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Guidance to Be Clarified for Sales of Real Estate Investments

Businesses wanted the FASB to explain how to account for partial sales of real estate and other nonfinancial assets, given the changes that were adopted in the 2014 revenue recognition standard. The FASB decided to largely leave intact the existing accounting guidance for real estate sales.

The FASB on April 7, 2015, clarified how a business should recognize a gain or loss on the partial sale of a nonfinancial asset, such as real estate.

Businesses would take two steps: think about consolidation guidance first, and then think about accounting for revenue, the FASB decided.

If finalized, the process would be close to existing practice in U.S. GAAP, FASB members said.

The FASB needed to address the issue because the board’s sweeping revenue standard, published in May 2014 as Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers , replaced the guidance in FASB ASC 360-20-15, Property, Plant, and Equipment—Real Estate Sales—Scope and Scope Exceptions , formerly SFAS No. 66.

The FASB’s revenue standard, released concurrently with the IASB’s largely converged, IFRS 15, Revenue From Contracts With Customers , goes into effect in 2017. The standards get rid of the myriad, industry-specific accounting guidance in U.S. GAAP and outline a principles-based, five-step model by which all businesses, regardless of industry, can calculate the top line in their income statements.

The new standards, however, do not address the partial sales of real estate or other nonfinancial assets.

“There’s really no clear guidance on how to account for partial sales transactions,” FASB practice fellow Nick Burgmeier told the accounting board.

Many questions have cropped up about determining when a customer has obtained control of the asset and how to account for retained interests, Burgmeier said.

To address these questions, the board agreed that gains or losses should only be recognized if the legal entity is not consolidated by the seller.

The decisions were part of the board’s effort to clarify the definition of a business, a project the FASB took on in 2013 in part to help clarify situations such as accounting for high-rise buildings that are set up to be a separate company or a subsidiary of a company.

As part of that effort, the FASB also wanted to help businesses determine how and when to measure gains or losses on sales and the measurement of retained interests resulting from a sale of a partial interest in an asset.

The FASB on April 7 also addressed accounting for retained interests. The board decided that when a business sells a part of a nonfinancial asset, any noncontrolling interest retained by the seller should be measured at historical cost.

The board plans to resume discussions about the definition of a business in May.

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