# ASC 505-60-05: Equity — Spinoffs and Reverse Spinoffs — 05 Overview and Background

Source: FASB Accounting Standards Codification, Basic View

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## ASC 505-60-05: 05 Overview and Background

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##### [505-60-05-1](https://asc.understandingaccounting.org/asc/505/60/#505-60-05-1)

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This Subtopic provides guidance related to the distribution of nonmonetary assets that constitute a [business](https://asc.understandingaccounting.org/glossary/b/#business "Paragraphs 805-10-55-3A805-10-55-4805-10-55-5805-10-55-6 and 805-10-55-8805-10-55-9 define what is considered a business.") to owners of an entity in transactions commonly referred to as spinoffs. This Subtopic also addresses [spinoff](https://asc.understandingaccounting.org/glossary/s/#spinoff "The transfer of assets that constitute a business by an entity (the spinnor) into a new legal spun-off entity (the spinnee), followed by a distribution of the shares of the spinnee to its shareholders, without the surrender by the shareholders of any stock of the spinnor.") transactions in which the substance of the transaction may differ from the legal form, and provides guidance on how to determine such situations and their required accounting and reporting.

##### [505-60-05-2](https://asc.understandingaccounting.org/asc/505/60/#505-60-05-2)

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An entity may desire to reorganize its operations in response to its business needs. For example, an entity (the spinnor) may transfer assets into a new legal spun-off entity (the spinnee) and distribute the shares of the spinnee to its shareholders, without the surrender by the shareholders of any stock of the spinnor. Such a transaction is commonly referred to as a spinoff. An illustration of a spinoff is presented in Example 1 (see paragraph [505-60-55-1](https://asc.understandingaccounting.org/asc/505/60/#505-60-55-1)).

##### [505-60-05-3](https://asc.understandingaccounting.org/asc/505/60/#505-60-05-3)

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A spinoff allows an entity to be reorganized in a manner that allows it to meet the needs of its owners. However, there may be other benefits as well. If the spinoff qualifies as a nontaxable reorganization, the distribution results in no taxable gain being recognized by either the spinnor or its shareholders. Additionally, if the spinnee is subsequently sold by the shareholders, the double taxation that would have occurred if an entity sold its subsidiary directly and distributed the proceeds to its shareholders is avoided.

##### [505-60-05-4](https://asc.understandingaccounting.org/asc/505/60/#505-60-05-4)

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In certain cases, the spinoff of a subsidiary to its shareholders is such that the legal form of the transaction does not match its substance. That is, in certain circumstances, the spinnee will be the continuing entity and the transaction will commonly be referred to as a [reverse spinoff](https://asc.understandingaccounting.org/glossary/r/#reverse-spinoff "A spinoff of a subsidiary to an entity's shareholders in which the legal form of the transaction does not match its substance such that the new legal spun-off entity (the spinnee) will be the continuing entity."). An entity needs to determine whether to account for a spinoff as a reverse spinoff based on the substance instead of the legal form of the transaction. An illustration of a reverse spinoff is presented in Example 2 (see paragraph [505-60-55-4](https://asc.understandingaccounting.org/asc/505/60/#505-60-55-4)).