FASB Clarifies the Derecognition of Nonfinancial Assets Guidance

March 2017

The US Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) No. 2017-05, 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 contract may involve the transfer of both nonfinancial assets (eg intangible assets, land, buildings or materials and supplies) and financial assets (eg cash and receivables). ASU 2017-05 clarifies that entities must account for the transfer of nonfinancial assets or ‘in substance nonfinancial assets’ when a counterparty obtains control of it under FASB Accounting Standards Codification Subtopic 610-20.

ASU 2017-05 also clarifies that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an ‘in substance nonfinancial asset’. For this purpose, ASU 2017-05 defines ‘in substance nonfinancial assets’ in part, as a financial asset promised to a counterparty in a contract if substantially all of the fair value of the assets (recognised and unrecognised) that are promised to the counterparty in the contract is concentrated in nonfinancial assets.

The amendments clarify that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. For example, a parent may transfer control of nonfinancial assets by transferring ownership interests in a consolidated subsidiary. A contract that includes the transfer of ownership interests in one or more consolidated subsidiaries is within the scope of Subtopic 610-20 if substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets.

ASU 2017-05 also clarifies that even if substantially all of the fair value of the assets that are promised to the counterparty in a contract is not concentrated in nonfinancial assets, a financial asset that is held in an individual consolidated subsidiary within a contract is an ‘in substance nonfinancial asset’ if substantially all the fair value of the assets (recognised and unrecognised) that are promised to the counterparty in that subsidiary is concentrated in nonfinancial assets.

The amendments are effective at the same time Topic 606, Revenue from Contracts with Customers, is effective. For public entities, they are effective for annual reporting periods beginning after 15 December 2017, including interim reporting periods within that reporting period. For all other entities, the amendments are effective for annual reporting periods beginning after 15 December 2018, and interim reporting periods within annual reporting periods beginning after 15 December 2019.

ASU 2017-05 is available from the FASB on this link.

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