February 2010
Accounting Standards Update Will Affect Ownership Change Provisions
 Jim Brown The amendments in ASU 2010-02 are effective in the first interim or annual period ending on or after December 15, 2009, for for-profit entities. The amendments apply as of the beginning of that year. ASC 810-10 and ASU 2010-02 are both effective for the first set of a not-for-profit’s initial or annual financial statements for a reporting period beginning on or after December 15, 2010. Decrease in Ownership Provisions The ASU expands ASC 810-10’s scope and increases the transactions to which it applies. ASC 810-10 previously covered situations where a parent, for-profit entity ceased to have a controlling financial interest in a subsidiary that is a business. The ASU introduces the term “nonprofit activity” which it defines as: ASU 2010-02 expands applicability of ASC 810-10 to include:
ASC 810-10’s deconsolidation/derecognition provisions also now apply to:
For example, ASC 810-10 applies when Company A sells its plastics manufacturing division to Company B as long as the plastics manufacturing division meets the definition of a business. Company A would recognize the cash or other assets received in the sale, derecognize the assets and liabilities making up its plastics manufacturing division at their carrying amounts and report a gain or loss for the difference. Company B would account for the acquisition as a business combination under ASC 805 [FAS 141(R)] by recording assets and liabilities acquired at fair value. Goodwill would be recognized for a purchase price more than the fair values of the assets minus the liabilities acquired, or Company B would report a gain for the fair value of the assets minus the liabilities acquired over the purchase price. Further, if an entity transfers a subsidiary or group of assets constituting a business or nonprofit activity it controls to another entity in which it does not have a controlling interest, ASC 810-10 applies. Such transactions are common in the construction industry, and they may take place in other industries, too. The accounting under ASC 810-10 is significantly different from previous methods that recognized the transaction using the amortized cost of the transferred assets and liabilities. For example, the ASU applies when Contractor C forms a joint venture (partnership, limited liability company, etc.) with Contractor D to operate a paving and excavation construction business. Each contractor transfers a business it controls (a subsidiary or group of assets) to the joint venture and has a noncontrolling, 50 percent financial interest in the joint venture. Contractors C and D would each recognize the transaction by recording its investment in the joint venture at the amount of the fair value of the assets less the liabilities transferred, derecognize the assets and liabilities transferred at their carrying amounts and recognize a gain or loss for the difference. The joint venture would account for the transactions as a business combination. Accounting for the joint venture formation is different, however, when one of the transferors has a controlling financial interest in the joint venture. Assume the same joint venture formation between Contractors C and D except that Contractor C has a noncontrolling 49 percent interest and Contractor D has a 51 percent controlling interest in the joint venture. The accounting for the transaction by Contractor C would not change, and the joint venture would account for the transaction with Contractor C as a business combination. However, Contractor D and the joint venture would account for the transaction as a transfer between interests under common control instead of a business combination. Contractor D would recognize its investment in the joint venture at the net carrying amount of the assets and liabilities transferred and derecognize those assets and liabilities at their carrying amounts, resulting in no recognized gain or loss. The joint venture would recognize the assets and liabilities transferred at the carrying amounts of Contractor D. Inconsistent GAAP Provisions FASB received several questions about which provisions of U.S. generally accepted accounting principles (GAAP) to follow when both ASC 810-10 and another provision of GAAP appear to apply. ASU 2010-02 resolves these inconsistencies. It now requires a transaction resulting in an entity no longer having a controlling financial interest in a subsidiary or group of assets that is a business or nonprofit activity be accounted for under the provisions of:
Otherwise, ASC 810-10 as amended governs. Real estate entities will apply the same accounting they used for FASB Statement No. 66 as amended. Entities recognized a loss on sale at the time of the transaction but recognized a gain only when the acquirer had a sufficient initial and continuing investment and the seller had no continuing involvement with the real estate. The result will be quite different, though, if previously accounted for as the sale of a subsidiary or controlled entity with immediate recognition of gain or loss. Under the ASU, a real estate entity would recognize the entire loss immediately, but would recognize the entire gain or the appropriate portion thereof if and only when the criteria in ASC 360-20 (or 976-605) regarding initial and continuing investment adequacy and lack of continuing involvement are met. Applying ASC 810-10 to Cessation of Controlling Interest in a Subsidiary That Is Not a Business or Nonprofit Activity ASU 2010-02 resolves this, specifying ASC 810-10 should be applied to a transaction involving cessation of controlling financial interest in a subsidiary that is not a business or nonprofit activity, if the substance of the transaction is not addressed directly by guidance in another ASC topic. ASC topics that may directly address the substance of a particular transaction include, but are not limited to:
Thus, the transferor should first determine if the particular transaction is directly addressed by an ASC topic, such as one of those topics listed in the preceding paragraph. If so, the transferor should account for the transaction using the provisions of that ASC topic instead of ASC 810-10. If another ASC topic does not provide guidance directly addressing the substance of the transaction, the transferor should apply the provisions of ASC 810-10. ASC 810-10 provides guidance for the transferor, but not the acquirer. The acquirer would follow the normal guidance for purchase or exchange of assets that would be applied in a circumstance that is not a business combination. Additional Disclosures ASU 2010-02 adds additional disclosures for transferors that deconsolidate a subsidiary or derecognize a group of assets. These disclosures provide more detailed information to enable financial statement users to better understand how fair values were developed and assess any continuing involvement or other relationships that may exist between the transferor and acquirer going forward. For more information on this issue or related matters, please consult your BKD advisor. 
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