EITF Issue No. 08-10 FASB Emerging Issues Task Force Issue No. 08-10 Title: Selected Statement 160 Implementation Questions Document: Issue Summary No. 1, Supplement No. 1 Date prepared: January 6, 2009 FASB Staff: Bonn (ext. 226)/Nickell (ext. 282) EITF Liaison: Hanson Date previously discussed: November 13, 2008 Previously distributed EITF materials: Issue Summary No. 1, dated October 31, 2008 References: FASB Statement No. 66, Accounting for Sales of Real Estate (Statement 66) FASB Statement No. 141 (revised 2007), Business Combinations (Statement 141(R)) FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (Statement 159) FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements (Statement 160) FASB Interpretation No. 43, Real Estate Sales (Interpretation 43) AICPA Accounting Research Bulletin No. 51, Consolidated Financial Statements (ARB 51) APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock (Opinion 18) APB Opinion No. 29, Accounting for Nonmonetary Transactions (Opinion 29) AICPA Statement of Position 78-9, Accounting for Investments in Real Estate Ventures (SOP 78-9) The alternative views presented in this Issue Summary Supplement are for purposes of discussion by the EITF. No individual views are to be presumed to be acceptable or unacceptable applications of Generally Accepted Accounting Principles until the Task Force makes such a determination, exposes it for public comment, and it is ratified by the Board. EITF Issue No. 08-10 Issue Summary No. 1, Supplement No. 1, p. 1
AcSEC Issues Paper, Joint Venture Accounting (AcSEC Issues Paper on joint ventures) International Accounting Standard 18, Revenue (IAS 18) International Accounting Standard 27, Consolidated and Separate Financial Statements (IAS 27) International Accounting Standard 28, Investments in Associates (IAS 28) International Accounting Standard 31, Interests in Joint Ventures (IAS 31) EITF Issue No. 98-8, "Accounting for Transfers of Investments That Are in Substance Real Estate" (Issue 98-8) EITF Issue No. 01-2, "Interpretations of APB Opinion No. 29" (Issue 01-2) EITF Issue No. 08-8, "Accounting for an Instrument (or an Embedded Feature) with a Settlement Amount That Is Based on the Stock of an Entity's Consolidated Subsidiary" (Issue 08-8) EITF Issue No. 08-10 Issue Summary No. 1, Supplement No. 1, p. 2
Background 1. At the November 13, 2008 EITF meeting, the Task Force discussed the following three issues, which were raised by constituents relating to the impact of Statement 160: Issue 1 How an entity should account for the transfer of an interest in a subsidiary that is in substance real estate Issue 2 How an entity should account for the transfer of an interest in a subsidiary to an equity method investee that results in deconsolidation of the subsidiary Issue 3 How an entity should account for the transfer of an interest in a subsidiary in exchange for a joint venture interest that results in deconsolidation of the subsidiary. 2. At the November 13, 2008 EITF meeting, the Task Force reached a consensus-for-exposure on Issue 1 that an entity should not apply Statement 160 to transfers of interests in a subsidiary that are in substance real estate but should account for the transfers in accordance with Statement 66 and related literature. 3. On Issues 2 and 3 the Task Force reached a consensus-for-exposure that Statement 160 should be applied when accounting for transfers of interests of subsidiaries to an equity method investee including exchanges of a subsidiary for an interest in a joint venture. 4. Some Task Force members expressed concerns that questions may continue to arise involving the application of Statement 160. Some of those concerns related to situations in which a transferred subsidiary may have been structured to achieve a particular accounting result. Task Force members with those concerns noted that other accounting literature would apply to that type of transaction if the assets (and liabilities) did not reside within the subsidiary entity. To address those concerns, the Task Force reached a consensus-for-exposure to amend paragraphs 32-37 of ARB 51, which provide guidance on partial sales of interests in a subsidiary, including sales that result in deconsolidation of the subsidiary, to apply only when the subsidiary is a substantive entity. EITF Issue No. 08-10 Issue Summary No. 1, Supplement No. 1, p. 3
5. The Task Force directed the staff to pursue the issuance of a draft abstract for public comment on the above consensus-for-exposure. A draft abstract for this Issue was posted to the FASB website on December 1, 2008, with a comment period that ended on December 26, 2008. Four comment letters were received and distributed to the Task Force. In addition, the staff received several informal comments on the draft abstract. At the January 15, 2009 EITF meeting, the Task Force will have the opportunity to consider the comment letters and the informal comments as it redeliberates the consensus-for-exposure in the draft abstract. If the Task Force affirms its consensus-for exposure, the staff will then ask the Task Force whether it agrees with the staff recommendation to add certain proposed drafting changes to the draft abstract. However, if the Task Force does not affirm the consensus-for-exposure, the staff will ask the Task Force how it wishes to proceed. Comment Letters and Informal Comments Received on the Draft Abstract 6. Four comment letters were received on this Issue. Three letters were from preparer constituents and one was from an accounting firm. One respondent was fully supportive of the consensus-for-exposure. The other respondents had several comments on the consensus-forexposure. Certain of the comments involved situations in which an entity sells a group of assets that constitutes a business and receives an equity interest as consideration. Two respondents questioned which guidance should be applied to such transactions Statement 160 or Issue 01-2. The deconsolidation provisions of Statement 160 specifically apply to transactions involving subsidiaries that are defined as entities, including an unincorporated entity such as a partnership or trust, in which another entity, known as its parent, holds a controlling financial interest. Issue 6 of Issue 01-2 specifies the accounting for an exchange of assets for an equity interest; however, it is unclear whether Issue 01-2 or Statement 160 should apply when a group of assets that constitutes a business is sold. The staff also received several informal comments from constituents regarding this same question. 7. All of the constituents who raised this issue proposed that Statement 160 should apply to such transactions. The rationale for that conclusion is that the form of the transaction should not result in a different accounting treatment. These constituents believe that the same accounting treatment should apply regardless of whether the business was transferred in the form of a group EITF Issue No. 08-10 Issue Summary No. 1, Supplement No. 1, p. 4
of assets or in the form of a subsidiary. The staff agrees with that view and believes that it is consistent with the Task Force's consensus for exposure that the partial sale and deconsolidation provisions of Statement 160 should not be applied to non-substantive subsidiaries. The Task Force added the non-substantive provision to Statement 160 in order to clarify that the form of a transaction should not override its substance. The staff recommends that Statement 160 and Issue 01-2 be modified to clarify that Statement 160 should be applied to such transactions. The staff has provided suggested revisions to Statement 160 and Issue 01-2 in Appendix A for the Task Force's review. Question 1 Does the Task Force agree that Statement 160 should be applied to sales of businesses in exchange for equity interests? If so, does the Task Force agree with the staff's suggested revisions to Statement 160 and Issue 01-2? 8. Three of the respondents also requested that the Task Force provide clarification regarding what it means by "substantive entity." The staff notes that the Task Force discussed whether to provide a definition of a substantive entity at the November 13, 2008 meeting and decided that a definition was not necessary. Additionally, the term substantive entity was also included without definition in Issue 08-8. Accordingly, the staff believes that judgment should be applied in determining whether an entity is substantive and that further clarification is not necessary. The staff notes that during deliberations for Issue 08-8, Task Force members commented that substantive entity could be a group of assets that would not qualify as a business. Question 2 Does the Task Force wish to provide further clarification of the term "substantive entity" is not necessary? If so, the staff will ask Task Force members for their views as to how they would like the term clarified. 9. The staff also received numerous comments on the proposed revisions to paragraph 32 of ARB 51 included in the draft abstract to Issue 08-10. The respondents indicated that they believe that the modification to clarify that paragraphs 32-34 should not be applied to non-substantive subsidiaries or in substance real estate was only meant to apply when a parent sells some of its ownership interests in a subsidiary. They do not believe that this scope limitation was meant to EITF Issue No. 08-10 Issue Summary No. 1, Supplement No. 1, p. 5
apply to situations in which additional interests of the subsidiary were acquired or reacquired or when the subsidiary has issued additional shares. The staff agrees with those comments and has revised paragraph 32 in Appendix A to provide that clarification. Question 3 Does the Task Force agree with the revisions to paragraph 32? 10. One respondent also raised the question as to what guidance should be applied if an entity loses control of a subsidiary that is in substance real estate in situations in which the transaction causing the loss of control would not be subject to Statement 66 or other authoritative guidance addressing in substance real estate. The staff also received an informal comment raising that same question. The staff believes that the Task Force's intent in scoping out in substance real estate from the partial sale/deconsolidation provisions of Statement 160 was to avoid inconsistencies that would arise between Statement 160 and other accounting literature. In those situations, the Task Force concluded that other literature should apply. Therefore, the staff believes that this question can be addressed by modifying the amendments to paragraphs 32 and 35 of ARB 51 such that ARB 51 would not apply if other authoritative guidance exists. Question 4 Does the Task Force agree with these revisions to paragraphs 32 and 35? 11. Lastly, one of the respondents provided several drafting suggestions on the draft abstract. The staff incorporated those suggestions into the revised draft abstract as it deemed appropriate. EITF Issue No. 08-10 Issue Summary No. 1, Supplement No. 1, p. 6
Appendix 08-10A EITF ABSTRACTS (DRAFT ) Issue No. 08-10 Title: Selected Statement 160 Implementation Questions Dates Discussed: November 13, 2008; [January 15, 2009] References: FASB Statement No. 66, Accounting for Sales of Real Estate FASB Statement No. 141 (revised 2007), Business Combinations FASB Statement No. 154, Accounting Changes and Error Corrections FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements FASB Interpretation No. 43, Real Estate Sales AICPA Accounting Research Bulletin No. 51, Consolidated Financial Statements APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock APB Opinion No. 29, Accounting for Nonmonetary Transactions AICPA Statement of Position 78-9, Accounting for Investments in Real Estate Ventures EITF Issue No. 98-8, "Accounting for Transfers of Investments That Are in Substance Real Estate" EITF Issue No. 01-2, "Interpretations of APB Opinion No. 29" Objective 1. The objective of this Issue is to clarify the accounting for certain transactions involving a transfer of an interest in a subsidiary after the effective date of Statement 160. All paragraphs in this Issue have equal authority. Paragraphs in bold set out the main principles. Background * This draft abstract is being exposed for a public comment period that will end on December 26, 2008. EITF Issue No. 08-10 Issue Summary No. 1, Supplement No. 1, p. 7
2. Statement 160 establishes the accounting for the noncontrolling interest in a subsidiary and for changes in the parent's ownership interest in a subsidiary, including those that result in the deconsolidation of a subsidiary. Statement 160 amends ARB 51 and is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Statement 160 applies to all entities that prepare consolidated financial statements except not-forprofit organizations. Changes in a parent's ownership interest in a subsidiary that do not result in deconsolidation of the subsidiary are accounted for as equity transactions. Upon deconsolidation of a subsidiary, Statement 160 requires a parent to record any retained interest in the subsidiary at fair value and recognize a gain or loss in net income as the difference between: a. The aggregate of: (1) The fair value of any consideration received (2) The fair value of any retained noncontrolling investment in the former subsidiary (including any accumulated other comprehensive income attributable to the noncontrolling interest) at the date the subsidiary is deconsolidated (3) The carrying amount of any noncontrolling interest in the former subsidiary (including any accumulated other comprehensive income attributable to the noncontrolling interest) at the date the subsidiary is deconsolidated b. The carrying amount of the former subsidiary's assets and liabilities. 3. There is no scope limitation within Statement 160 in applying the above guidance except with respect to a nonreciprocal transfer to owners, which is accounted for in accordance with Opinion 29. While Statement 160 provides general guidance on accounting for changes in a parent's ownership interest in a subsidiary, including those that result in the deconsolidation of a subsidiary, some constituents have raised concerns that other authoritative guidance exists that may conflict with Statement 160 for the treatment of changes in a parent's ownership interest recognition of a gain or loss upon deconsolidation of in a subsidiaryies when the subsidiary is in -substance real estate or the transaction involves an equity method investee or joint venture. Scope 4. This Issue applies to the following transfers of interests of a consolidated subsidiary: a. Transfers of interests in a consolidated subsidiary that are in substance real estate b. Transfers of interests in a consolidated subsidiary to an equity method investee that results in deconsolidation of the subsidiary c. Transfers of an interests in a consolidated subsidiary in exchange for an interest in a joint venture that results in deconsolidation of the subsidiary. EITF Issue No. 08-10 Issue Summary No. 1, Supplement No. 1, p. 8
Amendments to ARB 51 and Opinion 18 and Issue 01-2 5. This Issue amends ARB 51 (as amended by Statement 160) to exclude from its scope transfers of interests in a subsidiary that are in -substance real estate when authoritative guidance other than ARB 51 would apply to the transaction. This Issue amends Opinion 18 to clarify that transfers of an interest within the scope of this Issue should be accounted for in accordance with ARB 51. It also amends ARB 51 to clarify that the partial sale and deconsolidation provisions of ARB 51 do not apply to subsidiaries that are not substantive entities. Lastly, this Issue amends Issue 01-2 to add guidance that if an entity sells a group of assets that constitutes a business and receives an equity interest in the transferee as consideration, a gain or loss should be recorded equal to the difference between the fair value of all consideration received and the carrying value of the transferred assets. Effective Date and Transition 6. This Issue shall be effective for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years. This Issue shall be applied prospectively. 7. The transition disclosures in paragraphs 17 and 18 of Statement 154 shall be provided, if applicable. The provisions of this Issue need not be applied to immaterial items. EITF Issue No. 08-10 Issue Summary No. 1, Supplement No. 1, p. 9
Exhibit 08-10A AMENDMENTS TO ARB 51, AND OPINION 18, AND ISSUE 01-2 1. ARB 51 is amended as follows: [Added text is underlined and deleted text is struck out.] a. Paragraph 32: A parent's ownership interest in a subsidiary might change while the parent retains its controlling financial interest in the subsidiary. For example, a parent's ownership interest in a subsidiary might change if (a) the parent purchases additional ownership interests in its subsidiary, (b) the parent sells some of its ownership interests in its subsidiary, (c) the subsidiary reacquires some of its ownership interests, or (d) the subsidiary issues additional ownership interests. If the parent's ownership interest in a subsidiary that is non-substantive or is in substance real estate changes as the result of the parent selling some of its ownership interests in that subsidiary or because the subsidiary issues additional ownership interests, Pparagraphs 32 34 are not applicable and the subsidiary is in-substance real estate or is not a substantive entity authoritative guidance other than ARB 51 would apply to the transaction. b. Paragraph 35: A parent shall deconsolidate a subsidiary as of the date the parent ceases to have a controlling financial interest in the subsidiary. Paragraphs 35 37 are not applicable if the subsidiary is not a substantive entity or is in substance real estate and is not a substantive entity other authoritative guidance would apply to the transaction. Examples of events that result in deconsolidation of a subsidiary are: a. A parent sells all or part of its ownership interest in its subsidiary, and as a result, the parent no longer has a controlling financial interest in the subsidiary. b. The expiration of a contractual agreement that gave control of the subsidiary to the parent. c. The subsidiary issues shares, which reduces the parent's ownership interest in the subsidiary so that the parent no longer has a controlling financial interest in the subsidiary. d. The subsidiary becomes subject to the control of the government, court, administrator, or regulator. EITF Issue No. 08-10 Issue Summary No. 1, Supplement No. 1, p. 10
2. Opinion 18 is amended as follows: a. Paragraph 19(a): Intercompany profits and losses should be eliminated until realized by the investor or investee as if a corporate joint venture or investee company were consolidated. ARB 51 provides guidance for changes in a parent's ownership interest in a subsidiary and for deconsolidation of a subsidiary. If an investor transfers an interest in a consolidated subsidiary to a corporate joint venture or investee company, the investor accounts for the transfer is accounted for in accordance with ARB 51. Issue 01-2 provides guidance for transfers of a group of assets that constitutes a business and is a not in substance real estate. If an investor transfers a group of assets that constitutes a business and is not in substance real estate, the investor accounts for the transfer in accordance with Issue 01-2. 3. Issue 01-2 is amended as follows: a. Issue 6: Issue 6 If a nonmonetary exchange is required to be accounted for at fair value, whether full or partial gain recognition is appropriate in a circumstance in which one entity (Entity A) transfers its ownership of either a controlled productive asset, group of assets, or business other than in substance real estate to another entity (Entity B) in exchange for a noncontrolling ownership interest in that entity (Entity B). b. Paragraph 16: The following guidance applies if the asset(s) transferred does not constitute a business: The Task Force reached a consensus on Issue 6 that if the fair value of the asset(s) given up (or of the ownership interest received if the fair value of that asset is more readily determinable) is less than its carrying value, that difference should be recognized as a loss. [Note: See STATUS section.] If the fair value of the asset(s) given up (or of the ownership interest received if that asset's fair value is more readily determinable) is greater than its carrying value, then (a) a gain in the amount of that difference should be recognized if the entity accounts for the ownership interest received using the cost method, or (b) a partial gain should be recognized if the entity accounts for the ownership interest received using the equity method. The partial gain should be calculated as the amount described in (a), above, less the portion of that gain represented by the economic interest (which may be different from the voting interest) retained. For example, if Entity A exchanges an asset with a carrying value of $1,000 and a fair value of $2,000 for a 30 percent economic interest in Entity B, Entity A should recognize a gain of $700 [($2,000 $1,000) 70%]. Thus, the amount EITF Issue No. 08-10 Issue Summary No. 1, Supplement No. 1, p. 11
recorded for the ownership interest received is partially based on its fair value at the exchange date and partially based on the carryover amount of the asset(s) surrendered. c. Paragraph 16A is added as follows: The following guidance applies if the assets transferred constitute a business that is not in substance real estate: All consideration received should be recorded at its fair value, including the ownership interest received in Entity B. The difference between the fair value of the consideration received and the carrying value of the transferred assets should be recorded as a gain or loss. d. Paragraph 17A: ARB 51 provides guidance for deconsolidation of a subsidiary. If the asset Entity A transfers to Entity B in exchange for a noncontrolling interest in Entity B is a subsidiary that is a substantive entity and is not in substance real estate, the gain or loss of a controlling financial interest in that subsidiary is accounted for in accordance with ARB 51. e. Issue 8(b): Issue 8(b) In a monetary exchange (required to be accounted for at fair value), whether "full or partial" gain recognition is appropriate if an entity transfers its ownership of a controlled asset, or group of assets, or business to another entity in exchange for a noncontrolling ownership interest in the other entity. EITF Issue No. 08-10 Issue Summary No. 1, Supplement No. 1, p. 12