Industry Insights

On December 14, 2011, the Financial Accounting Standards Board (FASB) issued  Accounting Standards Update (ASU) No. 2011-10, Property Plant, and Equipment (Topic 360) to clarify existing guidance in Accounting Standard Codification (ASC) Subtopic 360-20, Property, Plant, and Equipment—Real Estate Sales. Under the clarifying guidance, a parent (reporting entity) would not satisfy the requirements to derecognize a subsidiary that is in-substance real estate in which the parent ceases to have a controlling interest as a result of default on the subsidiary's nonrecourse debt before the legal transfer of the real estate to the lender and the extinguishment of the related nonrecourse debt.

Differing views existed on whether the parent of an in-substance real estate subsidiary must satisfy criteria in Subtopic 360-20 to derecognize the in-substance real estate. This ASU is intended to address the diversity in practice for 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. In general, a parent company would not satisfy the requirements to derecognize in-substance real estate before a legal transfer of the real estate and extinguishment of the related indebtedness by the lender. Under this ASU, even if the parent ceases to have a controlling financial interest under Subtopic 810-10, the parent would continue to include the real estate, debt and results of the subsidiary’s operations in its consolidated financial statements until the legal title to the real estate is transferred to legally satisfy the debt. FASB emphasizes accounting for such transactions is based on their substance, rather than their form. The ASU includes several examples illustrating the application of the scope clarification.

Amendments in the ASU should be applied prospectively to deconsolidation events occurring after the effective date. Prior periods should not be adjusted, even if the parent company has continuing involvement with previously derecognized in-substance real estate entities.

This ASU is effective for public entities with fiscal and interim periods beginning on or after June 15, 2012, and for nonpublic entities for fiscal and interim periods on or after December 15, 2013. Early adoption is permitted.

For more on this ASU, contact your BKD advisor or .