Project Update

Clarifying the Definition of a Business (Formerly Application of Asset- or Entity-Based Guidance to Nonfinancial Assets in an Entity)

Last updated on June 30, 2014.  Please refer to the Current Technical Plan for information about the expected release dates of exposure documents and final standards.

(Updated sections are indicated with an asterisk *)

The staff has prepared this summary of Board decisions for information purposes only. Those Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.

Project Objective
Decisions Reached at Last Meeting
Summary of Decisions Reached to Date
Next Steps
Board/Other Public Meeting Dates
Background Information
*Contact Information

Project Objective

This project is intended to clarify the definition of a business with the objective of addressing whether transactions involving in-substance nonfinancial assets (held directly or in a subsidiary) should be accounted for as acquisitions (or disposals) of nonfinancial assets or as acquisitions (or disposals) of businesses. The project will include clarifying the guidance for partial sales or transfers and the corresponding acquisition of partial interests in a nonfinancial asset or assets.

Decisions Reached at Last Meeting (May 29, 2013)

The Board decided to add a standard-setting project to clarify the definition of a business with the objective of addressing whether transactions involving in-substance nonfinancial assets (held directly or in a subsidiary) should be accounted for as acquisitions (or disposals) of nonfinancial assets or as acquisitions (or disposals) of businesses. The project will include clarifying the guidance for partial sales or transfers and the corresponding acquisition of partial interests in a nonfinancial asset or assets.

Summary of Decisions Reached to Date

See Decisions Reached at Last Meeting.

Next Steps

The Board will begin deliberations.

Board/Other Public Meeting Dates

The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final standard.

May 29, 2013 Board Meeting—Adding the project as a standard-setting project
November 30, 2011 Board Meeting—Agenda Announcement

Background Information

The amendments in FASB Accounting Standards Update No. 2010-02, Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary—A Scope Clarification, added a scope exception to Subtopic 810-10, Consolidation—Overall, for the deconsolidation/derecognition of sales of in substance real estate. EITF Issue No. 10-E, “Accounting for Deconsolidation of a Subsidiary That Is In Substance Real Estate,” highlighted a concern about in substance real estate in which there is an event or circumstance other than a sale in which an entity may be required to deconsolidate in substance real estate because the reporting entity has lost a controlling financial interest; however, that reporting entity may not be able to derecognize the in substance asset under the guidance in Subtopic 360-20, Property, Plant, and Equipment—Real Estate Sales. The amendments in FASB Accounting Standards Update No. 2011-10, Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate—A Scope Clarification, codified the consensus in EITF Issue 10-E and resolved diversity in practice by clarifying that when a parent (reporting entity) ceases to have a controlling financial interest (as described in Subtopic 810-10) in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity shall apply the guidance in Subtopic 360-20 to determine whether it should derecognize the in substance real estate. Furthermore, on the basis of the feedback received, the Task Force recommended that the FASB add a project to its agenda to address lenders’ accounting in situations in which a borrower ceases to have a controlling financial interest in an in substance real estate entity because of a default on its nonrecourse debt. After considering the recommendation of the Task Force and the comments received on Update 2011-10, a research project was added to the Board’s agenda to explore the broader issue of determining when an entity that substantially consists of nonfinancial assets should be accounted for as an in substance asset or as an entity, with the results of the research project being considered in determining whether to add a standard-setting project to the Board’s agenda.

The staff’s research indicated that the accounting ramifications in applying asset-based guidance as compared to entity-based guidance could be significant and whether the transaction involves a business appears to be a key determinant of which accounting to apply. Therefore, although this project began as an asset versus entity project, the staff’s research indicated that the accounting question is mainly whether asset- or business-related guidance should apply. The staff’s research also indicated that the main reasons for the differential or, in some circumstances, the lack of accounting guidance that exists today include (a) the measurement and timing of recognizing gains or losses on sales of assets in which continuing involvement exists, especially partial sales, and (b) the measurement of any retained interests resulting from a sale of a partial interest in an asset. At its May 29, 2013, meeting, the Board discussed the results of the staff’s research and whether to add a standard-setting project to the Board’s agenda. The Board decided to add a standard-setting project to clarify the definition of a business with the objective of addressing whether transactions involving in-substance nonfinancial assets (held directly or in a subsidiary) should be accounted for as acquisitions (or disposals) of nonfinancial assets or as acquisitions (or disposals) of businesses. The project will include clarifying the guidance for partial sales or transfers and the corresponding acquisition of partial interests in a nonfinancial asset or assets.

*Contact Information

Jennifer Hillenmeyer
Practice Fellow
jhillenmeyer@fasb.org

Victoria McMillen
Postgraduate Technical Assistant
vmmcmillen@fasb.org