ASC 610: Gains and Losses on Nonfinancial Assets

Accounting Standards Codification (ASC) 610, titled “Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets,” provides instructions for companies when they sell or transfer assets that are not part of their primary business operations. The standard was developed by the Financial Accounting Standards Board (FASB) to create consistency in how these transactions are reported. It ensures that the gains or losses from disposing of these non-core assets are calculated and recognized distinctly from the revenue a company earns from its everyday activities.

This guidance applies to transactions that fall outside a company’s main revenue streams. Before the creation of ASC 610, the rules for these sales were spread across different accounting topics. By consolidating the guidance, the FASB aligned the accounting for these disposals with the principles of control and measurement found in the revenue recognition standard, ASC 606. This creates a more uniform approach to reporting gains and losses from these incidental transactions.

Scope and Applicability of the Standard

The guidance within ASC 610 targets the sale or transfer of nonfinancial assets. This is a broad category that includes tangible assets like property, plant, and equipment (PP&E), real estate, and supplies. It also covers intangible assets, such as patents and intellectual property. A nonfinancial asset is any asset that does not meet the definition of a financial asset, like cash, stocks, or bonds.

A key concept is derecognition, which is the act of removing an asset from the company’s balance sheet once control has been transferred to another party. For a company to derecognize a nonfinancial asset and record a gain or loss, it must lose control over that asset. The accounting rules borrow principles from the revenue recognition standard to determine when this transfer of control has occurred.

The trigger for applying ASC 610 is that the asset being sold is not an output of the entity’s ordinary activities, meaning the transaction is incidental to the company’s main purpose. For example, a technology firm selling its old office building would apply ASC 610 because its business is selling software, not real estate. This distinction determines whether the proceeds are treated as a gain or loss under ASC 610 or as revenue under a different standard.

Differentiating from ASC 606

A company must determine if a transaction falls under ASC 610 or ASC 606, the standard for “Revenue from Contracts with Customers.” This determination depends on whether the asset sold is an output of the company’s ordinary activities. An output of ordinary activities relates to the goods or services a company provides as part of its central operations, and this judgment dictates how the gain or loss is presented on the income statement.

To illustrate, consider a manufacturing company that sells one of its factories. The sale of this factory would be accounted for under ASC 610. The manufacturer’s primary business is producing goods, not selling large real estate assets, making the factory sale an incidental event outside its ordinary activities.

Contrast this with a real estate development company that constructs and sells commercial buildings. When this company sells a building, the transaction falls under ASC 606. For the real estate developer, selling buildings is the core of its business, and the proceeds from the sale are recognized as revenue. The same physical asset can therefore be subject to two different accounting standards depending on the nature of the seller’s business.

This analysis must be performed for each transaction. For example, a pharmaceutical company selling a patent for a drug it no longer intends to develop would be an ASC 610 transaction. However, if a company’s business model is to acquire patents to sell them to other firms, then the sale of a patent would be an ordinary activity accounted for under ASC 606.

The Gain and Loss Recognition Model

Once a company determines a transaction falls under ASC 610, it must calculate the resulting gain or loss. The calculation focuses on the difference between what the company received and the asset’s recorded value. The formula is the consideration received minus the carrying amount of the asset sold.

Consideration received is the total value the company gets in exchange for the asset. This commonly includes cash but can also involve noncash consideration, such as receiving another asset. If noncash consideration is part of the deal, it must be measured at its fair value. The total consideration also includes the value of any liabilities the buyer assumes.

The carrying amount is the asset’s value as recorded on the seller’s balance sheet. This figure is calculated as the asset’s original historical cost less any accumulated depreciation or amortization. For example, if a company bought a machine for $100,000 and has recorded $70,000 in depreciation, its carrying amount is $30,000.

To make this concrete, imagine a company sells equipment for $45,000 in cash. The equipment’s carrying amount is $30,000, based on a $100,000 original cost and $70,000 in accumulated depreciation. The gain on the sale is calculated as $45,000 minus $30,000, resulting in a recognized gain of $15,000.

Financial Statement Presentation and Disclosure

After calculating the gain or loss, the final step is to report it correctly in the financial statements. The presentation of transactions under ASC 610 is different from revenue-generating activities. The net gain or loss is reported on the income statement within a non-operating category, such as “Other income (expense).” This presentation helps users distinguish between income from core operations and incidental events.

Companies are also required to provide specific details about the transaction in the notes to the financial statements. These disclosures give investors and other stakeholders a clear understanding of the nature of the disposal. Required information includes:

• A description of the nonfinancial asset sold and the circumstances of its derecognition.
• The carrying amount of the asset at the time of the sale.
• The amount of the recognized gain or loss and the income statement line item where it is included.
• For transactions with noncash consideration, the valuation methods used to determine its fair value.

These detailed notes provide transparency and context that the numbers on the income statement alone cannot convey.