Property, Plant, and Equipment (Topic 360)

1 Property, Plant, and Equipment (Topic 360) Derecognition of in Substance Real Estate a Scope Clarification a consensus of the FASB Emerging Issues Task Force This Exposure Draft of a proposed Accounting Standards Update of Topic 360 is issued by the Board for public comment. Written comments should be addressed to: Technical Director File Reference No. EITF-100E Proposed Accounting Standards Update Issued: July 20, 2011 Comments Due: October 3, 2011 The FASB Accounting Standards Codification is the source of authoritative generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities.

2 An Accounting Standards Update is not authoritative; rather, it is a document that communicates how the Accounting Standards Codification is being amended. It also provides other information to help a user of GAAP understand how and why GAAP is changing and when the changes will be effective. Notice to Recipients of This Exposure Draft of a Proposed Accounting Standards Update The Board invites individuals and organizations to send written comments on all matters in this Exposure Draft of a proposed Accounting Standards Update. Responses from those wishing to comment on the Exposure Draft must be received in writing by October 3, 2011.

3 Interested parties should submit their comments by email to File Reference No. EITF-100E. Those without email should send their comments to Technical Director, File Reference No. EITF-100E, FASB, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116. Do not send responses by fax. All comments received constitute part of the FASB s public file. The FASB will make all comments publicly available by posting them to the online public reference room portion of its website. An electronic copy of this Exposure Draft is available on the FASB s website. Financial Accounting Standards Board of the Financial Accounting Foundation 401 Merritt 7, PO Box 5116, Norwalk, Connecticut 06856-5116 Copyright 2011 by Financial Accounting Foundation.

4 All rights reserved. Permission is granted to make copies of this work provided that such copies are for personal or intraorganizational use only and are not sold or disseminated and provided further that each copy bears the following credit line: Copyright 2011 by Financial Accounting Foundation. All rights reserved. Used by permission. Proposed Accounting Standards Update Property, Plant, and Equipment (Topic 360) Derecognition of in Substance Real Estate a Scope Clarification July 20, 2011 Comment Deadline: October 3, 2011 CONTENTS Page Numbers Summary and Questions for Respondents .. 1 3 Amendments to the FASB Accounting Standards Codification.

5 5 10 Background Information and Basis for Conclusions ..11 13 Amendments to the XBRL Taxonomy .. 14 1 Summary and Questions for Respondents Why Is the FASB Issuing This Proposed Accounting Standards Update (Update)? Subtopic 810-10, Consolidation Overall, requires that a parent deconsolidate a subsidiary if the parent ceases to have a controlling financial interest in the subsidiary. However, differing views exist in practice on whether the parent of an in substance real estate subsidiary must satisfy the criteria in Subtopic 360-20, Property, Plant, and Equipment Real Estate Sales, in order to derecognize the real estate. The objective of this proposed Update is to resolve the diversity in practice about whether the guidance in Subtopic 360-20 applies to a parent that 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.

6 This proposed Update does not address whether the guidance in Subtopic 360-20 would apply to other circumstances when a parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate. Who Would Be Affected by the Amendments in This Proposed Update? The amendments in this proposed Update would affect entities that cease 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. What Are the Main Provisions? When a 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, this proposed Update would require a reporting entity to apply the guidance in Subtopic 360-20 to determine whether it should derecognize the assets (including real estate) and liabilities (including the related nonrecourse debt) in the in substance real estate entity.

7 In addition, the entity should apply the measurement provisions in Subtopic 360-20. 2 How Would the Main Provisions Differ from Current Generally Accepted Accounting Principles (GAAP) and Why Would They Be an Improvement? The amendments in this proposed Update would clarify the scope of current GAAP. The Board believes that the proposed Update would resolve the diversity in practice about whether the guidance in Subtopic 360-20 applies to the derecognition of real estate when the parent ceases to have a controlling financial interest (as described in Subtopic 810-10) in a subsidiary that is in substance real estate because of a default by the subsidiary on its nonrecourse debt.

8 The Board believes that clarifying that guidance improves current GAAP by eliminating the diversity in practice and emphasizing that the accounting for such transactions is based on their substance rather than their form. When Would the Amendments Be Effective? The amendments in this proposed Update would be applied on a prospective basis to deconsolidation events occurring after the effective date. Prior periods would not be adjusted even if the reporting entity has continuing involvement with previously derecognized in substance real estate entities. The effective date will be determined after the Task Force considers feedback on the proposed Update.

9 How Do the Proposed Provisions Compare with International Financial Reporting Standards (IFRS)? The amendments in this proposed Update do not eliminate the existing differences in accounting and reporting between GAAP and IFRS. IFRS guidance on accounting for decreases in ownership of subsidiaries may apply to all subsidiaries, even those that involve in substance real estate. Questions for Respondents The Board invites individuals and organizations to comment on all matters in this proposed Update, particularly on the issues and questions below. Comments are requested from those who agree with the proposed guidance as well as from those who do not agree.

10 Comments are most helpful if they identify and clearly explain the issue or question to which they relate. Those who disagree with the proposed guidance are asked to describe their suggested alternatives, supported by specific reasoning. 3 Question 1: Do you agree that the scope of this proposed Update should be limited to a reporting entity s loss of control (as described in Subtopic 810-10) of a subsidiary that is in substance real estate when that loss of control is a result of the subsidiary defaulting on its nonrecourse debt? If not, what other situations have arisen in practice that the Task Force should consider? Question 2: Do you agree that a reporting entity that ceases to have a controlling financial interest (as described in Subtopic 810-10) in a subsidiary that is in substance real estate because of a default by the subsidiary on its nonrecourse debt should apply the guidance in Subtopic 360-20 to determine whether it should derecognize the assets (including real estate) and liabilities (including the related nonrecourse debt) of the subsidiary?