the scope of Topic 606 on revenue from contracts with customers:

a. Investor sells inventory downstream to investee (Case A) b. Investee sells inventory upstream to investor (Case B).



Intangibles—Goodwill and Other—Overall

Derecognition

27

> Transfer or Sale of Intangible Assets

350-10-40-1 An entity shall account for the derecognition of a nonfinancial asset,

including an in substance nonfinancial asset, within the scope of this Topic in accordance with Subtopic 610-20 on gains and losses from the derecognition of nonfinancial assets, unless the entity sells or transfers the nonfinancial asset in a contract with a customer. The derecognition of a nonfinancial asset in a contract

with a customer shall be accounted for in accordance with Topic 606 on revenue from contracts with customers.

350-10-40-2 Unless a subsidiary or group of assets is an in substance nonfinancial

asset, anAn entity shall account for the derecognition of a subsidiary or a group of assets that is either a business or nonprofit activity in accordance with the

derecognition guidance in Subtopic 810-10. The derecognition of an in substance nonfinancial asset shall be accounted for in accordance with paragraph 350-10-40-1.

350-10-40-3 If an entity transfers a nonfinancial asset in accordance with

paragraph 350-10-40-1 and the contract does not meet all of the criteria in paragraph 606-10-25-1, the entity shall not derecognize the nonfinancial asset and shall follow the guidance in paragraphs 606-10-25-6 through 25-8 to determine if and when the contract subsequently meets all of the criteria in paragraph 606-10-25-1. Until all of the criteria in paragraph 606-10-25-1 are met, the entity shall continue to do all of the following:

a. Report the nonfinancial asset in its financial statements b. Recognize amortization expense as a period cost for those assets with a

finite life c. Apply the impairment guidance in Section 350-30-35.


18. Supersede the pending content of paragraph 360-10-40-2 and its related heading that links to paragraph 842-10-65-1, with a link to transition paragraph 606-10-65-1, as follows:

Property, Plant, and Equipment—Overall

Derecognition

Pending Content:


28

> Sale of Leased Assets

360-10-40-2 Paragraph superseded by Accounting Standards Update No. 201X-

XX.To determine when an asset subject to a lease shall be derecognized, an entity shall apply the following paragraphs in Topic 606 on revenue from contracts with customers:

a. Paragraphs 606-10-25-1 through 25-8 on the existence of a contract b. Paragraph 606-10-25-30 on when an entity satisfies a performance

obligation by transferring control of an asset.

19. Amend paragraph 360-10-40-3A, with a link to transition paragraph 842-10-65-1, as follows:

> Transfer or Sale of Property, Plant, and Equipment

360-10-40-3A An entity shall account for the derecognition of a nonfinancial asset,

including an in substance nonfinancial asset and an asset subject to a lease, within the scope of this Topic in accordance with Subtopic 610-20 on gains and losses from the derecognition of nonfinancial assets, unless the entity sells or transfers the nonfinancial asset in a contract with a customer or in a sale and leaseback

transaction. The derecognition of a nonfinancial asset in a contract with a customer shall be accounted for in accordance with Topic 606 on {add glossary link}revenue{add glossary link} from contracts with customers.

20. Amend paragraphs 360-10-40-3B and 360-10-40-5, with a link to transition paragraph 606-10-65-1, as follows:

General

360-10-40-3B Unless a subsidiary or group of assets is an in substance

nonfinancial asset, anAn entity shall account for the derecognition of a subsidiary or group of assets that is either a business or nonprofit activity in accordance

with the derecognition guidance in Subtopic 810-10. The derecognition of an in substance nonfinancial asset shall be accounted for in accordance with paragraph 360-10-40-3A.

360-10-40-3C If an entity transfers a nonfinancial asset in accordance with

paragraph 360-10-40-3A, and the contract does not meet all of the criteria in paragraph 606-10-25-1, the entity shall not derecognize the nonfinancial asset and shall follow the guidance in paragraphs 606-10-25-6 through 25-8 to determine if and when the contract subsequently meets all the criteria in paragraph 606-10-25-1. Until all the criteria in paragraph 606-10-25-1 are met, the entity shall continue to do all of the following:

a. Report the nonfinancial asset in its financial statements

29

b. Recognize depreciation expense as a period cost unless the assets have been classified as held for sale in accordance with paragraphs 360-10-45-9 through 45-10

c. Apply the impairment guidance in Section 360-10-35.

Impairment or Disposal of Long-Lived Assets

> Recognition of Gain or Loss from Sale

360-10-40-5 A gain or loss not previously recognized that results from the sale of

a long-lived asset (disposal group) shall be recognized when the long-lived asset (disposal group) is derecognized in accordance with applicable Topics (for example, Topic 610 on other income, Topic 810 on consolidation, or Topic 860 on transfers and servicing)at the date of sale.


21. Amend paragraphs 810-10-40-3A through 40-3B, with a link to transition paragraph 606-10-65-1, as follows:

Consolidation—Overall

Derecognition

> Deconsolidation of a Subsidiary or Derecognition of a Group of Assets

810-10-40-3A The deconsolidation and derecognition guidance in this Section

applies to the following:

a. A subsidiary that is a nonprofit activity or a business, except for either

of the following: 1. Subparagraph superseded by Accounting Standards Update No.

201X-XX.A transfer of in substance nonfinancial assets (for guidance on transfers of in substance nonfinancial assets, see Subtopic 610-20)

2. A conveyance of oil and gas mineral rights (for guidance on conveyances of oil and gas mineral rights and related transactions, see Subtopic 932-360).

3. A transfer of a good or service in a contract with a customer within

the scope of Topic 606 b. A group of assets that is a nonprofit activity or a business, except for

either of the following:

30

1. Subparagraph superseded by Accounting Standards Update No. 201X-XX.A transfer of in substance nonfinancial assets (for guidance on transfers of in substance nonfinancial assets, see Subtopic 610-20)

2. A conveyance of oil and gas mineral rights (for guidance on conveyances of oil and gas mineral rights and related transactions, see Subtopic 932-360).

3. A transfer of a good or service in a contract with a customer within the scope of Topic 606

c. A subsidiary that is not a nonprofit activity or a business if the substance of the transaction is not addressed directly by guidance in other Topics that include, but are not limited to, all of the following: 1. Topic 606 on revenue from contracts with customers

2. Topic 845 on exchanges of nonmonetary assets 3. Topic 860 on transferring and servicing financial assets 4. Topic 932 on conveyances of mineral rights and related transactions 5. Subtopic 610-20 on gains and losses from the derecognition of

nonfinancial assets within the scope of Topic 350 on intangibles or Topic 360 on property, plant, and equipment.

810-10-40-3B The deconsolidation and derecognition guidance in this Section

does not apply to a parent that ceases to have a controlling financial interest (as described in this Subtopic) in a subsidiary that is anwhen the assets in the subsidiary are {add glossary link}in substance nonfinancial assets{add glossary link}asset (for example, in substance real estate) within the scope of Subtopic 610-

20 as a result of default on the subsidiary’s nonrecourse debt. See also paragraph 610-20-15-2(b).

22. Amend paragraph 810-10-45-21A, with a link to transition paragraph 606-10-65-1, as follows:

Other Presentation Matters

> Changes in a Parent’s Ownership Interest in a Subsidiary

810-10-45-21A The guidance in paragraphs 810-10-45-22 through 45-24 applies

to the following:

a. Transactions that result in an increase in ownership of a subsidiary b. Transactions that result in a decrease in ownership of either of the

following while the parent retains a controlling financial interest in the subsidiary: 1. A subsidiary that is a business or a nonprofit activity, except for

either of the following: i. Subparagraph superseded by Accounting Standards Update

No. 201X-XX.A transfer of in substance nonfinancial assets (for guidance on transfers of in substance nonfinancial assets,

31

see Subtopic 610-20 on gains and losses from the derecognition of nonfinancial assets)

ii. A conveyance of oil and gas mineral rights (for guidance on conveyances of oil and gas mineral rights and related transactions, see Subtopic 932-360).

iii. A transfer of a good or service in a contract with a customer within the scope of Topic 606.

2. A subsidiary that is not a business or a nonprofit activity if the substance of the transaction is not addressed directly by guidance in other Topics that include, but are not limited to, all of the following: i. Topic 606 on revenue from contracts with customers ii. Topic 845 on exchanges of nonmonetary assets iii. Topic 860 on transferring and servicing financial assets iv. Topic 932 on conveyances of mineral rights and related

transactions v. Subparagraph superseded by Accounting Standards Update

No. 201X-XX.Subtopic 610-20 on gains and losses from the derecognition of nonfinancial assets within the scope of Topic 350 on intangibles or Topic 360 on property, plant, and equipment.


23. Amend paragraphs 845-10-05-1 and 845-10-05-11 and supersede paragraph 845-10-05-12 and its related Subsection title, with a link to transition paragraph 606-10-65-1, as follows:

Nonmonetary Transactions—Overall

Overview and Background

General

845-10-05-1 The Nonmonetary Transactions Topic contains only the Overall

Subtopic. This Subtopic includes the following fivefour Subsections:

a. General b. Purchases and sales of inventory with the same counterparty c. Barter transactions d. Exchanges involving monetary considerations e. Subparagraph superseded by Accounting Standards Update No. 201X-

XX.Exchanges of a nonfinancial asset for a noncontrolling ownership interest.

32

Exchanges Involving Monetary Consideration

845-10-05-11 The Exchanges Involving Monetary Consideration Subsections

provide guidance on all of the following:

a. The level of monetary consideration in a nonmonetary exchange that

causes the transaction to be considered monetary in its entirety and, therefore, outside the scope of this Subtopic

b. Subparagraph superseded by Accounting Standards Update No. 201X-XX.Whether full or partial gain recognition is appropriate in a monetary exchange (required to be accounted for at fair value), if an entity transfers a nonfinancial asset (or assets) to another entity in exchange for a noncontrolling ownership interest in the other entity

c. Subparagraph superseded by Accounting Standards Update No. 2014-09.

Exchanges of a Nonfinancial Asset for a Noncontrolling Ownership Interest


XX.The Exchanges of a Nonfinancial Asset for a Noncontrolling Ownership Interest Subsections provide guidance for certain nonmonetary exchanges in which one

entity transfers a nonfinancial asset (or assets) to a second entity in exchange for a noncontrolling ownership interest in that second entity.

24. Amend paragraph 845-10-15-4 and supersede paragraphs 845-10-15-18 through 15-20 and their related headings and Subsection title, with a link to transition paragraph 606-10-65-1, as follows:


General

> Transactions

845-10-15-4 The guidance in the Nonmonetary Transactions Topic does not apply

to the following transactions:

a. A business combination accounted for by an entity according to the provisions of Topic 805 or a combination accounted for by a not-for-profit entity according to the provisions of Subtopic 958-805

b. A transfer of nonmonetary 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, or between a corporate joint venture and its owners

c. Acquisition of nonmonetary assets or services on issuance of the capital stock of an entity under Subtopics 718-10 and 505-50

33

d. Stock issued or received in stock dividends and stock splits that are accounted for in accordance with Subtopic 505-20

e. A transfer of assets to an entity in exchange for an equity interest in that entity (except for certain exchanges of a nonfinancial asset for a noncontrolling ownership interest, see paragraph 845-10-15-18)

f. A pooling of assets in a joint undertaking intended to find, develop, or produce oil or gas from a particular property or group of properties, as described in paragraph 932-360-40-7

g. The exchange of a part of an operating interest owned for a part of an operating interest owned by another party that is subject to paragraph 932-360-55-6

h. The transfer of a financial asset within the scope of Section 860-10-15 i. Involuntary conversions specified in paragraph 610-30-15-2 j. The transfer of goods or services in a contract with a customer within

the scope of Topic 606 on revenue from contracts with customers in

exchange for noncash consideration (see paragraphs 606-10-32-21 through 32-24)

k. The transfer of a nonfinancial asset within the scope of Subtopic 610-20 in exchange for noncash consideration (see paragraphparagraphs 610-20-32-1 through 32-2, which requiresrequire measurement consistent with paragraphs 606-10-32-21 through 32-24). However, if the noncash consideration promised in exchange for the nonfinancial asset is a noncontrolling ownership interest, that transaction is within the scope of this Topic.


> Overall Guidance


XX.The Exchanges of a Nonfinancial Asset for a Noncontrolling Ownership Interest Subsections follow the same Scope and Scope Exceptions as outlined in the General Subsection of this Subtopic, see paragraph 845-10-15-1, with specific transaction exceptions noted below.

> Transactions


XX.The guidance in the Exchanges of a Nonfinancial Asset for a Noncontrolling Ownership Interest Subsections applies to nonmonetary transfers of a nonfinancial asset (or assets) for a noncontrolling ownership interest.


XX.The guidance in these Subsections does not apply to the following types of transfers:

a. Transfers between a joint venture and its owners

34

b. Capital contributions of real estate in return for an unconsolidated real estate investment (for guidance, see Section 970-323)

c. Subparagraph superseded by Accounting Standards Update No. 2014-09]

d. Subparagraph superseded by Accounting Standards Update No. 2010-08

e. A deconsolidation of a subsidiary that is a business or nonprofit activity

that is within the scope of Subtopic 810-10 (see paragraph 810-10-40-3A)

f. A derecognition of a group of assets that constitutes a business or nonprofit activity that is within the scope of Subtopic 810-10 (see paragraph 810-10-40-3A).

25. Supersede paragraphs 845-10-25-9 through 25-12 and their related heading, with a link to transition paragraph 606-10-65-1, as follows:

Recognition


> Monetary Exchange of a Nonfinancial Asset for a Noncontrolling Ownership Interest


XX.In a monetary exchange (required to be accounted for at fair value) in which an entity (Entity A) transfers a nonfinancial asset (or assets) to another entity (Entity B) in exchange for a noncontrolling ownership interest in the other entity (Entity B), full or partial gain recognition is required.


XX.If Entity A has no actual or implied commitment, financial or otherwise, to support the operations of the new Entity B in any manner, the amount of gain recognized, if applicable, may exceed the amount that would be computed pursuant to the guidance for the preceding paragraph.


XX.A transaction is committed to if the parties to the transaction have signed a binding, written agreement that specifically sets forth the principal provisions of the transaction. If any of the principal provisions are yet to be negotiated, or are subsequently changed, such a preliminary agreement does not qualify as a commitment for purposes of this guidance.


XX.See Example 1 (paragraph 845-10-55-27) for illustration of the application of the gain recognition guidance discussed in this Subsection.

35

26. Supersede paragraphs 845-10-30-22 and its related heading, 845-10-30-24 through 30-25, and 845-10-30-25B through 30-27 and their related Subsection title, with a link to transition paragraph 606-10-65-1, as follows:

Initial Measurement


> Monetary Exchange of a Nonfinancial Asset for a Noncontrolled Ownership Interest


XX.In a monetary exchange (required to be accounted for at fair value), the gain recognized on a monetary exchange under paragraph 845-10-25-9 shall be computed in a manner consistent with the guidance in paragraphs 845-10-30-26 through 30-27.



XX.An entity (Entity A) transfers a nonfinancial asset (or assets) to another entity (Entity B) in exchange for a noncontrolling ownership interest in that entity (Entity

B).


XX.Except for the transactions identified in paragraph 845-10-30-25B, the following transactions shall be accounted for as a deconsolidation in accordance with paragraphs 810-10-40-3A through 40-5:

a. An entity transfers a subsidiary that is a business or nonprofit activity

(excluding an in substance nonfinancial asset) to a second entity in exchange for a noncontrolling interest in that second entity

b. An entity transfers a group of assets that constitute a business or nonprofit activity (excluding an in substance nonfinancial asset) to a second entity in exchange for a noncontrolling interest in that second entity.

845-10-30-25B Paragraph superseded by Accounting Standards Update No.

201X-XX.The following transactions shall be accounted for in accordance with the following Subtopics:

a. The transfer of a nonfinancial asset, including an in substance nonfinancial asset (see Subtopic 610-20). However, if the noncash consideration promised in exchange for the nonfinancial asset (or in substance nonfinancial asset) to a second entity is a noncontrolling ownership interest in that second entity, see paragraphs 845-10-30-25C through 30-27.

36

b. A conveyance of oil and gas mineral rights (for guidance on conveyances of oil and gas mineral rights, see Subtopic 932-360).

845-10-30-25C Paragraph superseded by Accounting Standards Update No.

201X-XX.Except for exchanges or transactions described in paragraphs 845-10-30-25 and 845-10-30-25B, if an exchange of a nonmonetary asset for a noncontrolling ownership interest in a second entity is accounted for at fair value, full or partial gain recognition is required. Paragraphs 845-10-30-26 through 30-27 provide guidance on how the gain or loss is to be determined.


XX.If the fair value of the asset or assets given up (or of the ownership interest received if that asset’s fair value is more readily determinable) is greater than their carrying value, then either of the following should take place:

a. A gain in the amount of that difference shall be recognized if the entity accounts for the ownership interest received using Topic 321.

b. A partial gain shall be recognized if the entity accounts for the ownership interest received using the equity method in Topic 323.

The partial gain shall be calculated as the amount described in (a) less the portion of that gain represented by the economic interest (which may be different from the voting interest) retained. For example, if Entity A exchanges an asset with a carrying value of $1,000 and a fair value of $2,000 for a 30 percent economic interest in Entity B, Entity A shall recognize a gain of $700 [($2,000 - $1,000) × 70%]. Thus, the amount recorded for the ownership interest received is partially based on its fair value at the exchange date and partially based on the carryover amount of the asset(s) surrendered.


XX.If the fair value of the nonfinancial asset or assets given up (or of the ownership interest received if the fair value of that asset is more readily determinable) is less than their carrying value, that difference shall be recognized as a loss.

27. Amend paragraph 845-10-55-2 and supersede paragraphs 845-10-55-27 through 55-28 and their related headings and Subsection title, with a link to transition paragraph 606-10-65-1, as follows:


General

> Implementation Guidance

> > Summary of Guidance

37

845-10-55-2 The following table summarizes the guidance contained in this

Subtopic.

Investment

accounted for by

the equity method

Controlled asset or group of assets that does not meet the

definition of a business

Controlled group of

assets that meets the

definition of a business

Investment

accounted for by

the equity

method

A transfer of an

equity method

investment should

be accounted for

under the

provisions of Topic

860.

A transfer of an equity method investment should be

accounted for under the provisions of Topic 860.Fair value (Topic 805)

Controlled

asset or group

of assets that

does not meet

the definition of

a business

If the transfer is

accounted for at

fair value, see

paragraph 845-10-

30-25AIf the

contract is with a

customer and

within the scope of

Topic 606, apply

Topic 606.

If the contract is not

within the scope of

Topic 606,

evaluate if the

transaction is

within the scope of

Subtopic 610-20. If

so, apply Subtopic

610-20.

If the contract is not

within the scope of

Subtopic 610-20

and is within the

scope of Topic

845, apply Topic

845.

Otherwise, apply

other GAAP.

If the contract is with a customer and within the scope of

Topic 606, apply Topic 606.

If the contract is not within the scope of Topic 606, evaluate if

the transaction is within the scope of Subtopic 610-20. If so,

apply Subtopic 610-20.

If the contract is not within the scope of Subtopic 610-20 and

is within the scope of Topic 845, apply Topic 845.

Otherwise, apply other GAAP.

Fair value (Topic 805)

ASSET RECEIVED

A

S

S

E

T

G

I

V

E

N

U

P

Controlled

group of assets

that meets the

definition of a

business

Fair value (Topic 805)

If the controlled group of assets that meets the definition of a business is (1) a

conveyance of oil and gas mineral rights, apply Subtopic 932-360, or (2) an in

substance nonfinancial asset, apply Subtopic 610-20. Otherwise, apply Subtopic

810-10.

38


> Illustrations

> > Example 1: Monetary Exchange of Nonfinancial Asset for a Noncontrolled Ownership Interest

845-10-55-27 Paragraph superseded by Accounting Standards No. Update 201X-

XX.This Example illustrates the guidance in paragraph 845-10-25-9.


XX.Entity A transfers its ownership of an individual nonfinancial asset (or assets) to a newly created entity (Entity B) in exchange for an ownership interest in Entity

B that will be accounted for by the equity method and monetary consideration. The monetary consideration received exceeds the fair value of the portion of the surrendered nonfinancial asset that has been sold in the exchange. The excess monetary consideration is funded by proceeds from nonrecourse financing within the newly created entity. Subsequent to the transfer, Entity A does not control Entity B. The specifics of the transaction are as follows:

a. Entity A owns equipment with a book basis of $100 and an appraised value of $400.

b. Entity B, previously unrelated to Entity A, creates a new subsidiary,

Entity X, and transfers cash of $60 to Entity X. c. Entity A transfers the equipment to Entity X in exchange for shares of

Entity X stock that represent a 40 percent ownership interest in Entity X. Simultaneously, Entity X borrows $300 with recourse to only the equipment and pays Entity A $360 cash.

Paragraph 845-10-25-10 requires that if Entity A has no actual or implied commitment, financial or otherwise, to support the operations of Entity B in any manner, a gain of $260 shall be recognized. The investor’s basis in the new entity shall be no less than zero. The gain calculation is illustrated as follows.

39

240$

(60)

80 (a)

260$

(a)

100$

(60)

40

(120)

(80)$ Negative investment

Fair value of interest in equipment sold ($400 × 60%)

Less: Cost of interest in equipment sold ($100 × 60%)

Plus: Additional gain to the extent of the negative investment

Total gain recognized

The additional gain is calculated as follows:

Cost of equipment

Less: Cost of interest in equipment sold

Less: Cash received in excess of 60% of the equipment’s fair

value ($360 – $240)

Remaining cost

Specific facts and circumstances may affect gain recognition and that it would be impractical to consider all possible variations of the basic transaction described above.



Transfers and Servicing—Overall


> Transactions

860-10-15-4 The guidance in this Topic does not apply to the following transactions

and activities:

a. Except for transfers of servicing assets (see Section 860-50-40) and for the transfers noted in the following paragraph, transfers of nonfinancial assets

b. Transfers of unrecognized financial assets, for example, minimum lease payments to be received under operating leases

c. Transfers of custody of financial assets for safekeeping d. Contributions (for guidance on accounting for contributions, see Subtopic

958-605)

40

e. Transfers of in substance nonfinancial assets, see Subtopic 610-20

ownership interests that are in substance sales of nonfinancial assets (For guidance related to transfers of investments that are in substance a sale of a nonfinancial asset, see Subtopic 610-20. For guidance related to sale-leaseback transactions involving real estate, including real estate with equipment, such as manufacturing facilities, power plants, and office buildings with furniture and fixtures, see Subtopic 840-40.)

f. Investments by owners or distributions to owners of a business entity g. Employee benefits subject to the provisions of Topic 712 h. Leveraged leases subject to Topic 840 i. Money-over-money and wrap lease transactions involving nonrecourse

debt subject to Topic 840.

In addition, amend the following pending content for paragraph 860-10-15-4, with no additional link to transition:

Pending Content:


860-10-15-4 The guidance in this Topic does not apply to the following transactions

and activities:

a. Except for transfers of servicing assets (see Section 860-50-40) and for the transfers noted in the following paragraph, transfers of nonfinancial assets

b. Transfers of unrecognized financial assets, for example, lease payments to be received under operating leases

c. Transfers of custody of financial assets for safekeeping d. Contributions (for guidance on accounting for contributions, see Subtopic

958-605) e. Transfers of in substance nonfinancial assets, see Subtopic 610-20

ownership interests that are in substance sales of nonfinancial assets (For guidance related to transfers of investments that are in substance a sale of a nonfinancial asset, see Subtopic 610-20. For guidance related to sale and leaseback transactions involving real estate, including real estate with equipment, such as manufacturing facilities, power plants, and office buildings with furniture and fixtures, see Subtopic 842-40 on sale and leaseback transactions.)

f. Investments by owners or distributions to owners of a business entity g. Employee benefits subject to the provisions of Topic 712 h. Leveraged leases subject to Topic 842 i. Money-over-money and wrap lease transactions involving nonrecourse

debt subject to Topic 842.

41



> Implementation Guidance

> > Scope

> > > Examples of Transactions and Activities That Are Included in the Scope

860-10-55-3 The guidance in this Topic applies to the following transactions and

activities, among others:

a. All loan participations

b. Transfers of equity method investments, unless the transfer is of an in substance nonfinancial asset (see Subtopic 610-20)

c. Transfers of cost-method investments d. With respect to the guidance in paragraph 860-10-40-5 only, transfers of

financial assets in desecuritization transactions.


30. Amend paragraph 970-323-30-3 and supersede paragraphs 970-323-30-4 through 30-5, with a link to transition paragraph 606-10-65-1, as follows:

Real Estate—General—Investments—Equity Method and Joint Ventures

Initial Measurement

> > Contribution of Real Estate

970-323-30-3 An investor that contributes real estate to the capital of a real estate

venture generally should record its investment in the venture at the investor’s cost (less related depreciation and valuation allowances) of the real estate contributed, fair value when the real estate is derecognized, regardless of whether the other investors contribute cash, property, or services. The transaction shall be accounted for in accordance with the guidance in paragraphs 360-10-40-3A through 40-3C. An investor shall not recognize profit on a transaction that in economic substance is a contribution to the capital of an entity. Some transactions,

42

structured in the form of capital contributions, may in economic substance be are sales of an ownership interest that result in an entity being an investor in a real estate venture. Those in substance sales of real estate shall be accounted for in accordance with the guidance in paragraphs 360-10-40-3A through 40-3C on derecognition of nonfinancial assets within the scope of Topic 360 on property, plant, and equipment. An example of such a transaction is includes one in which investor A contributes to a venture real estate (that is not considered a business or nonprofit activity and, therefore, is within the scope of Subtopic 610-20) with a fair value of $2,000 and investor B contributes cash in the amount of $1,000 which is immediately withdrawn by investor A, and, following such contributions and withdrawals, each investor has a 50 percent interest in the venture (the only asset of which is the real estate). Assuming investor A does not have a controlling financial interest in the venture, investor A applies the guidance in paragraphs 610-20-40-1 and 610-20-40-8 through 40-10. When investor A meets the criteria to derecognize the property, investor A measures its retained ownership interest at fair value consistent with the guidance in paragraph 610-20-40-10 and includes that amount in the consideration used in calculating the gain or loss on derecognition of the property. Assuming investor A is not committed to reinvest the $1,000 in the venture, the substance of this transaction is a sale by investor A of a one-half interest in the real estate in exchange for cash.


XX.However, that transaction is not a derecognition of a nonfinancial asset (that is, the sale of real estate) unless the investor that contributes real estate to the venture withdraws cash (or other hard assets) and has no commitment to reinvest in the venture.


XX.An investor contributing property to a venture may obtain a disproportionately small interest in the venture based on a comparison of the carrying amount of the property with the cash contributed by the other investors. That situation might indicate that the investor contributing the property has suffered a loss that should be recognized.

31. Amend paragraphs 970-323-35-14 through 35-15, with a link to transition paragraph 606-10-65-1, as follows:

Subsequent Measurement

> > Intra-entity Profit and Losses

970-323-35-14 Intra-entity profit shall be eliminated by the investor in relation to

the investor’s ownership interest in the investee unless one of the exceptions in paragraph 323-10-35-7 applies, except that an investor that controls the investee and enters into a transaction with the investee shall eliminate all of the

43

intercompany profit on assets remaining within the group. (See Subsection 323-30-35 for accounting guidance concerning partnership ownership interest.)

970-323-35-15 A sale of property in which the seller holds or acquires ana

noncontrolling equity interest in the buyer shall be evaluated under the guidelines in paragraphs 360-10-40-3A through 40-3Bresult in recognizing only the part of the profit proportionate to the outside interest in the buyer. No profit shall be recognized if the seller controls the buyer until realized from transactions with outside parties through sale or operations of the property.


Derecognition

> Sale of an Investment in a Real Estate Venture

970-323-40-1 A sale of an investment in a consolidated real estate venture

(including the sale of stock in a corporate real estate venture) is the equivalent of a sale of an interest in the underlying real estate and shall be evaluated under the guidelines set forth in paragraphs 360-10-40-3A through 40-3B. The sale of a noncontrolling investment in a real estate venture that is being accounted for in accordance with Topic 320 on investments—debt securities, Topic 321 on investments—equity securities, Topic 323 on investments—equity method and joint ventures, or Topic 325 on other investments shall be accounted for in accordance with the guidance in Topic 860 on transfers and servicing.


33. Amend paragraph 606-10-65-1 as follows:

Revenue from Contract with Customers—Overall

Transition and Open Effective Date Information

> Transition Related to Accounting Standards Updates No. 2014-09, Revenue from Contracts with Customers (Topic 606), and No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), and No. 2016-10, Revenue from Contract with Customers (Topic 606): Identifying Performance Obligations and Licensing, and No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, and No. 201X-XX, Other Income—Gains and Losses

from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying

44

the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets:

606-10-65-1 The following represents the transition and effective date information related to Accounting Standards Updates No. 2014-09, Revenue from Contracts with Customers (Topic 606), and No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), and No. 2016-10, Revenue from Contract with Customers (Topic 606): Identifying Performance Obligations and Licensing, and No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, and No. 201X-XX, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets:

a. A public business entity, a not-for-profit entity that has issued, or is a

conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, and an employee benefit plan that files or furnishes financial statements with or to the Securities and Exchange Commission shall apply the pending content that links to this paragraph for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

b. All other entities shall apply the pending content that links to this paragraph for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. However, all other entities may elect to apply the pending content that links to this paragraph earlier only as of either: 1. An annual reporting period beginning after December 15, 2016,

including interim reporting periods within that reporting period. 2. An annual reporting period beginning after December 15, 2016, and

interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which an entity first applies the pending content that links to this paragraph.

3. Subparagraph superseded by Accounting Standards Update No. 2015-14.

c. For the purposes of the transition guidance in (d) through (i): 1. The date of initial application is the start of the reporting period in

which an entity first applies the pending content that links to this paragraph.

2. A completed contract is a contract for which all (or substantially all) of the revenue was recognized in accordance with revenue

guidance that is in effect before the date of initial application.

45

d. An entity shall apply the pending content that links to this paragraph using one of the following two methods: 1. Retrospectively to each prior reporting period presented in

accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10 subject to the expedients in (f).

2. Retrospectively with the cumulative effect of initially applying the pending content that links to this paragraph recognized at the date of initial application in accordance with (h) through (i).

e. If an entity elects to apply the pending content that links to this paragraph retrospectively in accordance with (d)(1), the entity shall provide the disclosures required in paragraphs 250-10-50-1 through 50-2 in the period of adoption, except as follows. An entity need not disclose the effect of the changes on the current period, which otherwise is required by paragraph 250-10-50-1(b)(2). However, an entity shall disclose the effect of the changes on any prior periods that have been retrospectively adjusted.

f. An entity may use one or more of the following practical expedients when applying the pending content that links to this paragraph retrospectively in accordance with (d)(1): 1. An entity need not restate contracts that begin and are completed

within the same annual reporting period. 2. For completed contracts that have variable consideration, an entity

may use the transaction price at the date the contract was

completed rather than estimating variable consideration amounts in the comparative reporting periods.

3. For all reporting periods presented before the date of initial application, an entity need not disclose the amount of the transaction price allocated to the remaining performance obligations and an

explanation of when the entity expects to recognize that amount as revenue (see paragraph 606-10-50-13).

4. For contracts that were modified before the beginning of the earliest reporting period presented in accordance with the pending content that links to this paragraph, an entity need not retrospectively restate the contract for those contract modifications in accordance with paragraphs 606-10-25-12 through 25-13. Instead, an entity shall reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented in accordance with the pending content that links to this paragraph when: i. Identifying the satisfied and unsatisfied performance

obligations ii. Determining the transaction price iii. Allocating the transaction price to the satisfied and unsatisfied

performance obligations. g. For any of the practical expedients in (f) that an entity uses, the entity

shall apply that expedient consistently to all contracts within all reporting

46

periods presented. In addition, the entity shall disclose all of the following information: 1. The expedients that have been used 2. To the extent reasonably possible, a qualitative assessment of the

estimated effect of applying each of those expedients. h. If an entity elects to apply the pending content that links to this paragraph

retrospectively in accordance with (d)(2), the entity shall recognize the cumulative effect of initially applying the pending content that links to this paragraph as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) of the annual reporting period that includes the date of initial application. Under this transition method, an entity may elect to apply this guidance retrospectively either to all contracts at the date of initial application or only to contracts that are not completed contracts at the date of initial application (for example, January 1, 2018, for an entity with a December 31 year-end). An entity shall disclose whether it has applied this guidance to all contracts at the date of initial application or only to contracts that are not completed at the date of initial application. Under this transition method, an entity may apply the practical expedient for contract modifications in (f)(4). If an entity applies the practical expedient for contract modifications in (f)(4), it shall comply with the guidance in (g).

i. For reporting periods that include the date of initial application, an entity shall disclose the nature of and reason for the change in accounting principle and provide both of the following disclosures if the pending content that links to this paragraph is applied retrospectively in accordance with (d)(2): 1. The amount by which each financial statement line item is affected

in the current reporting period by the application of the pending content that links to this paragraph as compared with the guidance that was in effect before the change

2. An explanation of the reasons for significant changes identified in (i)(1).

j. An entity may elect to apply the pending content that links to this paragraph in its entirety using one of the methods listed in (d). An entity need not apply the same transition method to contracts with customers

and contracts that are not with customers. For example, an entity could elect to apply the pending content that links to this paragraph to contracts with customers (for example, contracts within the scope of Topic 606 and Subtopic 340-40) retrospectively in accordance with (d)(1) and contracts that are not with customers (for example, contracts within the scope of Subtopic 610-20) retrospectively in accordance with (d)(2). If the entity elects different transition methods for contracts with customers and contracts that are not with customers, it shall disclose that election and provide the appropriate disclosures associated with each transition method.

47

The amendments in this proposed Update were approved for publication by the unanimous vote of the seven members of the Financial Accounting Standards Board:

Russell G. Golden, Chair James L. Kroeker, Vice Chair

Daryl E. Buck Thomas J. Linsmeier R. Harold Schroeder Marc A. Siegel Lawrence W. Smith

48

Background Information and Basis for Conclusions

Introduction

BC1. The following summarizes the Board’s considerations in reaching the conclusions in this proposed Update. It includes reasons for accepting certain approaches and rejecting others. Individual Board members gave greater weight to some factors than to others.

Background Information

BC2. The amendments in Update 2014-09 require that an entity apply the guidance from Topic 606 on the existence of a contract, transfer of control, and measurement to the accounting for transfers of nonfinancial assets that are not an output of the entity’s ordinary activities. The Board added that guidance, which was codified in Subtopic 610-20, to address the absence of general accounting guidance on transfers of nonfinancial assets in nonrevenue transactions. Additionally, that guidance replaced the industry- and transaction-specific guidance on real estate sales in Subtopic 360-20. The amendments on the derecognition of nonfinancial assets in Update 2014-09 were added to Subtopic 610-20.

BC3. As a result of the amendments in Update 2014-09 (and before the effective date of the amendments in this proposed Update), the primary asset derecognition models for transactions that are not with customers (or leases) would include:

a. Subtopic 610-20 on the derecognition of nonfinancial assets and in substance nonfinancial assets

b. Subtopic 810-10 on the derecognition of businesses and nonprofit activities (unless the business is an in substance nonfinancial asset)

c. Topic 845 on certain nonmonetary transactions including the exchange of a nonfinancial asset for a noncontrolling ownership interest in another entity

d. Topic 860 on transfers of financial assets.

BC4. The current scope of Subtopic 610-20 includes the derecognition of in substance nonfinancial assets. Stakeholders have informed the Board that there is not a uniform view on what constitutes an in substance nonfinancial asset because the term is not defined. As such, some stakeholders are uncertain about what types of transactions should be within the scope of Subtopic 610-20.

BC5. The current guidance in Subtopic 610-20 also does not address partial sales of nonfinancial assets. Partial sales are common in the real estate industry and

49

typically include transactions in which the seller retains an equity interest in the entity that owns the asset or has an equity interest in the buyer. The historical real-estate-specific guidance, which was replaced by the amendments in Update 2014-09, included detailed guidance on partial sales transactions. Because the nonfinancial asset model does not specifically address partial sales transactions, stakeholders have indicated that they are uncertain on how an entity would account for those transactions after the effective date of the amendments in Update 2014-09.

BC6. The Board also received feedback from stakeholders that certain scope exceptions in Subtopic 610-20 have created complexity and confusion on which model an entity should apply. For example, a transfer of a nonfinancial asset in exchange for a noncontrolling interest in another entity is addressed in the nonmonetary guidance in Topic 845 rather than in Subtopic 610-20. However, a transfer of a nonfinancial asset for any other form of noncash consideration is within the scope of Subtopic 610-20. Furthermore, stakeholders have informed the Board that the lack of clear guidance on contributions of nonfinancial assets to form joint ventures and the accounting differences between transfers of assets and businesses to equity method investees (including joint ventures) created additional complexity.

BC7. In 2013, the Board added a project to its agenda on clarifying the definition of a business with the objective of providing guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or acquisitions (or disposals) of businesses or nonprofit activities. When the Board added the project, it anticipated clarifying the reference to in substance nonfinancial assets and the accounting for partial sales of nonfinancial assets. The Board decided to address the issues identified in the project in three phases:

a. Phase 1: The Board proposed guidance to assist entities in applying the definition of a business. Proposed Accounting Standards Update, Business Combinations (Topic 805): Clarifying the Definition of a Business, was issued in November 2015. The comment period ended on

January 22, 2016. The Board received 37 comment letters on that proposed Update.

b. Phase 2: The Board decided to address (1) the scope of Subtopic 610-20 and clarifying the reference to in substance nonfinancial assets and (2) the guidance on partial sales or transfers of assets within the scope of Subtopic 610-20 and the corresponding accounting for retained interests in those assets.

c. Phase 3: In a future phase of this project, the Board will discuss whether there are differences in the accounting for the acquisition and derecognition of assets and businesses that could be removed.

BC8. This proposed Update includes amendments relating to Phase 2. One reason the Board approached this project in phases is that the definition of a

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business affects the scope of Subtopic 610-20. The types of transactions that meet the definition of a business under current guidance or in the proposed Update on clarifying the definition of a business may provide insight to the Board on how to clarify the scope of Subtopic 610-20.

BC9. The guidance on the derecognition of nonfinancial assets in Update 2014-09 should be applied to public and nonpublic entities. The Board received feedback that the clarifications in this proposed Update should be the same between public entities and nonpublic entities as in Update 2014-09.

Cost-Benefit

BC10. The objective of financial reporting is to provide information that is useful to present and potential investors, creditors, donors, and other capital market participants in making rational investment, credit, and similar resource allocation decisions. However, the benefits of providing information for that purpose should justify the related costs. Present and potential investors, creditors, donors, and other users of financial information benefit from improvements in financial reporting, while the costs to implement new guidance are borne primarily by present investors. The Board’s assessment of costs and benefits of issuing new guidance is unavoidably more qualitative because there is no method to objectively measure the costs to implement new guidance or to quantify the value of improved information in financial statements.

BC11. In the Board’s view, the amendments in this proposed Update would meet the objective of financial reporting by clarifying the scope of Subtopic 610-20, clarifying the accounting for partial sales of nonfinancial assets, reducing diversity in practice by defining in substance nonfinancial assets, and improving consistency between the accounting for the derecognition of assets and businesses. The Board believes that the amendments in this proposed Update would reduce complexity by eliminating the guidance in Section 845-10-30 on transfers of nonfinancial assets for a noncontrolling ownership interest in another entity, clarifying contributions of nonfinancial assets to joint ventures, and eliminating exceptions to the financial asset derecognition model. While there may be some amount of complexity in evaluating the definition of the term in substance nonfinancial asset, in many cases the amendments reduce the number of accounting decisions that entities need to make when evaluating the derecognition of nonfinancial assets. The Board considered that the amendments in this proposed Update would create changes from historical practice, especially in the real estate industry; however, the Board believes that the benefits of streamlining GAAP and aligning asset and business accounting differences justify the costs of implementing the guidance.

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Scope of Subtopic 610-20

Scope of Subtopic 610-20 as Issued in Update 2014-09

BC12. Currently, the scope of Subtopic 610-20, as issued in Update 2014-09, is specific to the derecognition of nonfinancial assets within the scope of Topic 350 on intangibles or Topic 360 on property, plant, and equipment unless the entity transfers the nonfinancial asset in a contract with the customer. That guidance also applies to the transfer of an in substance nonfinancial asset within the scope of Topic 350 or Topic 360. Generally, a group of assets or a subsidiary that constitutes a business or nonprofit activity is excluded from the scope of Subtopic 610-20, in which case the guidance in Subtopic 810-10 on consolidation applies. However, a business also could be an in substance nonfinancial asset, which would require the derecognition of that business to be accounted for in Subtopic 610-20.

BC13. The Board understands that the primary concern raised by stakeholders about the scope of Subtopic 610-20 relates to interpreting the term in substance nonfinancial asset. However, the Board also understands that stakeholders have

other questions about the scope of that guidance. For example, stakeholders have indicated that it is unclear whether Subtopic 610-20 applies to transactions that involve a subsidiary or group of assets that include assets subject to Topics other than Topic 350 or Topic 360 (such as inventory or financial assets). Similarly, the Board understands that stakeholders also have indicated that it is unclear what guidance to apply when a buyer assumes a liability of the seller. The following sections discuss the Board’s decisions on clarifying the scope of Subtopic 610-20.

In Substance Nonfinancial Assets

BC14. The real estate guidance replaced by Subtopic 610-20 included a concept of in substance real estate. Many transactions in the real estate industry that currently meet the definition of a business are considered in substance real estate. As a result, those transactions are accounted for in accordance with Subtopic 360-20 rather than Topic 810. That is, under the current definition of a business, income-producing real estate often is considered a business for acquisition purposes; however, the same transaction for disposal purposes is typically accounted for in accordance with the real estate guidance.

BC15. The Board received feedback from stakeholders that there is diversity in how an entity determines if a transaction includes in substance real estate. Some

entities consider quantitative factors such as whether substantially all of the assets transferred are real estate but there still is diversity in how that analysis is performed. For example, some entities base the evaluation on the fair value of the assets transferred, and others only consider the carrying value of the assets transferred, while others might perform a qualitative analysis.

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BC16. Determining whether a transaction involves an in substance nonfinancial asset will be a concept that is new to many entities outside the real estate industry. Stakeholders indicated that it is unclear whether they should apply the historical real estate practice to other types of transactions. Those stakeholders also observed that applying the historical real estate practice to other transactions could lead to many more transactions involving businesses being within the scope of Subtopic 610-20 rather than within the scope of Topic 810.

Businesses within the Scope of Subtopic 610-20

BC17. The Board considered whether any business (including real estate that meets the definition of a business) or nonprofit activity should be within the scope of Subtopic 610-20. That is, they considered whether a business should, in some circumstances, be considered an in substance nonfinancial asset.

BC18. The Board decided that all businesses and nonprofit activities should be excluded from the scope of Subtopic 610-20. The Board believes that this decision simplifies the guidance because an entity would not have to consider if a business or nonprofit activity also is an in substance nonfinancial asset. Furthermore, the Board decided that a specific exception solely for real estate is not necessary because the real-estate-specific guidance has been replaced.

BC19. In making that decision, the Board considered the proposed Update on clarifying the definition of a business. In that proposed Update, the Board intended to narrow the definition, which should result in fewer real estate transactions being considered businesses. As a result, the Board believes that the definition of a business in that proposed Update more appropriately distinguishes the types of transactions that involve the transfer of a business. In addition, the Board received feedback from stakeholders indicating that treating transactions as a business or nonfinancial asset consistently for acquisition and derecognition purposes simplifies the guidance.

BC20. The proposed Update on clarifying the definition of a business would not result in all real estate transactions being accounted for under Subtopic 610-20; however, the Board observed that this outcome is no different from any other industry. Nevertheless, if the feedback to the proposed Update on clarifying the definition of a business indicates that the revised definition may not result in a more narrow application of that guidance, the Board may (a) reconsider whether there are certain types of businesses that should be accounted for in accordance with Subtopic 610-20 or (b) consider modifications to that proposal.

Groups of Assets or Subsidiaries That Are Not a Business

BC21. Stakeholders have indicated that it is not clear whether Subtopic 610-20 applies to a contract in which an entity transfers a group of assets or a subsidiary that is not a business or nonprofit activity but all the assets are not entirely within

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the scope of Topic 350 or Topic 360. For example, an entity may enter into a contract to transfer commercial real estate and outstanding accounts receivable from the tenants to the counterparty. That transaction involves the transfer of both nonfinancial assets and financial assets and could be structured as the transfer of a group of assets or the transfer of a subsidiary.

BC22. The Board believes that there is no substantive difference between the transfer of an entire nonfinancial asset and a transfer of an entire subsidiary that only consists of that nonfinancial asset. As such, the Board decided that an in substance nonfinancial asset could consist of a nonfinancial asset in a subsidiary that is not a business or nonprofit activity. Because a subsidiary may in some cases have assets other than nonfinancial assets, the Board decided that if the substance of the entire transaction is the transfer of nonfinancial assets, all of the assets in the subsidiary should be within the scope of Subtopic 610-20.

BC23. The Board observed that the definition of an in substance nonfinancial asset should not be limited to transactions involving legal entities because an entity could choose to transfer the same set of assets outside a legal entity and potentially apply different derecognition guidance. As such, the definition of in substance nonfinancial assets also includes all of the assets promised in a contract regardless of legal form if the substance of the transaction is the transfer of nonfinancial assets. If all of the assets promised in a contract are determined to be in substance nonfinancial assets, each asset is within the scope of Subtopic 610-20 regardless of whether the asset otherwise would be within the scope of other Topics.

BC24. Under the Board’s approach, when the substance of the transaction is the sale of nonfinancial assets, an entity would not be required to separate a minor amount of financial assets and apply Topic 860 to the financial assets. Although there might be some complexity in determining when a contract includes in substance nonfinancial assets, the complexity in scope is offset by the practicality of applying a single model according to the substance of the transaction. See paragraph BC34 for further details on separating assets in a subsidiary.

BC25. When an entity evaluates whether the assets promised in a contract are in substance nonfinancial assets, it is determining the scope of the derecognition guidance for those assets but not the unit of account for derecognition purposes. Paragraphs BC45–BC47 provide further detail about determining the unit of account, which is a distinct nonfinancial asset. The Board decided to include guidance in this proposed Update to help entities determine whether the substance of a transaction is the transfer of nonfinancial assets and added the term in substance nonfinancial asset to the Master Glossary. The Board clarified that when substantially all of the fair value of the assets promised in a contract or assets in a subsidiary is concentrated in nonfinancial assets, all of the assets promised in the contract or in the subsidiary are in substance nonfinancial assets. In some cases, that determination may be made qualitatively. That is because an entity only needs to make that assessment for transactions that do not involve a business or

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nonprofit activity, which typically do not involve a significant mix of financial and nonfinancial assets.

BC26. The Board also clarified that cash and cash equivalents should be excluded from the analysis so that an entity could not avoid an accounting outcome simply by contributing cash to an entity that is being sold and increasing the purchase price by the same amount. Similarly, under Topic 606 cash paid to a customer is typically a reduction of the transaction price unless it is in exchange for goods or services. As such, any cash transferred would not affect the determination of scope but, rather, would result in a reduction of the transaction price and the amount of gain or loss recognized.

BC27. Paragraph 610-20-15-5 indicates that an entity first should evaluate whether all of the assets promised in a contract are in substance nonfinancial assets. Often, the entity only would need to make this determination at the contract level (even if ownership interests in a subsidiary are transferred). However, in some situations all of the assets promised in a contract might not meet the definition of an in substance nonfinancial asset but the assets in an individual subsidiary within that contract would meet the definition. That could be the case if, for example, an entity transferred ownership interests in two subsidiaries in a single contract and one of those subsidiaries consisted of nonfinancial assets and the other consisted of financial assets. For those scenarios, paragraph 610-20-15-6 indicates that the analysis includes a second step so that a subsidiary that consists of nonfinancial assets would still be within the scope of Subtopic 610-20 even when there are other financial assets in the transaction.

BC28. An entity only would apply the second step in paragraph 610-20-15-6 to contracts that involve the transfer of ownership interests in a subsidiary in addition to other assets (or a contract to transfer multiple subsidiaries). That is, an entity would not need to group assets outside a subsidiary to determine whether there is a combination of assets that when grouped together would meet the definition of in substance nonfinancial assets. That determination is only necessary for subsidiaries because if the subsidiary is not within the scope of Subtopic 610-20, none of the assets in that subsidiary would be within the scope of Subtopic 610-20. See paragraph BC33 for further details on the derecognition of subsidiaries that are not entirely within the scope of Subtopic 610-20.

BC29. The Board considered other alternatives to assessing whether the substance of a transaction is the transfer of a nonfinancial asset. For example, the Board considered utilizing the term predominant instead of substantially all. In that

alternative, if the assets in a subsidiary or a group of assets in a contract are predominantly nonfinancial assets, the assets would be subject to Subtopic 610-20. The Board rejected that approach in favor of substantially all because substantially all is a higher threshold and it is more likely to result in an appropriate

assessment of the substance of the transfer. Furthermore, that term is well understood because it is used frequently throughout the Accounting Standards Codification.

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BC30. The Board also considered providing additional exceptions to the substantially all threshold, such as an exception for a financial asset directly related to an entity’s operation of a nonfinancial asset (for example, accounts receivable related to the operation of the building and leases) regardless of the magnitude of the financial asset. The Board rejected that approach because it was concerned that the approach could be interpreted too broadly and, therefore, result in a transaction being accounted for in accordance with Subtopic 610-20 when the nonfinancial asset was minor in comparison to the financial asset.

Nonfinancial Assets That Are Not Subject to Topic 350 or Topic 360

BC31. The Board decided that Subtopic 610-20 would be the default derecognition guidance for nonfinancial assets when no other guidance applies. As such, a specific reference to Topic 360 and Topic 350 in paragraph 610-20-15-2(a) was no longer needed because that reference limited the types of nonfinancial assets that technically would be within the scope of the guidance. The Board also clarified additional transactions in paragraph 610-20-15-3 under which the transfer or derecognition of a nonfinancial asset would not be accounted for under Subtopic 610-20. As such, entities would need to consider whether the guidance in paragraph 610-20-15-3 applies before accounting for the transaction in accordance with Subtopic 610-20.

Contracts Partially within the Scope of Other Guidance

BC32. If a transaction is not entirely within the scope of Subtopic 610-20 or other Topics, the contract may be partially within the scope of Subtopic 610-20 and partially within the scope of other Topics. As such, the Board decided that an entity generally should apply the separation and allocation guidance included in paragraph 606-10-15-4 on how to separate and measure one or more parts of the contract unless those assets are in a subsidiary. However, the Board does not intend for the amendments in this proposed Update to change an entity’s historical practice for determining when transactions were entirely subject to other guidance such as in Topic 860 on transfers of financial assets.

BC33. The Board observed that the current deconsolidation and derecognition guidance in Subtopic 810-10 applies to a subsidiary that is not a business or nonprofit activity if the substance of the transaction is not addressed directly by other Topics, including Subtopic 610-20. The Board decided not to amend that guidance and as a result, unless the assets in a subsidiary are in substance nonfinancial assets, the transfer of a subsidiary is not within the scope of Subtopic 610-20. This also means that an entity would not separate and apply different derecognition models to different assets in a subsidiary because the subsidiary could not be partially within the scope of Subtopic 610-20 and partially within the scope of other Topics. The Board received feedback from stakeholders that the types of transactions that would fall into this category are not common. As such,

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the Board believes that the transactions that involve a substantive mix of assets in a subsidiary are beyond the scope of what Subtopic 610-20 set out to address and reasoned that the subsidiary accounting model in Subtopic 810-10 would still be appropriate.

BC34. The Board considered requiring that an entity apply paragraph 606-10-15-4 to all contracts with assets partially within the scope of Subtopic 610-20 and other Topics (including transfers of subsidiaries). The Board received mixed feedback from stakeholders—some who stated that applying this guidance to all transactions including transfers of legal entities would be appropriate because it ignored legal form, and others who were concerned about being able to practically apply different accounting models to different assets transferred in the same subsidiary. The Board was concerned that this approach might result in unintended consequences or create operability issues when the transaction involves the transfer of a subsidiary. The Board also observed that it could be difficult to apply both the guidance in Subtopic 610-20 and the guidance in Topic 860 to portions of a transaction in a partial sale transaction in which the seller retains an ownership interest in a former subsidiary.

BC35. In substance nonfinancial assets might include a minor amount of assets that would otherwise be considered financial assets. As such, the Board included paragraphs 610-20-15-4 through 15-10 to clarify the interaction between in substance nonfinancial assets and when an entity would separate and account for assets subject to other Topics. In addition, paragraph 610-20-15-9 clarifies that in substance nonfinancial assets are limited to assets of the entity and determining what constitutes an in substance nonfinancial asset would not be affected by other contractual promises that are not assets of the entity. For example, a contract could include in substance nonfinancial assets within the scope of Subtopic 610-20 and a guarantee within the scope of Topic 460, Guarantees. The presence of the guarantee would not change whether the assets are in substance nonfinancial assets. Likewise, the presence of in substance nonfinancial assets would not mean the guarantee would be accounted for in accordance with Subtopic 610-20. The Board added examples to further illustrate those points.

Transfers of Investments

BC36. Currently, paragraph 860-10-55-3 requires that Topic 860 be applied to the transfer of an equity method investment unless the equity method investment is considered an in substance nonfinancial asset. That concept originally applied to an equity method investment that was in substance real estate, and the amendments in Update 2014-09 changed the exception to apply to any in substance nonfinancial asset. In other words, an entity historically applied the real estate guidance to the transfer of an equity method investment in a real estate entity.

BC37. The Board removed the scope exception in Topic 860 for in substance nonfinancial assets. The Board observed that its decisions significantly narrowed

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the types of transactions that would be considered in substance nonfinancial assets. If the Board did not make changes to the scope of Topic 860, before determining the appropriate derecognition guidance an entity first would need to evaluate whether an investment is in a business or nonprofit activity when it transfers an equity method investment. If the investment is not in a business or nonprofit activity, the entity would need to consider whether substantially all of the assets are nonfinancial assets. To simplify the analysis and be consistent with the decisions on the scope of Subtopic 610-20, the Board made conforming changes to the scope of Topic 860 in this proposed Update and removed the scope exception in Topic 860 for in substance nonfinancial assets. The Board made similar amendments in Subtopic 310-10 on the sales of an acquisition, development, and construction arrangements that are accounted for as investments in real estate because the sale of investments are not within the scope of Subtopic 610-20.

BC38. The Board believes that eliminating this exception would simplify the analysis because an entity would not have to apply the definition of a business to the transfer of an equity method investment. Furthermore, an entity would account for the transfer of all equity method investments in a consistent manner. The Board notes that, historically, an entity only needed to look through the investment in a real estate entity, and because the real-estate-specific guidance has been replaced, the Board does not believe that the exception to Topic 860 is needed.

Liabilities

BC39. An entity may enter into a contract to transfer a nonfinancial asset to a counterparty and that counterparty agrees to assume a liability of the seller. For example, an entity may promise to transfer a building subject to a mortgage loan that will be assumed by the counterparty. Stakeholders indicated that it was unclear whether the buyer’s promise to assume the seller’s liability would affect the guidance applied to the derecognition of a nonfinancial asset.

BC40. The Board decided that a buyer’s promise to assume a liability does not affect whether an asset is subject to Subtopic 610-20. Furthermore, the Board decided that the buyer’s assumption of a liability should be included as consideration used to calculate the gain or loss upon derecognition of the asset. The Board believes that characterizing the buyer’s assumption of a liability as consideration received in exchange for the asset reflects the substance of the transaction. That is, if the buyer does not assume the liability, it would have to provide additional consideration to acquire the asset.

BC41. The Board considered whether the derecognition of the asset and liability (and related gain or loss) should be separated into two elements and accounted for separately. That approach would require an entity to allocate the gain or loss on the entire transaction between the derecognition of the asset and the liability. While the total gain or loss would be the same under both approaches, the Board observed that the timing and classification of the gain or loss in the income

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statement could be different if accounted for separately. The Board believes that characterizing the buyer’s assumption of the liability as consideration more appropriately reflects the substance of the transaction because it results in the gain or loss upon derecognition of the asset in the same line item at the same time. Additionally, because the amount of cash a buyer pays for the asset is correlated to the value of the liability assumed, the Board does not believe that the benefits of allocating the net gain to its component parts and reporting them separately justify the costs.

BC42. The Board concluded that the amount included in the calculation of the gain or loss is the carrying amount of the liability assumed. The Board observed that adjusting the consideration to equal the fair value of the liability assumed would not change the total net gain or loss recognized because any difference between the fair value and recorded amount of the liability would offset each other when the liability is derecognized. As such, the Board noted that, in these transactions, there would be no need to consider the fair value of the liability being assumed.

BC43. Subtopic 405-20, Liabilities—Extinguishments of Liabilities, addresses the criteria that must be met to derecognize a liability. The amendments in this proposed Update would not change when an entity can derecognize a liability. That is, the guidance in Subtopic 610-20 would address only the timing of when a distinct nonfinancial asset is derecognized and the amount of gain or loss that should be recognized.

BC44. Paragraph 610-20-45-3 provides guidance on when an entity meets the criteria to derecognize a liability before or after it can derecognize a distinct nonfinancial asset. That scenario could arise if the seller is legally released from its obligation before transferring control of the distinct nonfinancial asset. Paragraph 610-20-45-3 would require an entity to account for the counterparty’s assumption of the liability in the same manner as any other consideration received before or after the distinct nonfinancial asset is derecognized. For example, an entity would record a contract liability if it receives cash before the distinct nonfinancial asset is derecognized. Similarly, if an entity derecognizes the liability before fulfilling its promise to transfer the distinct nonfinancial asset, the entity would derecognize the liability and recognize a corresponding contract liability. That is, the entity would effectively reclassify the existing liability to a contract liability. The Board believes that a contract liability better reflects the entity’s remaining obligation, which is to transfer control of a distinct nonfinancial asset.

Distinct Nonfinancial Assets

BC45. Subtopic 610-20 currently requires that an entity apply the guidance from Topic 606 on existence of a contract, transfer of control, and measurement to the transfer of nonfinancial assets. However, it does not specify that an entity should apply the guidance on identifying performance obligations and allocating the transaction price to each performance obligation.

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BC46. The Board decided that assets transferred in a contract could be considered nonfinancial assets or in substance nonfinancial assets within the scope of Subtopic 610-20. Some stakeholders questioned whether the unit of account for derecognition purposes was the group of assets deemed to be in substance nonfinancial assets. To clarify that the unit of account for derecognition purposes is not the entire group of in substance nonfinancial assets, this proposed Update specifies that entities would be required to apply the concepts used in Topic 606 on identifying performance obligations to identify a distinct nonfinancial asset.

BC47. A distinct nonfinancial asset in the contract is the unit of account for derecognition purposes. The Board observed that when an entity derecognizes in substance nonfinancial assets in a subsidiary, control of each asset typically will be transferred at the same time. Therefore, in practice, an entity often may not need to separate and allocate consideration to each distinct nonfinancial asset in the transaction. However, in situations in which distinct nonfinancial assets are transferred at different points in time, the Board believes that this proposed guidance on distinct nonfinancial assets would provide additional clarity.

Partial Sales

BC48. Partial sales are common in the real estate industry and include transactions in which the seller retains an interest in the property or has an interest in the buyer. The historical real estate guidance in Subtopic 360-20 includes guidance on partial sales of real estate; however, Subtopic 610-20 did not replace the guidance for similar transactions.

BC49. Additionally, the Board noted that Subtopic 610-20 currently excludes transfers of a nonfinancial asset to another entity in exchange for a noncontrolling ownership interest in that entity. Those transactions are accounted for in accordance with the guidance on exchanges of a nonfinancial asset for a noncontrolling ownership interest in Section 845-10-30. However, the Board observed that transactions accounted for under Section 845-10-30 are similar to partial sales of real estate because the entity retains an interest in the asset (through its ownership interest in the entity) after the transaction. The following examples are considered a partial sale of real estate:

a. Transaction 1: Entity A owns a single real estate asset and enters into a transaction with Entity B. Entity B forms a new entity, Entity X, and contributes $1,000 in cash to that entity. Entity A agrees to transfer the entire real estate asset directly to Entity X in exchange for $1,000 and a 50 percent ownership interest in the new entity. Assume Entity A does not control Entity X after the transfer.

b. Transaction 2: Entity A sells 50 percent of Entity X, a wholly owned subsidiary that consists of a single real estate asset, to Entity B in exchange for cash consideration of $1,000. Assume Entity A does not control Entity X after the sale.

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BC50. The following transactions are subject to the guidance in Section 845-10-30:

a. Transaction 3: Entity A transfers intellectual property (that is not a business) to Entity B in exchange for a 40 percent noncontrolling ownership interest in Entity B. Assume Entity A does not control Entity B after the transfer and that it would account for its investment in Entity B under the equity method. This transaction also could include monetary consideration.

b. Transaction 4: Entity A sells a machine to Entity B, a publicly traded company, in exchange for shares of Entity B. Entity A would account for its investment in Entity B in accordance with Topic 323, Investments—Equity Method and Joint Ventures.

BC51. In Transactions 1 and 2, Entity A ends up with $1,000 cash and a 50 percent noncontrolling ownership interest in Entity X; however, the form of each transaction is different. That is, Transaction 1 is structured as a sale of a nonfinancial asset to another entity, and Transaction 2 is structured as a partial sale of a subsidiary. In Transactions 3 and 4, Entity A transfers a nonfinancial asset to another entity and retains an interest in the asset through its ownership interest in Entity B. The Board observed that in all four transactions, Entity A retains an ownership interest in the asset transferred. The Board notes that there could be different iterations of the transactions above and that those transactions would not be the only transactions subject to Subtopic 610-20.

BC52. The Board received feedback from stakeholders that indicated that the guidance in Section 845-10-30 was no longer necessary if the Board provided guidance to address partial sales in Subtopic 610-20. Furthermore, stakeholders indicated that if that guidance was retained, it would create inconsistencies in the accounting for similar transactions. The Board decided that any transfer of an asset subject to Subtopic 610-20 in which the seller retains a noncontrolling ownership interest in the asset or in the buyer should be accounted for in accordance with Subtopic 610-20. As such, the Board decided to eliminate the guidance in Section 845-10-30 on exchanges of nonfinancial assets to another entity in exchange for a noncontrolling ownership interest in that entity. The Board believes that those proposed amendments would simplify the guidance by accounting for similar transactions under the same guidance. The Board also reasoned that it may be difficult to distinguish between transactions that should be accounted for in accordance with Section 845-10-30 or Subtopic 610-20.

BC53. The Board believes that eliminating the guidance in Section 845-10-30 would remove an inconsistency between Subtopic 610-20 and Topic 606 on noncash consideration. That is, Topic 606 considers a customer’s promise to transfer an ownership interest similar to any other noncash consideration, and Subtopic 610-20 specifically excludes transactions in which a counterparty promises to transfer an ownership. The Board did not see a conceptual basis for

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excluding transactions from the scope of Subtopic 610-20 simply because the form of consideration was a noncontrolling ownership interest in another entity.

BC54. The Board also decided that the accounting treatment in Subtopic 610-20 should apply to a noncontrolling ownership interest in a joint venture as well as to other equity method investments. The Board observed that stakeholders find it challenging to distinguish between a joint venture and other types of equity method investments and that there is a lack of clear guidance on how an investor should account for a contribution of an asset to a joint venture. However, the Board understands that the investment is typically recorded at carryover basis and no gain or loss is recognized unless the investor receives cash. The Board believes that including joint venture transactions within the scope of Subtopic 610-20 would simplify GAAP by eliminating the need to distinguish between a joint venture and other types of investees as well as providing clarity to an area that previously was not addressed.

BC55. The Board added proposed guidance in paragraphs 610-20-32-5 and 610-20-40-3 through 40-10 to clarify the accounting for those transactions.

Seller Controls the Subsidiary

BC56. The scope of Subtopic 610-20 includes in substance nonfinancial assets in subsidiaries. When a reporting entity has an ownership interest in a legal entity, it evaluates whether it is required to consolidate that other entity in accordance with the guidance in Topic 810. The Board decided that because Subtopic 610-20 applies to the gains or losses on the derecognition of nonfinancial assets, no gain or loss should be recognized in transactions in which the seller is required to consolidate the subsidiary because the assets cannot be derecognized. As such, a reporting entity would not recognize a gain or loss when it transfers an ownership interest in a subsidiary but retains a controlling financial interest in the subsidiary. The Board decided that when a reporting entity retains a controlling financial interest in a subsidiary, that transaction should be accounted for as an equity transaction in accordance with the guidance in Topic 810.

BC57. The Board’s decision is consistent with transactions that involve a business or nonprofit activity. In Topic 810, a transaction that results in a change in ownership interest of a subsidiary while the parent retains control is accounted for as an equity transaction and no gain or loss is recognized. The Board also observed that under the real estate guidance in Subtopic 360-20, no profit is realized upon consummation of a partial sale if the seller is still required to consolidate the real estate entity. For example, a transaction in which a reporting entity transfers a 20 percent noncontrolling interest in a real estate subsidiary would not result in profit recognition. However, the historical real estate guidance is not explicit on how to record those transactions.

BC58. The Board understands that there is diversity in the real estate industry when the seller retains a controlling interest in a real estate entity. Some entities record the transaction as an equity transaction similar to the guidance in Topic

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810, some entities record a deferred gain, and some entities record a deferred gain for differences between the consideration received and the carrying amount of the interest sold. The Board also understands that there is diversity in the subsequent accounting for the deferred gain and that some entities defer the gain until the asset can be derecognized, while others amortize the deferred gain into earnings over time.

BC59. The Board considered those approaches and decided that when a reporting entity retains a controlling financial interest in a subsidiary, that transaction should be accounted for as an equity transaction in accordance with the guidance in Topic 810. The Board concluded that those transactions do not result in an obligation for the entity to transfer any distinct nonfinancial assets and, therefore, would not meet the definition of a contract liability. Therefore, the Board believes that recording a deferred gain or contract liability would be inconsistent with the overall model. While that approach may change practice for some entities in the real estate industry, the Board believes that eliminating diversity and conforming the accounting between transactions involving assets and transactions involving businesses would justify the cost of changing practice.

BC60. When a reporting entity no longer has a controlling financial interest in a former subsidiary, the reporting entity would evaluate whether control of a distinct nonfinancial asset is transferred in accordance with the guidance in paragraph 606-10-25-30. If control of the distinct nonfinancial asset does not transfer in accordance with the guidance in paragraph 606-10-25-30, the distinct nonfinancial asset would not be derecognized. The Board decided that a reporting entity should recognize a contract liability if the counterparty pays consideration before the entity transfers control of the distinct nonfinancial asset. In contrast to transactions in which the reporting entity retains a controlling interest in the subsidiary, when the seller cannot derecognize a distinct nonfinancial asset because it has not transferred control of the asset in accordance with the guidance in Topic 606, the contract liability represents the seller’s obligation to transfer the distinct nonfinancial asset to the counterparty.

Unit of Account for Partial Sales

BC61. Some stakeholders indicated that it was not clear whether the unit of account in a partial sale transaction is the partial ownership interest in the subsidiary transferred or the underlying distinct nonfinancial asset. That is, they questioned whether an entity should evaluate whether it transfers control of the ownership interest or the distinct nonfinancial asset.

BC62. On the basis of its decision to eliminate the guidance in Section 845-10-30, the Board observed that Subtopic 610-20 needed to address several types of transactions in which the seller retains a noncontrolling ownership interest in a distinct nonfinancial asset. The Board noted that the form of several transactions involved the transfer of an asset to another entity (for example, Transactions 2, 3, and 4 in paragraphs BC49–BC50) while the form of other transactions (for

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example, Transaction 1 in paragraph BC49) involved the transfer of an ownership interest in a subsidiary. The Board also noted that while the form of some transactions may be different, in substance they achieve the same outcome (for example, Transactions 1 and 2).

BC63. The Board decided that the unit of account should be the same for all transactions and that an entity should evaluate whether it transfers control of the entire asset and not the partial interest in the entity. That is, the Board decided that partial sales transactions should be viewed as the transfer of a distinct nonfinancial asset in exchange for a noncontrolling ownership interest in the counterparty. For example, because Transactions 1 and 2 in paragraph BC49 achieve the same outcome, the Board believes that they should be accounted for similarly and, therefore, can both be viewed as the transfer of an asset in exchange for an ownership interest in another entity.

BC64. The Board considered requiring a different unit of account for different transactions. For example, it considered an alternative in which the unit of account for Transactions 1 and 2 would be the partial interest transferred and the unit of account for Transactions 3 and 4 would be the entire asset. The Board believes that having the same unit of account for all transactions subject to Subtopic 610-20 provides a consistent approach and reduces complexity that would be created in trying to distinguish when a transaction is a partial sale or the sale of an entire asset. Furthermore, Subtopic 610-20 was created to evaluate the transfer of a nonfinancial asset and not the transfer of an ownership interest in a subsidiary.

Measurement of Noncontrolling Ownership Interest

BC65. Stakeholders also indicated that consistent and clear guidance should be provided to address how an entity should measure the retained noncontrolling ownership interest (and, therefore, the ultimate gain or loss recognized). Under current GAAP, the measurement of the gain is different based on the scope of the transaction. For example:

a. Subtopic 360-20: The real estate guidance requires an entity to recognize a partial gain and to record the noncontrolling ownership interest at carryover basis.

b. Subtopic 810-10: The consolidation guidance requires an entity to recognize a full gain upon derecognition of a business and to measure any retained interest at fair value.

c. Subtopic 845-10: If fair value measurement is elected, the nonmonetary transactions guidance requires an entity to recognize a partial gain if the noncontrolling ownership interest is accounted for under the equity method and to recognize a full gain or loss if the ownership interest is considered a cost method investment.

BC66. The Board has received mixed feedback from stakeholders on the measurement of the noncontrolling ownership interest. Stakeholders that prefer a fair value measurement view the substance of the transaction as if the reporting

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entity transferred a nonfinancial asset in exchange for something different from what it previously owned. Stakeholders that prefer a carryover basis view the substance of the transaction as the seller retaining a smaller portion of the same asset. However, stakeholders generally acknowledge the benefits of aligning the accounting between transactions with assets and businesses. The Board considered all of those approaches and decided that the noncontrolling ownership interest should be measured at fair value. As noted above, the Board decided that those transactions should be viewed as the sale of an entire nonfinancial asset in exchange for a noncontrolling ownership interest. As such, a noncontrolling ownership interest would be accounted for as noncash consideration measured at fair value consistent with the guidance in paragraphs 606-10-32-21 through 32-24.

BC67. The Board considered an alternative view in which the gain would be limited to the extent of the ownership interest retained because the entity retains an interest in the asset. However, the Board believes that recognizing a full gain is justified because the nature of the asset changing from a nonfinancial asset to a financial asset (that is, a change from a controlled nonfinancial asset or group of assets to a noncontrolling ownership interest) is consistent with viewing the transaction as transferring control of a nonfinancial asset and receiving a financial asset. In contrast, the Board generally believes that it would be inappropriate to remeasure a retained interest if the asset continued to be consolidated or was proportionately consolidated because the nature of the asset would be the same before and after the transaction.

BC68. The Board understands that users of financial statements often view gains or losses recognized on transactions within the scope of Subtopic 610-20 to be nonrecurring items that may be excluded from key financial metrics and addressed differently in financial analysis regardless of how the gain or loss is measured. As such, the Board placed more emphasis on simplifying the accounting decisions and eliminating accounting differences between transactions involving an asset and a business or a nonprofit activity rather than the amount of the gain or loss recognized. The Board also observed that the amendments in Accounting Standards Update No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, require many equity investments to be measured at fair value. As such, if the Board required a partial gain for all transactions, in some transactions equity investments initially would be measured at carryover basis and immediately remeasured to fair value in accordance with the amendments in that Update. Therefore, the Board also believes that a fair value measurement is more consistent with the amendments in Update 2016-01.

BC69. The Board considered whether its decision was inconsistent with the guidance on intra-entity transactions in Topic 323 on equity method investments. Paragraph 323-10-35-7 requires an entity to eliminate the profit on the sale of an asset to the investee to the extent of the ownership interest in the investee if the assets still remain with an investor or investee. However, the Board observed that if a business is transferred to an equity method investee, the profit is not eliminated.

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BC70. The Board decided that transactions with an investee are similar to transfers of a nonfinancial asset in exchange for a noncontrolling ownership interest in another entity (that is, the entity retains an interest in the asset through its investment). As such, this proposed Update contains a conforming change in paragraph 323-10-35-7 to require that no gain or loss be eliminated when an entity transfers an asset subject to Subtopic 610-20. The Board acknowledged that this is inconsistent with revenue transactions with equity method investees; however, the Board placed more emphasis on eliminating differences between the derecognition of assets and businesses or nonprofit activities.

Evaluating the Transfer of Control

BC71. Subtopic 610-20 requires that an entity apply paragraph 606-10-25-30 to determine when it transfers control of an asset. The guidance in paragraph 606-10-25-30 is based on the point in time at which a customer obtains control of an asset. The Board observed that the guidance in paragraph 606-10-25-30 does not do either of the following:

a. Contemplate transactions in which an entity transfers ownership interests in a subsidiary to more than one buyer

b. Retain a noncontrolling ownership interest.

BC72. The Board is aware that some stakeholders interpret the definition of control in Topic 606 to mean that a single counterparty in a transaction must control the legal entity and obtain substantially all of the economics in that entity to obtain control of the asset. The Board observed that this interpretation creates a higher derecognition threshold than the amended real estate guidance in Subtopic 360-20 and the derecognition guidance in Topic 810 for businesses. Paragraphs 610-20-40-3 through 40-10 were added in this proposed Update to clarify how an entity would evaluate when control of an asset transfers when the form of the transaction is the transfer of an ownership interest in an entity.

BC73. The Board also considered amending Subtopic 610-20 so that an entity would evaluate whether it surrendered control of the promised asset instead of evaluating whether the other party obtained control of the asset. The Board noted that this alternative was another way to achieve the same outcome as that in paragraphs 610-20-40-3 through 40-10 in this proposed Update. The Board noted that an entity often loses control at the same time that the other party or parties obtain control. However, the Board was concerned about creating inconsistencies in the control perspective between Topic 606 and Subtopic 610-20 and the potential for unintended consequences of this alternative.

Retained Ownership Interest in the Entity

BC74. As described in paragraphs BC61–BC70, the Board decided that a partial sales transaction should be viewed as the transfer of an asset to another entity in exchange for a noncontrolling ownership interest in the other entity. The Board

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observed that when the form of a transaction is the transfer of a partial ownership interest in an entity rather than the asset itself, it may not be intuitive for stakeholders to evaluate when the counterparty obtains control of the asset. Therefore, paragraphs 610-20-40-8 through 40-10 were added in this proposed Update to clarify how to evaluate transactions in which the entity retains a noncontrolling ownership interest in a former subsidiary.

BC75. The Board also clarified that when a reporting entity retains a noncontrolling interest in a former subsidiary, the reporting entity transfers control of a distinct nonfinancial asset if (or when) the former subsidiary has (or obtains) control of the asset. Paragraph 610-20-40-8 clarifies that once an entity outside the consolidated group controls the distinct nonfinancial asset, the seller would have transferred control of the asset even if it retained an ownership interest. That is, the entity would not evaluate whether the counterparty that receives the ownership interest obtains substantially all of the economic benefits in the entity that controls the asset for the seller to derecognize the asset.

BC76. The Board observed that in many transactions in which the seller surrenders control of a former subsidiary, the requirements to derecognize the asset also will be met. However, the entity still needs to consider the guidance on control in Topic 606 to consider whether it can derecognize a distinct nonfinancial asset. For example, a repurchase feature that would require or allow an entity to repurchase the asset (either directly or by purchasing a controlling interest in the entity) in the future could prohibit the asset from being derecognized. As such, Case B in paragraphs 610-20-55-20 through 55-21 was added to help illustrate the application of the guidance in this proposed Update.

No Ownership Interest Is Retained

BC77. The Board clarified that when an entity transfers ownership interests in a subsidiary and does not retain an ownership interest, the entity would apply the guidance in paragraph 606-10-25-30 to determine if the counterparty or other parties collectively control the asset. The Board believes that there is no substantive difference between transferring a subsidiary to a single counterparty and transferring the underlying assets outright; therefore, entities should evaluate the transfer of control in a similar manner.

BC78. The Board observed that nonrevenue transactions may involve the transfer of an ownership interest in an asset to more than one investor. Because the Board was aware that some stakeholders were unclear on whether a single party needed to obtain control of an asset, the Board decided to clarify that the seller could evaluate whether the other parties collectively control the assets in the subsidiary. The Board believes that when the other parties collectively control the assets, the entity has satisfied its obligation under the contract with the counterparty.

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Comparison with International Financial Reporting Standards (IFRS)

BC79. The amendments in Update 2014-09, together with IFRS 15, Revenue from Contracts with Customers, were the result of a joint effort by the FASB and the International Accounting Standards Board (IASB). In the joint project on revenue recognition, the IASB also decided to amend the guidance in IAS 16, Property, Plant and Equipment, IAS 38, Intangible Assets, and IAS 40, Investment Property, to require that an entity apply the guidance in IFRS 15 on determining when an entity transfers control of a nonfinancial asset and how to measure the gain or loss upon derecognition. However, the IASB did not include the concept of in substance nonfinancial assets in its guidance because the derecognition of a subsidiary regardless of whether it is an asset or a business is accounted for in accordance with IFRS 10, Consolidated Financial Statements. Because of those differences, the FASB understands that entities applying IFRS do not have similar questions about the scope of the derecognition guidance and accounting for partial sales of nonfinancial assets.

BC80. The FASB considered an alternative that would have required the derecognition of all entities, regardless of whether they were an asset or a business or nonprofit activity, to be accounted for in accordance with Topic 810, which is similar to IFRS 10. The FASB rejected that alternative because it believes that the form of the transaction generally should not dictate the accounting model. However, the FASB’s decisions on the measurement of a retained noncontrolling ownership interest and on when the seller retains control of an entity is consistent with the guidance in Topic 810 and IFRS 10.

BC81. There currently are differences between IFRS and GAAP on contributions of nonfinancial assets to equity method investees and joint ventures. IAS 28, Investments in Associates and Joint Ventures, requires entities to recognize a partial gain or loss (to the extent of the equity interests of the other investors) on contributions to an associate in an exchange for an interest in that associate unless the transaction lacks commercial substance. Under GAAP, the investor either records the investment at carryover basis with no gain or loss recognized or recognizes a partial gain (to the extent of the equity interests of the other investors). The FASB’s decision to account for those transactions in accordance with Subtopic 610-20 and measure the investment received at fair value is different from what IFRS requires; however, the FASB observed that there already were differences between GAAP and IFRS and decided to place more emphasis on creating consistency in GAAP between assets and businesses.

BC82. The Board also observed that the IASB issued a narrow-scope amendment to IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture, to address inconsistencies between the accounting for the contribution of a nonmonetary asset in IAS 28 and the derecognition of an entity in IFRS 10. However, the effective date of that amendment was indefinitely

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deferred because the IASB decided to address those issues as part of the research project on the equity method of accounting.

Effective Date and Transition

BC83. The amendments in this proposed Update would be effective at the same time as those in Update 2014-09. The amendments in Update 2014-09 state that an entity can apply the guidance utilizing a full retrospective approach or a modified retrospective approach. The Board decided to amend the transition guidance in Update 2014-09 so that entities could elect to apply different transition methods to transactions with customers and transactions with noncustomers. For example, an entity could elect to apply the full retrospective approach to transactions with customers and it also could choose to apply the modified retrospective approach to transactions that are not with customers.

BC84. The Board believes that because the transactions that are not with customers (that is, transactions within the scope of Subtopic 610-20) are typically nonrecurring items, the time-series trend in reported information may not be as important to users of financial statements. Therefore, even if an entity elects to apply the full retrospective approach to revenue transactions, it may not be as important to the entity’s financial trends to also require a full retrospective approach to transactions that are not with customers. Furthermore, the Board did not want an entity to base its transition approach for revenue transactions on the cost of applying Subtopic 610-20. As such, providing this election may help alleviate some costs of a full retrospective approach for nonrevenue transactions.

BC85. The Board also considered allowing an entity to apply Subtopic 610-20 on a prospective basis and requiring additional disclosures so that users could understand the effects of the different accounting models on the financial statements. The Board noted that this would require an entity to apply two sets of guidance for a significant period of time for contracts that have a long remaining life (for example, the sale of intellectual property with variable consideration). As such, the Board decided that the benefits of any potential savings of a prospective approach did not justify the cost of applying two sets of guidance and additional disclosure requirements.

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Amendments to the XBRL Taxonomy

The provisions of this Exposure Draft, if finalized as proposed, would require changes to the U.S. GAAP Financial Reporting Taxonomy (Taxonomy). We welcome comments on these proposed changes to the Taxonomy through ASU Taxonomy Changes provided at www.fasb.org. After the FASB has completed its deliberations and issued a final Accounting Standards Update, proposed amendments to the Taxonomy will be made available for public comment at www.fasb.org and finalized as part of the annual release process.



