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Phase two of effort to define a business in U.S. GAAP focuses on real estate deals

The FASB made several key decisions in its effort to clarify accounting for partial sales of nonfinancial assets, an important topic in the real estate industry. The effort is considered part two of the board’s wider project to improve the definition of a business.

The FASB on January 6, 2016, worked on a series of scenarios to come up with a consistent way to account for partial sales of nonfinancial assets, a topic that is important to the real estate industry.

The effort was part of the FASB’s broader project to clarify the definition of a business in U.S. GAAP. The discussion is the project’s second phase and focused on the types of transactions that are partial sales, in-substance nonfinancial assets, the partial sales accounting model, and what should be in the scope of Subtopic 610-20, Other Income—Gains and Losses From the Derecognition of Nonfinancial Assets.

Subtopic 610-20 was published alongside the FASB and IASB’s May 2014 landmark revenue recognition standards, the FASB’s Accounting Standards Update (ASU) No. 2014-09, Revenue From Contracts With Customers, and the IASB’s IFRS 15, Revenue From Contracts With Customers.

The FASB’s revenue standard replaced reams of industry-specific guidance for revenue transactions, including the guidance in FASB ASC 360-20-15, Property, Plant, and Equipment—Real Estate Sales—Scope and Scope Exceptions, formerly SFAS No. 66.

Subtopic 610-20 offers guidance for accounting for certain real estate transactions, specifying that a business should apply the guidance in the revenue standard for the existence of a contract, for control, and for measurement to contracts for the transfer of nonfinancial assets in nonrevenue transactions. Essentially, guidance in the revenue standard will be applied to sales of nonfinancial assets to an entity that is not a customer.

But businesses questioned how to interpret the term “in substance nonfinancial asset” when determining whether transactions should follow Subtopic 610-20 or Subtopic 810-10, Consolidation—Overall.

This led to the FASB’s most recent project.

The board on January 6 took several important steps to clarify that Subtopic 610-20 should include all transactions in which an entity retains an equity interest in the asset or receives an equity interest in the buyer. The board also decided to eliminate the guidance in Topic 845, Nonmonetary Transactions, which deals with exchanges of nonfinancial assets for a noncontrolling ownership interest. The end result is that transactions with similar economic characteristics will be treated the same way, board members said.

“It seems to me a clear choice between consistency and simplicity versus the opposite,” FASB member Daryl Buck said.

In addition, all businesses would be excluded from the scope of Subtopic 610-20. A subsidiary or group of assets that is not a business but is an in-substance financial asset would be subject to the guidance.

When transferring a nonfinancial asset and retaining an equity interest in the asset or the buyer, the board decided that a decision maker must consider the entire underlying asset. This is a change from a previous board decision that said the unit of account is the partial interest transferred. In addition, any retained noncontrolling investment would be recorded at fair value, the board decided.

The FASB plans to discuss at a later date how to account for undivided interests, the FASB’s research staff said at the end of the meeting.

In the meantime, the accounting board is preparing to review the feedback on phase one of the project. In November 2015, it released Proposed ASU No. 2015-330, Business Combinations (Topic 805): Clarifying the Definition of a Business, to draw a clear line between transactions that should be accounted for as acquisitions or disposals of assets and not businesses. Comments are due on January 22.

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Meet Paul Raymond

Meet Paul Raymond

Mr. Raymond is a sought after speaker in tax controversy law by many attorney, accountant, and business groups and at the request of the Internal Revenue Service, has presented programs at the IRS Nationwide Tax Forum, attended by tax professionals throughout the United States.

Additionally, he continues to be an active member in the Section of Taxation, American Bar Association, where he was the Past Chair of the Employment Taxes Committee.

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