Derecognition

ASC 205-20 governs when a disposal must be reported as a discontinued operation and how it is presented and disclosed. A disposal of a component (or group of components) qualifies only if it represents a strategic shift that has (or will have) a major effect on the entity's operations and financial results, triggered when the component is classified as held for sale, disposed of by sale, or disposed of other than by sale (e.g., abandonment or spinoff) (205-20-45-1B). Results of discontinued operations, net of tax, are presented as a separate component of income for current and prior periods, held-for-sale assets and liabilities are presented separately (not offset) on the balance sheet, and extensive note disclosures are required.

This subtopic governs the measurement, derecognition, and disclosure of receivables arising from retail land sales. Its core rule is that an allowance for contract cancellations must be provided for receivables not expected to be collected because of cancellation, estimated from historical collection data drawn from a representative, current sample covering an adequate period (310-976-35-1). Cancelled contract receivable balances are charged in full against that allowance (310-976-40-1), and specified receivable disclosures are required (310-976-50-1).

This subtopic governs how a software vendor accounts for the costs of producing physical copies of software to be sold, leased, or otherwise marketed. Costs of duplicating the software, documentation, and training materials from the product masters and of physically packaging the product for distribution are capitalized as inventory on a unit-specific basis (330-985-25-1). Those capitalized costs are charged to cost of sales when revenue from the sale of the related units is recognized (330-985-40-1).

ASC 350-10 is the Overall subtopic that sets the scope and structure for the Intangibles—Goodwill and Other Topic. It governs the subsequent measurement, presentation, and disclosure of goodwill and other intangible assets (through Subtopics 350-20, 350-30, 350-40, 350-50, and 350-60), but expressly excludes accounting at acquisition for goodwill and intangibles acquired in a business combination, an NFP acquisition, or recognized by a joint venture upon formation. It also directs that derecognition of nonfinancial assets within the Topic follow Subtopic 610-20 or Topic 606, as applicable.

ASC 360-20 formerly contained the specialized U.S. GAAP for recognizing profit on sales of real estate (the old FASB Statement No. 66 model with full accrual, installment, cost recovery, deposit, and percentage-of-completion methods, plus sale-leaseback and continuing-involvement rules). Every paragraph in the subtopic has been superseded — mostly by ASU 2014-09 (Revenue from Contracts with Customers) and ASU 2016-02 (Leases). Sales of real estate are now accounted for under ASC 606 if the counterparty is a customer, or under ASC 610-20 for sales of nonfinancial assets to noncustomers, with sale-leaseback transactions governed by ASC 842-40.

This subtopic governs how oil and gas entities capitalize, amortize, impair, and dispose of industry-specific property, plant, and equipment—mineral interests in properties, wells and related equipment and facilities, support equipment and facilities, and uncompleted wells—under the successful efforts method (full cost accounting is left to SEC literature). Only exploration and development costs that relate directly to specific oil and gas reserves are capitalized; other costs are expensed, and exploratory well costs are held in uncompleted wells pending a determination of whether proved reserves were found. Capitalized proved property and well costs are amortized by the unit-of-production method, unproved properties are periodically assessed for impairment via a valuation allowance, and conveyances of mineral interests generally produce no gain when they are poolings of assets or involve substantial future performance obligations.

ASC 405-20 governs when a debtor may derecognize a liability because it has been extinguished. Under 405-20-40-1, extinguishment occurs if and only if the debtor pays the creditor (cash, other financial assets, goods or services, or reacquisition of its own debt securities) and is relieved of the obligation, or the debtor is legally released as primary obligor judicially or by the creditor. The Subtopic also contains special derecognition (breakage) rules for liabilities from prepaid stored-value products and excludes debt conversions and troubled debt restructurings (see 470-20 and 470-60).

This Subtopic explains when a regulator's rate actions create liabilities (regulatory liabilities) for an entity with regulated operations. Three mechanisms create liabilities: required refunds to customers that meet the loss-contingency accrual criteria, current rates collected to recover costs expected to be incurred in the future for which the entity remains accountable, and gains or other reductions of net allowable costs that the regulator requires be amortized to customers over future periods. A regulator's actions can eliminate a liability only if the regulator's actions imposed it in the first place.

ASC 470-20 governs the issuer's accounting for debt with detachable warrants, convertible debt instruments, interest forfeited on conversion, induced conversions, conversions triggered by the issuer's call, and own-share lending arrangements entered into in contemplation of a convertible debt offering. After ASU 2020-06 eliminated the cash conversion and beneficial conversion feature models, the default rule is that convertible debt is accounted for in its entirety as a liability with no proceeds allocated to the conversion feature (470-20-25-12), unless the feature must be bifurcated as a derivative under 815-15 or the debt was issued at a substantial premium (470-20-25-13). Proceeds of debt issued with detachable warrants, by contrast, are allocated between the debt and the warrants based on relative fair values (470-20-25-2).

ASC 470-50 governs the debtor's accounting for extinguishments of debt and for modifications or exchanges of debt instruments with the same creditor (excluding troubled debt restructurings under 470-60 and conversions pursuant to conversion privileges under 470-20). Its core rule is the "10 percent cash flow test": if the present value of cash flows under the new instrument differs by at least 10% from the PV of the remaining cash flows of the original instrument (discounted at the original instrument's effective rate), the terms are substantially different and the transaction is accounted for as an extinguishment, with the new debt recorded at fair value and gain or loss recognized currently in income. If not substantially different, no gain or loss is recognized and a new effective interest rate is computed from the original carrying amount and revised cash flows.

ASC 470-60 governs how a debtor accounts for a troubled debt restructuring (TDR) — a restructuring in which the creditor, for economic or legal reasons related to the debtor's financial difficulties, grants a concession it would not otherwise consider (470-60-15-5). Settlements by transfer of assets or grant of an equity interest are measured at fair value, with a gain on restructuring equal to the excess of the payable's carrying amount over that fair value (470-60-35-2, 35-4). Pure modifications of terms are accounted for prospectively with no change in carrying amount and a new effective interest rate, unless total future cash payments (including contingent amounts) are less than the carrying amount, in which case the debtor writes down the payable and recognizes a gain (470-60-35-5 through 35-7).

This Subtopic gives health care entity-specific debt guidance, principally for tax-exempt bond financings. Bonds issued by a financing authority for a health care entity's benefit are recorded as a liability (or lease liability) only if the entity is responsible for repayment; otherwise the proceeds are reported as contributions from the sponsoring entity. It also addresses arbitrage rebate liabilities owed to the U.S. Treasury and the accounting for crossover refundings.

This Subtopic modifies the general rule that gains and losses on early extinguishment of debt hit income immediately (Subtopic 470-50) for entities whose rates are set by a regulator. If the regulator will recover a reacquisition loss through future rates, the regulated entity capitalizes the excess of reacquisition price over net carrying amount as a regulatory asset; if the regulator will reduce future rates for a gain, the entity records a regulatory liability. Either amount is amortized as an adjustment of interest expense over the period reflected in rate-making.

ASC 505-60 governs the pro rata distribution of nonmonetary assets that constitute a business to an entity's owners (a spinoff). Such distributions are recorded at the carrying (recorded) amount of the distributed business, reduced for any indicated impairment, and are never accounted for as a sale of the spinnee followed by a distribution of proceeds — even if the spun-off operations are sold immediately afterward. When the substance of the transaction differs from its legal form, the legal spinnee is treated as the accounting spinnor (reverse spinoff accounting).

ASC 605-40 formerly addressed gains and losses arising from involuntary conversions of nonmonetary assets (such as property destroyed by fire or taken by condemnation) into monetary assets like insurance or condemnation proceeds. Every paragraph in the subtopic — scope, recognition, measurement, presentation, and relationships — was superseded by ASU 2014-09 (the revenue recognition standard), so the subtopic contains no remaining authoritative guidance. Entities now look to ASC 610-30 for gains and losses on involuntary conversions and to ASC 606 for revenue from contracts with customers.

ASC 605-970 formerly provided the legacy revenue recognition guidance for real estate—general transactions (including profit recognition and measurement on real estate sales). Every paragraph in the subtopic — Sections 05, 15, 25, 30, 35, and 55 — was superseded by ASU 2014-09 (Revenue from Contracts with Customers). No substantive guidance remains; entities apply ASC 606 (and ASC 610-20 for sales of nonfinancial assets to noncustomers) instead.

ASC 605-974 formerly provided industry-specific revenue recognition guidance for real estate investment trusts under the legacy ASC 605 revenue model. Every paragraph in the subtopic (Sections 05, 15, 25, 45, and 50) was superseded by ASU 2014-09, the revenue standard. REIT revenue transactions are now accounted for under ASC 606 (contracts with customers) or, for rental income, under the leases guidance in ASC 842.

ASC 610-10 is the Overall subtopic of the Other Income Topic, which covers income that is not revenue from a contract with a customer under Topic 606 and is not addressed by other Topics (such as Topic 842 on leases or Topic 944 on insurance) or other revenue/income recognition guidance. It is largely a scope-setting subtopic: it establishes the pervasive scope for Topic 610 and identifies its Subtopics — Overall (610-10), Gains and Losses from the Derecognition of Nonfinancial Assets (610-20), and Gains and Losses on Involuntary Conversions (610-30). The guidance applies to all entities.

ASC 610-20 governs how an entity recognizes and measures gains or losses when it derecognizes nonfinancial assets (and "in substance nonfinancial assets") transferred to counterparties who are not customers — for example, sales of real estate, intangibles, IPR&D, or ownership interests in a non-business subsidiary holding only such assets. The entity first applies Topic 810 to determine whether it retains a controlling financial interest, then applies Topic 606's contract-existence, distinct-asset, and transfer-of-control criteria to decide when to derecognize each distinct asset, and computes gain or loss as the difference between consideration (transaction price plus the carrying amount of liabilities assumed or relieved) and the asset's carrying amount (610-20-25-1 through 25-7; 610-20-32-2).

ASC 610-30 governs the accounting when a nonmonetary asset (property, equipment, inventory) is involuntarily converted into monetary assets — e.g., insurance proceeds from destruction or theft, or condemnation awards in eminent domain. Because the conversion is a monetary transaction rather than a nonmonetary exchange, any difference between the asset's cost (or carrying amount) and the monetary assets received is a realized gain or loss that must be recognized, even if the proceeds are reinvested or the entity is obligated to reinvest them in replacement assets (610-30-25-2; 610-30-25-3).

ASC 840-40 was the legacy sale-leaseback guidance under the old lease model, addressing when a seller-lessee could recognize a sale of property it simultaneously leased back and how any gain or loss was deferred and amortized. Every substantive paragraph in the subtopic (Sections 05, 15, 25, 30, 35, 50, and 55) has been superseded by ASU 2016-02, so the subtopic now contains no operative guidance. Sale-leaseback transactions are instead accounted for under ASC 842-40, which conditions sale recognition on satisfying the transfer-of-control requirements in ASC 606.

ASC 842-40 governs sale and leaseback transactions, in which a seller-lessee transfers an asset to a buyer-lessor and leases it back. The threshold question is whether the transfer qualifies as a sale under Topic 606's control-transfer guidance; if it does, the seller-lessee derecognizes the asset, recognizes the sale at the transaction price, and accounts for the leaseback under 842-20, while the buyer-lessor accounts for the purchase under other Topics and the lease under 842-30. If the transfer is not a sale (e.g., the leaseback is a finance/sales-type lease or there is a non-fair-value repurchase option), the transaction is a failed sale accounted for as a financing by both parties.

ASC 860-10 is the Overall subtopic for Transfers and Servicing; it sets the scope for the whole topic and, critically, states the derecognition test for transferred financial assets. Under 860-10-40-5, a transfer of an entire financial asset, group of entire financial assets, or a participating interest is a sale if and only if (a) the assets are legally isolated from the transferor even in bankruptcy, (b) each transferee (or beneficial interest holder) can pledge or exchange what it received without a constraint that gives the transferor more than a trivial benefit, and (c) the transferor does not maintain effective control. If any condition fails, the transfer is accounted for as a secured borrowing under 860-30.

ASC 860-20 tells a transferor what to record once a transfer of financial assets qualifies as a sale under 860-10-40-5, and what happens if the transferor later regains control. For a sale of entire financial assets, the transferor derecognizes the assets, recognizes at fair value all assets obtained and liabilities incurred (cash, servicing assets/liabilities, beneficial interests, options, forwards, swaps), and books the gain or loss in earnings; for a participating interest, the prior carrying amount is allocated between the interest sold and the interest retained on relative fair values. If a change in law or circumstance causes the transferor to regain control, it rerecognizes the assets and related liabilities at fair value as if it purchased them, with no gain or loss on its beneficial interests.

ASC 860-30 governs transfers of financial assets that fail the sale conditions and therefore must be accounted for as secured borrowings, plus the accounting for collateral pledged in such transactions. The transferor keeps the transferred asset on its balance sheet with no change in measurement basis (860-30-25-2), reclassifying it separately (e.g., "securities pledged to creditors") if the secured party may sell or repledge it (860-30-45-1). Cash collateral — and securities collateral the holder may sell or repledge — is treated as proceeds of a borrowing rather than as collateral, and is recognized as an asset by the recipient with a corresponding obligation to return it (860-30-25-3, 25-8).

ASC 860-40 formerly governed transfers of financial assets to qualifying special-purpose entities (QSPEs), which under pre-2010 GAAP were exempt from consolidation and could support sale accounting for the transferor. Every substantive paragraph in the subtopic (Sections 05, 10, 15, 25, 40, 45 and 55) was superseded by ASU 2009-16 (formerly FAS 166), which eliminated the QSPE concept entirely. The subtopic is now an empty shell retained only for reference; transfers to securitization entities are analyzed under the general derecognition conditions of ASC 860-10 and the consolidation guidance in ASC 810.

ASC 980-20 governs what happens when an entity's operations (or a separable portion of them) stop meeting the criteria in 980-10-15-2 for rate-regulated accounting — because of deregulation, a shift away from cost-based rate-making, or competition/rate resistance. On discontinuation, the entity eliminates from its balance sheet all regulatory assets and liabilities that entities in general could not recognize, but does not adjust the carrying amounts of plant, equipment, and inventory unless impaired under Subtopic 360-10. The net adjustment goes to income of the period of discontinuation, classified separately within income from continuing operations as an unusual or infrequently occurring item.