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NYSSCPA supports FASB proposal to clarify real estate sales

The NYSSCPA is supporting the Financial Accounting Standards Board’s (FASB) proposal that, if adopted, would clarify the guidance in the Accounting Standards Codification covering situations where a subsidiary that is in-substance real estate defaults on its nonrecourse debt.

According to the proposal, the rules of Topic 360 (Property, Plant and Equipment) must be used to determine whether an entity should derecognize the assets (including real estate) and liabilities (including the related nonrecourse debt) of an in-substance real estate subsidiary.

The FASB said there was confusion over whether to apply the guidance found in Topic 360 or Topic 810 (Consolidation), when a parent company defaults on its nonrecourse debt and loses a controlling financial interest in a subsidiary that is in-substance real estate. Such confusion prompted the FASB to issue the proposed clarification. The Society agreed with the FASB in a Sept. 27 comment letter that Topic 360 does apply in such a situation.

Principal drafter Edward P. Ichart, a member of the Financial Accounting Standards Committee, said Topic 360 indicates that the assets (real estate) and liabilities (nonrecourse debt) should continue to be reported on the company’s balance sheet until the real estate has been transferred to the lender in complete satisfaction of the nonrecourse debt, while Topic 810 indicates that the parent company should deconsolidate the subsidiary, since it no longer controls the subsidiary.

“The timing of any recognition of gain or loss upon the extinguishment of the debt also varies depending on the use of Topic 810 or Topic 360,” he added.

The amendment would be applied on a prospective basis to deconsolidation events after the effective date, with prior periods not adjusted even if the entity has continuing involvement with previously derecognized in-substance real estate entities, according to the FASB document. The effective date will be determined after feedback is collected and considered, the FASB said.

Society to the FASB: Keep it simple
The Society said in its comment letter that clarifying guidance would improve the current accounting standards by eliminating a diversity in practice—an issue long overdue to be addressed, said Ichart.

“Unfortunately, when you had the same transaction, it was being accounted for differently. Both preparers and auditors could point to the codification and say they were correct, and so it did need to be cleared up,” explained Ichart. “In a typical situation that this proposal is seeking to clarify, the parent company gives the lender significant rights regarding the operating activities of its subsidiary, which has stopped making mortgage payments during the period before the real estate is transferred to the lender.”

While the issue applies only to a narrow set of situations, Ichart said that when it does come up, it could have a significant impact because, using the current rules, it is actually possible to get different answers for the same type of transaction.

“This proposal should eliminate any diversity,” said Ichart. “This is going to result in one set of guidelines for similar transactions, and the ambiguity and differing results should be eliminated.”

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