In its quest to clarify how to define “business” for the sake of accounting rules, the Financial Accounting Standards Board is wading into how to account for partial sales of nonfinancial assets.
FASB is trying to help sort out when transactions involving in-substance nonfinancial assets should be accounted for as an acquisition or disposal of a business or the acquisition or disposal of nonfinancial assets. The board has already issued a proposal on how to define a business for purposes of applying business combination rules, and it continues to accept comments through Jan. 22.
With respect to nonfinancial assets, FASB has tentatively decided that all transactions where an entity retains an equity interest in an asset or receives an equity interest in a buyer would be accounted for under Accounting Standards Codification Topic 610-20, which contains rules for gains and losses from the derecognitiion of nonfinancial assets. That means no business combination accounting where an entity retains an equity interest in a transaction.
FASB reversed itself on some earlier decisions on the subject at a recent meeting. The board previously determined it would regard the unit of account in such an transaction as the partial interest that is transferred. Instead, the board now considers the unit of account when transferring a nonfinancial asset and retaining an equity interest to be the entire underlying asset.
In addition, FASB has rethought its earlier position on how to record the value of any retained noncontrolling investment. Previously the board said such an interest should be carried at the carryover basis, but the board recently determined instead it should be recorded at fair value.
If control of the nonfinancial asset does not transfer in a particular transaction, the accounting will depend on the reason the asset is not being derecognized, FASB decided. If it’s because the seller still consolidates the legal entity into its financial statements, then the transaction would be recorded as an equity transaction consistent with existing guidance on consolidations. If it is not derecgonized because the requirements under gains and losses from derecognition of nonfinancial assets are not met, then the entity would record it as a contract liability as the offset for the consideration or payment that the entity received.
FASB plans to continue deliberations on the second phase of its effort to define a business with no scheduled target date for an exposure draft of a proposed change to accounting rules.