Down deep in the weeds of the implementation of the new revenue recognition standard, companies have a new clarification to consider from the Financial Accounting Standards Board around certain nonfinancial assets. 

The FASB issued Accounting Standards Update No. 2017-05 to clarify what it meant in its massive new requirements around how to recognize revenue in financial statements regarding gains and losses from the derecognition of nonfinancial assets in contracts with noncustomers. The board said it heard of uncertainties about what type of transactions would be scoped into the new revenue recognition guidance because there was no definition for the term “in substance nonfinancial assets.”

The amendments to the revenue recognition guidance contained in the new accounting standards update provide a definition for that term and makes other changes to clarify the original intention. As an example, the FASB says, the amendments exclude all businesses, including real estate businesses, and nonprofit activities from the scope of the revenue recognition standard. The effect is to steer the derecognition of all business and nonprofit activities except those in certain oil and gas contracts, to accounting guidance around consolidations.

The amendments also address transactions commonly considered partial sales of nonfinancial assets, which are common in real estate, as well as contributions of nonfinancial assets to a joint venture or other noncontrolled entity. Apparently, partial sales of nonfinancial assets are the norm in real estate circles, where a seller retains an equity interest in the entity that owns the assets or has an equity interest in the buyer.

Public companies are heading into the home stretch of adopting the new revenue recognition accounting standard, which takes effect in 2018. A handful of companies have disclosed they are adopting the standard early. FASB has issued at least a half dozen updates to the standard since issuing it in 2014 to answer various implementation questions and concerns. The new guidance regarding nonfinancial assets takes effect with the rest of the new revenue recognition standard.

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