Much has been publicized about new revenue recognition standards, but it is important to note that there also are new rules for “other income,” based in part on principles within Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers
. Topic 610, Other Income, was originally issued in Update 2014-09, which established ASC 606. Accounting Standards Updates have been issued in 2016 and 2017 to amend and clarify the original issuance.
Topic 610 includes 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets, and 610-30, Gains and Losses on Involuntary Conversions. While ASC 606 deals with revenue generated from the ongoing activities of an entity, ASC 610 covers accounting and reporting for income recognized that is not in a contract with a customer.
This column specifically addresses ASC 610-20 on the sale and disposal of nonfinancial assets in contracts with noncustomers. This primarily includes fixed assets, when this is not an entity’s ongoing activity, and it is especially relevant for real estate sales. Nonfinancial assets can include intangible assets, land, buildings, or materials and supplies.
“In Substance” Nonfinancial Assets
Often the sale of nonfinancial assets includes financial assets. ASC 610-20 provides guidance detailing the circumstances in which a financial asset is considered an “in-substance” nonfinancial asset that can be grouped with nonfinancial assets. An “in-substance” nonfinancial asset is a financial asset that is promised to a counterparty in a contract in which substantially all the fair value (recognized and unrecognized) promised to the counterparty is concentrated in nonfinancial assets. When evaluating if “substantially all” has been met, entities will exclude cash or cash equivalents and liabilities.
ASC 610-20 applies to a transfer of ownership interest (or variable interest entity) in a consolidated subsidiary (which is not a business or nonprofit activity) if all the assets in the subsidiary are nonfinancial assets or in-substance nonfinancial assets. A business or nonprofit activity is derecognized using the deconsolidation guidance in ASC 810 (Consolidation
A decision tree is included with 610-20 to assist in determining which standards apply.
Within the scope of this subtopic, an entity shall apply guidance in Topic 810 on consolidation and in Topic 606 on revenue from contracts with customers.
There are several steps to the recognition process under ASC 610-20. First, determine if the entity has, or continues to have, a controlling financial interest in the legal entity that holds the nonfinancial assets/in-substance nonfinancial assets by applying Topic 810 guidance on consolidation. Similarly, when an entity transfers its assets directly to a counterparty, the entity shall evaluate whether it has a controlling financial interest.
If an entity determines it has, or continues to have, a controlling financial interest, it shall not derecognize those assets and shall apply the guidance in Topic 810. If no controlling financial interest, then continue with ASC 610.
Applying the Guidance
Determine if the contract meets all the contract criteria in ASC 606. If the contract doesn’t meet all the criteria, an entity shall not derecognize the nonfinancial assets/in-substance nonfinancial assets, and it shall apply ASC 350-10-40-3 to any intangible assets and ASC 360-10-40-3C to any property, plant, and equipment:
- Continue to report asset in financial statements.
- Recognize depreciation/amortization expense as a period cost.
- Apply impairment guidance.
Follow ASC 606-10-25-6 to ASC 25-8 to determine when a contract meets all the criteria.
If, or when, a contract meets all the criteria, identify each distinct nonfinancial asset/in-substance nonfinancial asset in accordance with ASC 606. Derecognize each distinct asset when the entity transfers control of the asset in accordance with ASC 606.
Measurement and Disclosure
When an entity meets the criteria to derecognize a distinct nonfinancial asset/in-substance nonfinancial asset, it shall recognize a gain or loss for the difference between the amount of consideration measured and allocated and the carrying amount of the asset.
To determine the transaction price and allocate the consideration to each distinct nonfinancial asset/in-substance nonfinancial asset, an entity shall apply ASC 606 guidance.
For disclosure, follow guidance in ASC 360-10-50, Long-Lived Assets Classified as Held for Sale or Disposed Of
The effective dates for Topic 610 are the same as the new revenue recognition standard: For reporting periods beginning after Dec. 15, 2017 (calendar year 2018) for public entities, and for reporting periods beginning after Dec. 15, 2018 (calendar year 2019) for all other entities.
Sheila A. Border, CPA, is a senior manager with Wipfli LLP in Media. She can be reached at email@example.com.