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Deloitte comments on FASB's proposed ASU to clarify the guidance on nonfinancial assets

Published on: Aug 05, 2016

Deloitte & Touche LLP comments on the FASB's proposed ASU "Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets," which was issued in June 2016.

An excerpt from the comment letter is shown below:

We support the Board’s efforts to clarify and improve the guidance in ASC 610-20 to reduce potential diversity in practice. However, as discussed below in the appendix, we believe that the Board should make certain amendments to the proposed guidance before finalizing it.

We agree with the proposed ASU that a contract in which substantially all the fair value of the assets is concentrated in nonfinancial assets should be within the scope of ASC 610-20 and that all businesses or nonprofit activities and all investments should be excluded from the guidance’s scope. However, we are concerned about the potential inconsistencies in derecognition guidance for subsidiaries that are not businesses. Specifically, we believe that structuring opportunities may arise since some subsidiaries would be subject to the proposed ASU’s requirements because substantially all the fair value of their assets is concentrated in nonfinancial assets while other subsidiaries may have substantial financial assets and may therefore only be subject to the derecognition guidance in ASC 810-10. This issue arises as a result of inconsistent application of the principles for assessing control in ASC 810-10 and ASC 606 (and ASC 860). For example, retention of a call option on a transferred item indicates retention of control under one standard but may not under one of the other standards.

Under ASC 610-20-15-3(k), the derecognition of a subsidiary in which substantially all the fair value of the assets is not concentrated in nonfinancial assets is outside the scope of ASC 610-20 and would typically be derecognized in accordance with the consolidation guidance in ASC 810-10. Because the guidance in ASC 810-10 on determining when an entity transfers control differs from the guidance in ASC 860 and ASC 606, we are concerned that the legal form of the transaction could result in different accounting for economically similar transactions. Accordingly, we recommend that the Board either (1) eliminate the differences and thereby align the control model in ASC 810-10 with that in ASC 606 and ASC 860 or (2) stipulate that the guidance in ASC 606-10-15-4 also applies to subsidiaries in which substantially all the fair value of the assets is not concentrated in nonfinancial assets.

Full text of the comment letter is available below.

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