The FASB is currently working on a project to clarify the definition of a business. This project comprises three phases:

• Phase I — Clarifying the definition of a business.
• Phase II — Accounting for partial sales of, and retained interests in, nonfinancial assets and clarifying the definition of in-substance nonfinancial assets.
• Phase III — Minimizing certain differences between the accounting for assets and that for businesses.

At its meeting yesterday, the Board primarily focused on Phase II of this project and made tentative decisions on the accounting for partial sales of nonfinancial assets and retained noncontrolling interests.

Partial Sales

ASU 2014-09¹ supersedes ASC 360-20,² which contained guidance on the accounting for a partial sale of an equity interest in a real estate entity. While ASU 2014-09 provides guidance on sales or transfers of nonfinancial assets (or groups of nonfinancial assets) and in-substance nonfinancial assets (or groups of in-substance nonfinancial assets), it does not provide explicit guidance on partial sales of nonfinancial assets, including real estate.

The FASB tentatively decided that gain or loss recognition on partial sales of nonfinancial assets (including in-substance nonfinancial assets) held in a legal entity would depend on whether the seller controls (i.e., consolidates) the legal entity. If the seller retains control of the legal entity upon a partial sale of a nonfinancial asset (i.e., still consolidates the legal entity), it would not recognize a gain or loss. If the seller relinquishes control of the legal entity (i.e., no longer consolidates the legal entity), it would recognize a gain or loss on the equity interest sold.

Retaining Noncontrolling Interests

Unlike existing U.S. GAAP, ASU 2014-09 does not provide guidance on how to account for a retained noncontrolling interest resulting from a partial sale of a nonfinancial asset. As a result, the Board tentatively decided that a seller should measure its retained noncontrolling interest at historical cost. That is, the seller would derecognize the portion of the asset sold and would recognize a gain or loss on the basis of the “partial sales” guidance discussed above.

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1 FASB Accounting Standards Update No. 2014-09, Revenue From Contracts With Customers.

2 FASB Accounting Standards Codification Subtopic 360-20, Property, Plant, and Equipment: Real Estate Sales.