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Long-lived assets held for sale · PwC's accounting podcast

0:00
SPEAKER_00: Thought Leadership from PWC's National Office.
0:06
SPEAKER_01: Welcome to PWC's Accounting Podcast.
0:10
SPEAKER_01: I'm Heather Horn.
0:11
SPEAKER_01: Today's episode continues our March series on topics from our very popular property plant and equipment guide.
0:18
SPEAKER_01: You may remember that last week we talked about impairment of long-lived assets held and used.
0:24
SPEAKER_01: Today's episode will move on and turn our attention to the accounting for assets held for sale.
0:29
SPEAKER_02: You know, given the current economic environment, we're seeing companies initiate plans to sell.
0:34
SPEAKER_02: And so it can be achieved in multiple different ways, and it's important to have a good understanding of the facts and circumstances of the sales transaction in order to figure out the appropriate accounting treatment and the timing of held for sale.
0:51
SPEAKER_01: That was Beth Paul, Deputy Chief Accountant in PWC's national office, who leads our acquisitions, divestures, and consolidation team.
0:59
SPEAKER_01: Beth has years of experience answering client questions in this area, and she's joining us today to share her practical tips and insights.
1:08
SPEAKER_01: So stay tuned for my conversation with Beth.
1:11
SPEAKER_01: Beth, welcome back to the podcast for the second installment talking about PP and E topics.
1:17
SPEAKER_01: And specifically today, we're going to talk about long-lived assets and impairments under the Held for Sale model, which you promised us in last week's episode.
1:26
SPEAKER_01: So before we get into the details, can you just give us sort of overview of what we'll be talking about today?
1:32
SPEAKER_02: Yeah, certainly.
1:32
SPEAKER_02: And thanks for having me back.
1:34
SPEAKER_02: So I'm going to go through this in chronological order and first talk through classification as held for sale and the related measurement and impairment model, which differs from held in use model that I discussed with you on our last episode.
1:46
SPEAKER_02: Classification as held for sale impacts companies' measurement of these assets in two specific ways.
1:51
SPEAKER_02: First, a company stops depreciating and amortizing assets.
1:55
SPEAKER_02: And second, the disposal group is carried at the lower of caring value or fair value less cost to sell.
2:00
SPEAKER_02: Lastly, I'm going to talk about the actual disposal and highlight the importance of determining if what's being disposed is an asset or a business.
2:07
SPEAKER_02: And then, you know, given the current economic environment, we're seeing companies initiate plans to sell.
2:12
SPEAKER_02: And so it can be achieved in multiple different ways.
2:15
SPEAKER_02: And it's important to have a good understanding of the facts and circumstances of the sales transaction in order to figure out the appropriate accounting treatment and the timing of held for sale.
2:25
SPEAKER_01: All right, well, definitely a lot of interesting topics here.
2:28
SPEAKER_01: And again, as you mentioned, timely given the current environment.
2:31
SPEAKER_01: So I think the starting point here, as you mentioned, would be when does the held for sale model apply?
2:38
SPEAKER_01: And I think this can be complicated for companies sometimes to kind of think through.
2:43
SPEAKER_01: So what are some of the things we should think about?
2:45
SPEAKER_02: Right.
2:45
SPEAKER_02: I mean, it is important to figure out if you're classified as held for sale.
2:48
SPEAKER_02: I'll remind people of a 2022 podcast that we did in the fixed asset toolkit where we went through this in detail and we talked about the six criteria to qualify for held for sale and the measurement complexities.
3:01
SPEAKER_02: And I'm not going to really go deep into those today.
3:04
SPEAKER_02: I'm a lot of times going to assume we are at held for sale.
3:07
SPEAKER_02: And so if you need that refresher, I would highlight going back there because it is important to make sure you're in the right model to start.
3:14
SPEAKER_01: All right, so Beth, that's helpful and definitely a lot to think about here.
3:17
SPEAKER_01: And I definitely do recommend people go back to that other podcast if you're trying to figure out that sort of judgment point.
3:23
SPEAKER_01: But now it's so assuming we are in Held for Sale model, I do have a sort of a level setting question because last week when we discussed held and used, one of the key points we focused on was the level of testing and how to determine your asset group.
3:37
SPEAKER_01: So if I am in this held for sale model, am I following that same approach or what is the unit of account?
3:46
SPEAKER_02: Yeah, I mean, that's a great question because we're not following the same approach, right?
3:50
SPEAKER_02: So the unit of account for a held for sale assessment is referred to as a disposal group.
3:55
SPEAKER_02: And it represents long-lived assets to be disposed of together as a group in a single transaction and the related liabilities directly associated with those assets that will be included in the transaction.
4:05
SPEAKER_02: There are a few things for our listeners to consider when thinking about the disposal group.
4:09
SPEAKER_02: First, a disposal group could include assets from several different asset groups, whether individual assets from different asset groups or multiple complete asset groups.
4:18
SPEAKER_02: Once the disposal group has been identified, that is the new unit of account while we're in this held for sale model.
4:25
SPEAKER_02: And the previous asset group unit of account is not considered when I'm doing my held for sale.
4:32
SPEAKER_02: Additionally, similar to asset groups, the disposal group could include what I'll call our non-ASC360 or non-long-lived assets.
4:39
SPEAKER_02: And those are going to follow a different impairment model.
4:42
SPEAKER_02: This is important when thinking through the order of impairment testing, which I'll discuss in a little bit.
4:46
SPEAKER_02: And then lastly, the disposal group could be a discontinued operation.
4:50
SPEAKER_02: I know you just had my colleague Jay Celebron, so I'll encourage people if they're disposing and they think they might meet that or just want to find out if they meet disc ops to listen to that podcast.
5:00
SPEAKER_02: All right, great.
5:01
SPEAKER_01: So then once we've identified this disposal group, then what is the next step?
5:07
SPEAKER_01: Yeah.
5:07
SPEAKER_02: So the held for sale model has a specific order for testing impairment prior to determining the measurement of the disposal group at the lower carrying value or fair value list costs to sell.
5:18
SPEAKER_02: So before the disposal group is measured, the seller needs to first assess the carrying value of any assets that are not long-lived assets or not finite lived and tangible assets in the disposal group and record any necessary impairment in accordance with the applicable VAT.
5:32
SPEAKER_02: So basically, you first think about accounts receivable, inventory, goodwill, indefinite lived intangibles, and figure out if you need impairments there.
5:39
SPEAKER_02: Those individual assets are then adjusted if necessary.
5:42
SPEAKER_02: This sort of impairment testing is different from what we discussed last week on held and use.
5:47
SPEAKER_02: Under that model, goodwill is tested for impairment after we tested the asset group, wherein in this model, it's tested before we test the disposal group.
5:56
SPEAKER_02: After all the other assets are tested for impairment, the seller then compares the fair value less cost to sell of the disposal group to the carrying value of the disposal group.
6:05
SPEAKER_02: If the carrying value is above the fair value less cost to sell, I record a loss on sale.
6:09
SPEAKER_01: All right, that's helpful.
6:10
SPEAKER_01: And Beth, I was just trying to think through as you were walking through that, how this order of impairment testing could actually impact how much impairment is recorded, and then obviously this estimated loss on disposal.
6:24
SPEAKER_01: So in addition to making sure you get that order right, then what else should companies be thinking about as they think through this measurement?
6:32
SPEAKER_02: Yeah, I mean, one of the nuances in the held for sale model is the concept whereby the measurement at the lower of carrying value or fair value less cost to sell is an exercise that gets looked at every reporting period.
6:43
SPEAKER_02: And it's possible that each reporting period the company needs to either further reduce the disposal or in some instances maybe increase it since the previous reporting period, in which case the measurement of the disposal group would go up.
6:56
SPEAKER_02: But there's a few things to think about before you quickly write that, you know, increase up.
7:00
SPEAKER_02: First, you can't write it back up above any previous estimated losses on sale.
7:08
SPEAKER_02: And it's important here, and I've been saying estimated loss on sale, because that is different than an impairment.
7:13
SPEAKER_02: So if part of that ordering of intestine testing that I mentioned earlier, you took an impairment of goodwill, let's say, and then you took a you know additional write down for the loss on sale, you can only reverse the loss on sale.
7:25
SPEAKER_02: You cannot reverse an impairment that was previously taken.
7:28
SPEAKER_02: And I think that's important and gets to why that order is also important, and knowing what you either impaired or, as they call it, recorded as an estimated loss on sale.
7:37
SPEAKER_01: And Beth, in practice, to your, well, first, to your point, impairment is one way.
7:41
SPEAKER_01: Once you impair something, it's done under US GAP, you cannot recover those amounts.
7:47
SPEAKER_01: Do you often see then what if companies have assets held for sale that you they are adjusting this estimated loss on sale?
7:55
SPEAKER_02: I think it it really is gonna depend.
7:58
SPEAKER_02: Oftentimes, when we see those adjustments, it can be due to things like movements in CTA, which I can further explain as we go through this podcast.
8:08
SPEAKER_01: Okay, all right, let's get there then.
8:09
SPEAKER_01: Um but I again I think it's a really important point for people to recognize that nuance and make sure they're following their ordering properly.
8:17
SPEAKER_01: Any other nuances that we should be thinking about when we're thinking through impairment and measurement of this disposal group?
8:24
SPEAKER_02: Yeah, one topic I really wanted to talk about relates to an SEC staff speech that was delivered way back in 2008 at the AICPA National Conference on Current SEC and PCOB developments.
8:34
SPEAKER_02: So the SEC staff provide an example whereby the fair value less cost to sell of the disposal group was lower than the carrying value.
8:41
SPEAKER_02: Additionally, the difference between the fair value and carrying value was greater than the netbook value of the long-lived assets.
8:47
SPEAKER_02: The question discussed in the speech was whether this excess estimated loss could be recorded.
8:52
SPEAKER_02: And ultimately, the SEC staff concluded that it would not object to two views.
8:56
SPEAKER_02: One view would be to record the loss in excess of the carrying amount of the long-lived assets as a reduction of the carrying value of the entire group.
9:03
SPEAKER_02: The other view would be to limit the estimated loss to the carrying value of the long-lived assets in the disposal group.
9:08
SPEAKER_02: So if I take a simple example, say that the carrying value of my disposal group is 100, and the fair value less cost to sell is 75.
9:15
SPEAKER_02: This would create an implied loss on sale of 25.
9:18
SPEAKER_02: But let's also assume that the carrying value of the long-lived assets in the disposal group is only 20, and they have a fair value of 5.
9:23
SPEAKER_02: So that loss of 25 that I just talked about, that implied loss, is greater than the carrying value of the long-lived assets of 20, and greater than the implied loss of 15 of the individual asset, the 20 minus the five.
9:35
SPEAKER_02: So the first method as re- basically looks at GAAP and says, we've redefined the unit of account as the disposal group.
9:41
SPEAKER_02: Thus the loss should be recognized to record the disposal group at the lower of its carrying value amount or its fair value less cost to sell.
9:48
SPEAKER_02: And under this approach, the loss on sale would be 25 at the held for sale date, recorded as a valuation allowance against the whole group.
9:55
SPEAKER_02: So again, my 25 was taking simply my 100 disposal group minus the 75.
10:02
SPEAKER_02: The second method says, no, no, GAP wants to limit the loss to the carrying value over fair value of just the long-lived assets, because only long-lived assets are in the scope of 360.
10:12
SPEAKER_02: So under that approach, we say, okay, throw out the 25.
10:15
SPEAKER_02: I know I have a loss, but now I calculate that loss as the difference between the carrying value and fair value of just the 360 assets, which in my example was the 20 minus the five.
10:25
SPEAKER_02: And so I stop at 15 for the loss.
10:27
SPEAKER_01: All right.
10:27
SPEAKER_01: And Beth, in your first example, you made a point that it's a valuation or allowance against the whole group.
10:33
SPEAKER_01: I guess in your second example, then it would be specific then to the long-lived asset.
10:37
SPEAKER_01: It would be recorded against that long-lived asset.
10:39
SPEAKER_02: It wouldn't be recorded against the long-lived asset, but you would calculate it based on the long-lived asset.
10:44
SPEAKER_01: All right.
10:44
SPEAKER_01: That's helpful.
10:45
SPEAKER_01: And so basically then in that second option, you are actually potentially delaying recognition of some of the loss on disposal.
10:53
SPEAKER_01: And then that would actually be recognized at some point in the future when you actually complete the disposal.
10:58
SPEAKER_01: In the first option, you would be recognizing all the loss now.
11:02
SPEAKER_01: But so then, and maybe this goes to my earlier question.
11:04
SPEAKER_01: What does that mean from a balance sheet perspective if you've written down the asset group for an amount more than it's carrying amount?
11:10
SPEAKER_02: Right.
11:11
SPEAKER_02: So in effect, your assets now are kind of in that credit, net credit position, which doesn't make sense.
11:16
SPEAKER_02: And we can't show assets in a credit position on the balance sheet.
11:18
SPEAKER_02: So what we do is we record that in the liability section when we have sort of like the net negative, if you will.
11:26
SPEAKER_01: So Beth, that definitely doesn't sound like it's an everyday occurrence.
11:29
SPEAKER_01: So what are some of the things that could cause this circumstance?
11:34
SPEAKER_02: Yeah, you're right.
11:34
SPEAKER_02: It's not something that you would you at least intuitively think of.
11:37
SPEAKER_02: But I think in practice where I see this most often is um when you have foreign entities and you have CTA or cumulative translation adjustment associated with the disposal group.
11:47
SPEAKER_01: All right.
11:47
SPEAKER_01: I actually have a question for you before we get into the CTA because um my sense is it's going to be complicated.
11:53
SPEAKER_01: Um do you see, like, is this a policy choice then that companies are taking between this first approach and the second approach?
12:00
SPEAKER_01: That's right.
12:00
SPEAKER_01: And do you see one versus the other?
12:02
SPEAKER_01: Or again, it's all facts and circumstances.
12:05
SPEAKER_02: Yeah, I mean, practice is probably mixed, and I've never done an like study of it, but I I think that oftentimes people like to kind of explain the loss all at once.
12:14
SPEAKER_02: So they go with the method of like, let me just take it all, explain it to the street.
12:18
SPEAKER_02: This is what I expect to happen, as opposed to, as you mentioned, otherwise you're gonna like either dribble it in, yeah, have additional losses, or you're gonna take a loss and then take another loss on sale.
12:28
SPEAKER_01: Yeah, yeah.
12:29
SPEAKER_01: And that was actually what my guess would have been if um, but that's why I was curious if what you were seeing in practice.
12:34
SPEAKER_01: All right, let's go back then to CTA.
12:37
SPEAKER_01: And I do think that's important, obviously, for people to understand this.
12:41
SPEAKER_01: Um, but how how does it exactly factor in?
12:44
SPEAKER_01: Because I thought it wouldn't really be released from AOCI until you actually have the disposal.
12:50
SPEAKER_02: Yeah, that's right.
12:51
SPEAKER_02: It's not released, um, but you do have to factor it in.
12:53
SPEAKER_02: And so what I mean by that, and it can be tricky, and I'm gonna talk about CTA, but maybe for our listeners, you can have other things in AOCI like pensions, just fortunately or unfortunately, we don't see as many pensions these days, so we don't see them.
13:07
SPEAKER_02: But if you have anything in AOCI, what I'm gonna say as it relates to CTA would equally apply.
13:12
SPEAKER_02: So if the disposal group includes a sale of a foreign entity, the company will ultimately, as you said, need to release the CTA that was previously included in AOCI.
13:20
SPEAKER_02: Um, but it doesn't do that until it gets to the sale.
13:23
SPEAKER_02: But when we think about the carrying value, we do consider the CTA in measuring that value.
13:30
SPEAKER_02: And so if I bring this full circle to our previously previous point on the Asset group being in a credit position, the inclusion of CTA in the disposal group could increase the carrying value of the disposal group, resulting in a larger loss to be recorded that is above and beyond the net assets.
13:47
SPEAKER_02: And for me, that sounds like a lot, and I really just need an example.
13:51
SPEAKER_02: And so I'm gonna do an example, and hopefully I can do this justice.
13:54
SPEAKER_02: Okay, good.
13:55
SPEAKER_02: You anticipated my question.
13:56
SPEAKER_02: I'm gonna try and keep the numbers simple because I also can't do big math in my head.
14:00
SPEAKER_02: So let's assume that the carrying value in my disposal group is 20, and I have a CTA loss of 10 in OCI, which I'm not releasing, but I have it.
14:07
SPEAKER_02: So now when I do the carrying value, Gap would say I take that 20 and I add back the loss.
14:12
SPEAKER_02: So that means my calculated amount has to take the 20 and add back the loss of 10 to get to a 30.
14:18
SPEAKER_02: So now my carrying value is 30 for purposes of the test.
14:21
SPEAKER_02: If the fair value of the disposal group is$5, my estimated loss is 30 minus the 5 of 25.
14:28
SPEAKER_02: But if this amount is greater than the carrying value of the disposal group, which was only 20 in my example, so it is, right?
14:33
SPEAKER_02: 25 greater than 20, I can either write the carrying value down to zero and defer some of the losses like we just talked about, or I could record the full estimated loss of 25, which is going to result in that negative five in effect, which I'm going to classify as a liability on the balance sheet.
14:48
SPEAKER_02: And I know that sounds strange, and our listeners are probably saying, but wait, Beth, like I might have individual assets, and how am I doing those individual assets below their fair value?
14:56
SPEAKER_02: But it's important to remember this is like a concept that we don't have individual assets anymore, right?
15:01
SPEAKER_02: We've got a disposal group, and the standard is clear that any loss recognized does not, and it says shall not, so we all know in GAAP that means do not, shall not be allocated to the major classes of assets and liabilities in the disposal group.
15:13
SPEAKER_02: It's really a valuation allowance against the entire disposal group as a whole, not the individual assets.
15:18
SPEAKER_01: All right, that's definitely helpful, Beth.
15:20
SPEAKER_01: Although I hope for our listeners who are driving while they're listening, that they were not necessarily following all that math and paying attention to the road.
15:28
SPEAKER_01: But definitely helpful to walk through that and even I think to jot those numbers down if you're able to while you're listening.
15:34
SPEAKER_01: So any other reminders then that are relate to this help for sale assessment before we actually talk through the accounting for the sale or disposal?
15:42
SPEAKER_02: Yeah, one final situation I want to mention is that sometimes when a company plans to sell a sub-sub, it's gonna retain a non-controlling interest.
15:51
SPEAKER_02: Or said another way, I'm going to maintain an equity method investment in the entity that was previously, you know, a consolidated subsidiary.
15:58
SPEAKER_02: In those situations, the company should still reclassify all of the disposal group's assets and liabilities as held for sale at the date held for sale criteria are met.
16:07
SPEAKER_02: And it's still gonna need to think about CTA that I just talked about.
16:10
SPEAKER_02: And that's because due to the loss of control, the sale is treated as if I've sold a hundred percent of the company.
16:16
SPEAKER_02: And then the retained interest, that equity method investment, that's gonna be measured at fair value.
16:21
SPEAKER_01: All right.
16:21
SPEAKER_01: And Beth, I want to go back to something you said earlier, and it ties in with your discussion you just had about the CTA and the fact that your disposal group is a group now and not individual assets, because one question that I think often comes up is that companies want to keep depreciating their assets that are in that disposal group, and you don't.
16:42
SPEAKER_01: And so I just wanted to make sure we touched on that a little bit more and emphasize maybe that point.
16:47
SPEAKER_02: Yeah, that's right.
16:47
SPEAKER_02: Once we get to classification as held for sale, we cease depreciation of long-lived assets and we cease amortizing um finite lived intangible assets.
16:56
SPEAKER_02: And that is really important.
16:57
SPEAKER_02: And that right again goes to this notion of not really accounting for the individual assets anymore.
17:03
SPEAKER_02: We're accounting for the disposal group based on this criteria of is it carrying value or lower, the sort of the lower of carrying value or fair value less cost to sell.
17:11
SPEAKER_01: All right, that's helpful just as again as a reminder, because I know that question comes up.
17:15
SPEAKER_01: So now that we are at our point where we're either selling or disposing of the asset, what are some of the things companies should be thinking about?
17:24
SPEAKER_02: Yeah, I think now we have to think about are we going to sell an asset or are we going to sell a business?
17:30
SPEAKER_02: When a sales transaction has been entered into, companies really do need to look at it and and and make that assessment.
17:36
SPEAKER_02: And it's really important to do that because the guidance is different between the two models.
17:40
SPEAKER_01: Yeah, and actually my question said asset, but you are exactly right.
17:44
SPEAKER_01: You have you have to think that through.
17:46
SPEAKER_01: Is it one or the other?
17:48
SPEAKER_01: Um, and so I know for you this is very intuitive, but again, for our listeners, why is this such an important distinction?
17:55
SPEAKER_02: Yeah, I mean, the sale of a business typically involves a transfer of ownership of an entire business entity, including its assets, liabilities, and operations.
18:02
SPEAKER_02: However, it's not always the sale of a legal subsidiary or a business unit.
18:06
SPEAKER_02: So it's not as simple as stopping the assessment and concluding it's not a sale of a business when a legal sub or business isn't sold.
18:13
SPEAKER_02: Companies are gonna need to qualitatively assess what is being sold and consider the gap definition of a business.
18:19
SPEAKER_02: So you need to assess whether you get caught by the screen test first.
18:22
SPEAKER_02: You know, is it caught in the screen and therefore an asset disposition?
18:25
SPEAKER_02: And then you've got to look at whether you've sold inputs and processes that together provide the ability to create outputs.
18:31
SPEAKER_02: I know we're going to cover the definition of a business in more depth on a later podcast in this series, so I'll probably leave it there.
18:38
SPEAKER_02: But I think the key is it's important to note that the form of the transaction, that is, whether you've signed an agreement that says purchase of stock or purchase of assets, does not drive the conclusion as to whether a business or an asset was sold.
18:51
SPEAKER_02: The guidance for the sale of a business is included within the consolidation framework and results in deconsolidation of the business that is sold.
18:58
SPEAKER_02: The deconsolidation would occur when the company loses control.
19:02
SPEAKER_02: And the sale of assets is just covered by different guidance, often referred to as 6, 10, 20.
19:07
SPEAKER_01: All right.
19:07
SPEAKER_01: So then, Beth, what should we be considering if we do conclude that it's the sale of an asset?
19:12
SPEAKER_02: Yeah.
19:12
SPEAKER_02: So then we need to understand the nature of the assets sold.
19:16
SPEAKER_02: That is, are the assets financial or non-financial or both?
19:20
SPEAKER_02: So financial assets include things like receivables and investments.
19:23
SPEAKER_02: If the disposal group only includes financial assets, then the company needs to follow a relevant gap related to financial assets.
19:30
SPEAKER_02: For those that love the numbers, that's usually 860, as opposed to the held-for-sale model that I've been talking about here today, related to long-lived assets.
19:38
SPEAKER_02: We are focused on the sale of non-financial assets and in substance non-financial assets.
19:43
SPEAKER_02: And these transactions are governed by what we refer to as 61020.
19:47
SPEAKER_02: At a high level, 61020 is meant to align the sale of non-financial assets to a non-customer to the sale of inventory to a customer.
19:55
SPEAKER_02: And this linkage is going to become clear when I discuss some of the consideration transferred in this podcast.
20:01
SPEAKER_02: Examples of non-financial assets include intangible assets, land, building materials, supplies, all those 360 assets I've been talking about.
20:09
SPEAKER_02: Now, in substance, non-financial assets are financial assets that are promised in a contract in which substantially all the fair value is assets that are non-financial.
20:19
SPEAKER_02: So it's a financial asset, but it's part of a bigger contract that has a lot of non-financials.
20:23
SPEAKER_02: So it's important to consider here the unit of account for disposal, you know, what is in the contract or the agreement.
20:30
SPEAKER_02: And it could include both.
20:31
SPEAKER_02: And when that happens, it's possible we might still be in 610-20.
20:36
SPEAKER_02: If when we do the analysis, we determine that substantially all the fair value of the assets included in the disposal group is concentrated in the non-financial assets.
20:43
SPEAKER_01: All right.
20:43
SPEAKER_01: So substantially all is obviously a key to making sure you do this evaluation properly.
20:49
SPEAKER_01: And so how do we think about substantially all?
20:52
SPEAKER_02: Yeah, so it's not a bright line, it's not defined in the standard.
20:55
SPEAKER_02: I can't, you know, point to something.
20:56
SPEAKER_02: But typically the way we think about it is similar to things like in the leasing guidance, which also doesn't have a bright line, but talks about substantially all, and the screen test, which also has this notion of substantially all.
21:08
SPEAKER_02: And I think practice generally thinks about are you above 90%, then you're probably in substantially all.
21:14
SPEAKER_02: But certainly there is some judgment there.
21:15
SPEAKER_02: And again, I don't want to say that I created a bright line.
21:18
SPEAKER_02: I do not do that.
21:19
SPEAKER_01: Yeah, so and if someone's at 89%, don't say that you're automatically, oh, I'm fine.
21:23
SPEAKER_01: Like you definitely need to think it through, right?
21:25
SPEAKER_01: Right.
21:26
SPEAKER_01: And then so that's definitely a key point because the accounting model you're using, any other differences that you would highlight between the sale of a business and sale of an asset that you think are noteworthy?
21:36
SPEAKER_02: Yeah, I think the big one is the receipt of contingent consideration.
21:39
SPEAKER_02: Um, and we do just, for whatever reason, we are seeing more contingent consideration in deals as people look to agree on value transfer.
21:47
SPEAKER_02: And so contingent consideration is an obligation of the buyer to transfer additional assets or equity to the seller in the future when certain events occur.
21:56
SPEAKER_02: It is often used to enable the buyer and seller to agree to these terms of the Transactions, even though the ultimate value of the transaction really hasn't been determined.
22:04
SPEAKER_01: So then, Beth, what are the two models if there is contingent consideration as part of the transaction?
22:09
SPEAKER_02: Yeah, I'm going to start with the model if you're selling a business.
22:13
SPEAKER_02: So the seller would first then need to determine if the contingent consideration meets the definition of a derivative.
22:18
SPEAKER_02: And I'm going to leave that to our derivative experts.
22:20
SPEAKER_02: But so then if it's a derivative and doesn't meet one of the scope exceptions, then the contingent consideration would be recorded at fair value on the transaction date and subsequently adjusted to fair value.
22:30
SPEAKER_02: If the contingent consideration is not a derivative or does meet one of the scope exceptions in the derivative guidance, then the seller can make an accounting policy election.
22:37
SPEAKER_02: So they can either record the contingent consideration at fair value at the transaction date or record the contingent consideration when it's realizable.
22:45
SPEAKER_02: If the seller elects to record the contingent consideration at fair value, then the seller must also make an election with respect to what it's going to do on the subsequent reporting.
22:52
SPEAKER_02: Is it going to sort of continue the fair value model, or is it then going to go to what we call the contingent gain or the ASC 450 model?
23:00
SPEAKER_01: So there's some choices to be made there.
23:01
SPEAKER_01: All right.
23:02
SPEAKER_01: And Beth, you know I love to ask, anytime there's an accounting policy election, do we see more of one versus the other?
23:09
SPEAKER_01: It's really a facts and circumstances of I would think it would depend on the type of contingent consideration, the timeline, and some things like that.
23:16
SPEAKER_02: Yeah, it I yeah, I don't know that there is.
23:18
SPEAKER_02: I think you're right.
23:18
SPEAKER_02: It's probably facts and circumstances.
23:19
SPEAKER_02: I don't know that there is sort of a leaning one way or the other in practice.
23:23
SPEAKER_01: All right.
23:24
SPEAKER_01: Well, let's go on then to sale of an asset because I know there's some notable differences then.
23:28
SPEAKER_02: Right.
23:29
SPEAKER_02: And so here again, we're going to always start.
23:31
SPEAKER_02: Um, my derivative folks will love me saying this.
23:33
SPEAKER_02: We always start whether or not it's a derivative, because if it is, we have to do fair value.
23:36
SPEAKER_02: But if it isn't a derivative, um, then we have specific guidance.
23:41
SPEAKER_02: Whereas in our guidance 61020 that I mentioned, it talks about contingent consideration.
23:46
SPEAKER_02: It calls it variable consideration, which you're probably familiar.
23:49
SPEAKER_02: You know you're seeing that linkage to the revenue guidance, right?
23:51
SPEAKER_02: Because revenue guidance talks about variable consideration.
23:53
SPEAKER_02: And so then it's a very similar model.
23:56
SPEAKER_02: The seller needs to estimate the amount of variable consideration using either the expected value or most likely amount approach.
24:03
SPEAKER_02: The variable consideration can also only be included in the estimate of consideration when it's probable it won't be subject to a significant reversal in the future.
24:12
SPEAKER_02: This is a qualitative assessment, and the seller should consider both the magnitude and likelihood of a change in estimate.
24:17
SPEAKER_02: And the estimate would need to be reassessed each reporting period with any changes recognized.
24:22
SPEAKER_01: All right.
24:23
SPEAKER_01: So, Beth, one question for you, maybe to bring this all together.
24:26
SPEAKER_01: We started by talking about assets that are held for sale and or disposal, but then we mostly talked about sale.
24:34
SPEAKER_01: What other types of disposal would you have?
24:38
SPEAKER_02: It it is possible that um you might be thinking about an abandonment model.
24:43
SPEAKER_02: In that case, you don't really get to a sort of a held for sale first because you only move through the model on the day you actually abandon.
24:52
SPEAKER_02: And so on that date, you often are just taking you're just doing all everything.
24:56
SPEAKER_01: All right.
24:56
SPEAKER_01: Well, that's definitely helpful, Beth, because I think again, we always talk focus on the sales side of things, not this other potential avenue.
25:04
SPEAKER_01: And then, Beth, similar to last time, maybe we can wrap things up by just if there's any hints or advice that you would give to companies.
25:11
SPEAKER_01: Because again, this is not something that happens frequently.
25:14
SPEAKER_01: And so if you are, let's say you've gotten to help for sale, what are some of the tips that you would give?
25:21
SPEAKER_02: Yeah, so I mean, probably as people heard me talk through these examples, they can see there's some policy choices they have to make.
25:27
SPEAKER_02: And, you know, I sort of said, oh, we know the fair value, but again, we're gonna have some of those same challenges.
25:32
SPEAKER_02: We have to be able to figure out the fair value less cost to sell.
25:35
SPEAKER_02: And so we may need some of those same experts, potentially, valuation folks involved.
25:39
SPEAKER_02: And so again, it's just really bringing together the full team early on when we have these non-routine transactions.
25:45
SPEAKER_01: All right, well, Beth, as always, great insight and such a pleasure to have you on.
25:49
SPEAKER_01: So thanks so much for joining me.
25:50
SPEAKER_01: Great.
25:50
SPEAKER_01: Thanks for having me.
25:53
SPEAKER_01: That's our show for today.
25:55
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26:15
SPEAKER_01: From Thought Leadership at PWC, I'm Heather Horn.
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