Update to U.S. GAAP clarifies guidance for derecognition of nonfinancial assets

The FASB on Feb. 22, 2017, published 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, to help accounting professionals determine when the guidance for gains and losses on nonfinancial assets should be applied to a financial asset.

The FASB said the guidance in ASU No. 2017-05 is scheduled to become effective at the same time as the revenue standard in ASU No. 2014-09, Revenue From Contracts With Customers (Topic 606), goes into effect — 2018 for public companies and 2019 for privately held businesses.

The effective dates are aligned because ASU No. 2017-05 was issued to clarify the scope of Subtopic 610-20, Gains and Losses From the Derecognition of Nonfinancial Assets, which the revenue standard added to U.S. GAAP.

In ASU No. 2017-05, the FASB is defining the term “in substance nonfinancial asset.” Because the board did not define the term in its revenue standard, many financial reporting professionals were uncertain about the types of transactions that should be included in the nonfinancial asset derecognition guidance.

A financial asset is considered an in substance nonfinancial asset if it is part of a contractual commitment to another party and substantially all of its fair value is made up of nonfinancial assets, the FASB said. An asset that is considered to be nonfinancial falls within the scope of Subtopic 610-20.

The board agreed to issue the amendment because it wanted to clarify the accounting for partial sales of nonfinancial assets, such as real estate, in which the seller retains an equity interest in the business that owns the buildings or has an equity interest in the buyer. The amendment is part of a broader effort to help sharpen the difference between buying or selling a business versus buying or selling a group of assets.

For in-depth analysis of the FASB’s revenue recognition standard, please see Catalyst: U.S. GAAP — Revenue Recognition, also on Checkpoint.

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