Accounting for Real Estate Transactions E-Book

Maria K. Davis

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Corporate F&A
• Sprache: Englisch

Seitenzahl: 979

Veröffentlichungsjahr: 2011

Beschreibung

Accounting for Real Estate Transactions, Second Edition is an up-to-date, comprehensive reference guide, specifically written to help professionals understand and apply the accounting rules relating to real estate transactions. This book provides financial professionals with a powerful tool to evaluate the accounting consequences of specific deals, enabling them to structure transactions with the accounting consequences in mind, and to account for them in accordance with US GAAP. Accountants and auditors are provided with major concepts, clear and concise explanations of real estate accounting rules, detailed applications of US GAAP, flowcharts, and exhaustive cross-references of the authoritative literature.

Leseprobe

Contents

Cover

Wiley Corporate F&A Series

Title Page

Copyright

Dedication

Preface

Acknowledgments

About the Author

List of Abbreviations

Part 1: Accounting for Real Estate Transactions—General

Chapter 1: Acquisition, Development, and Construction of Real Estate

1.1 Overview

1.2 Acquisition, Development, and Construction Costs

1.3 Costs Incurred to Sell or Rent a Real Estate Project

1.4 Incidental Operations

1.5 Accounting for Costs Incurred Subsequent to Project Completion

1.6 Purchase of Income-Producing Property

1.7 Special Accounting Issues

1.8 Financial Statement Presentation and Disclosure

1.9 International Financial Reporting Standards

1.10 Synopsis of Authoritative Literature (Pre-Codification References)

Chapter 2: Nonmonetary Exchanges of Real Estate

2.1 Overview

2.2 Section 1031 Exchange

2.3 Nonmonetary Exchanges Not Governed by Topic 845 (APB Opinion No. 29)

2.4 Accounting for Nonmonetary Exchanges

2.5 Nonmonetary Exchange of Real Estate Involving Monetary Consideration

2.6 Special Accounting Issues

2.7 Financial Statement Presentation and Disclosure

2.8 International Financial Reporting Standards

2.9 Synopsis of Authoritative Literature (Pre-Codification References)

Chapter 3: Real Estate Sales

3.1 Overview

3.2 Applicability of the Real Estate Sale Guidance

3.3 Sale and Profit Recognition

3.4 Profit Recognition under the Accrual Method

3.5 Failure to Meet Criteria for the Application of the Accrual Method

3.6 Application of Other Accounting Methods

3.7 Special Accounting Issues

3.8 Financial Statement Presentation and Disclosure

3.9 International Financial Reporting Standards

3.10 Synopsis of Authoritative Literature (Pre-Codification References)

Chapter 4: Real Estate Leases

4.1 Overview

4.2 Definition of a Lease

4.3 Lease Classification—General

4.4 Lease Classification—Leases Involving Real Estate

4.5 Accounting for Leases

4.6 Special Accounting Issues

4.7 Financial Statement Presentation and Disclosure

4.8 International Financial Reporting Standards

4.9 Synopsis of Authoritative Literature (Pre-Codification References)

Chapter 5: Sale-Leaseback of Real Estate

5.1 Overview

5.2 Accounting for Sale-Leaseback Transactions Involving Real Estate

5.3 Specific Accounting Issues

5.4 Financial Statement Presentation and Disclosure

5.5 International Financial Reporting Standards

5.6 Synopsis of Authoritative Literature (Pre-Codification References)

Part 2: Accounting for Real Estate Industry-Specific Transactions

Chapter 6: Interests in Real Estate Ventures

6.1 Overview

6.2 Methods of Accounting for Interests in Real Estate Ventures

6.3 Accounting for Transactions with a Real Estate Venture

6.4 Special Accounting Issues Related to Consolidation

6.5 Special Accounting Issues Related to the Equity Method of Accounting

6.6 Financial Statement Presentation and Disclosure

6.7 International Financial Reporting Standards

6.8 Synopsis of Authoritative Literature (Pre-Codification References)

Chapter 7: Time-Sharing Transactions

7.1 Overview

7.2 Types of Time-Sharing Arrangements

7.3 Accounting for the Sale of Time-Sharing Intervals

7.4 Special Accounting Issues

7.5 Financial Statement Presentation and Disclosure 70

7.6 Synopsis of Authoritative Literature (Pre-Codification References)

Chapter 8: Retail Land Sales

8.1 Overview

8.2 Accounting for Retail Land Sales

8.3 Special Accounting Issues

8.4 Financial Statement Presentation and Disclosure

8.5 Synopsis of Accounting Literature (Pre-Codification References)

Glossary

Index

Wiley Corporate F&A Series

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The Wiley Corporate F&A series provides information, tools, and insights to corporate professionals responsible for issues affecting the profitability of their company, from accounting and finance to internal controls and performance management

Copyright © by Maria K. Davis. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

First Edition published by John Wiley & Sons, Inc. in 2008.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permissions.

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Portions of various AICPA documents are used and/or adapted with permission. Copyright 2011. American Institute of Certified Public Accountants, Inc. All rights reserved.

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Library of Congress Cataloging-in-Publication Data:

Davis, Maria K.

Accounting for real estate transactions: a guide for public accountants and corporate financial professionals/Maria K. Davis. – 2nd ed.

p. cm.

Includes bibliographical references and index.

ISBN 978-0-470-60338-3 (hardback); ISBN 978-1-118-16281-1 (ebk);

ISBN 978-1-118-16282-8 (ebk); ISBN 978-1-118-16283-5 (ebk)

1. Real property–Accounting. 2. Real estate investment–Accounting. I. Title.

HF5686.R3D38 2012

657′.8335–dc23

2011029932

To my parents—an ocean apart, close nevertheless

Preface

What is real estate? Land and structures, brick and mortar to some, a bundle of rights and obligations to others. Real estate can be sold outright or it can be securitized. Investors can buy real estate properties or invest in real estate investment trusts. The many facets of real estate and the size of the real estate market—trillions of U.S. dollars in the United States alone—make it so intriguing.

The past few years were marred by a global financial crisis and depressed real estate markets throughout the United States. Homebuilders let real estate purchase options expire; homeowners walked away from their homes or lost them in foreclosures; and corporate investors handed the keys to commercial real estate properties to the lenders that had granted loans on a nonrecourse basis.

Accounting for Real Estate Transactions addresses accounting issues that have become prevalent in the wake of the crumbling real estate markets, such as impairment and consolidation considerations for special-purpose entities. It is a comprehensive reference guide that provides financial professionals with a tool to evaluate the accounting consequences of specific deals, enabling them to structure transactions with the accounting consequences in mind and to account for them in accordance with U.S. GAAP. It helps members of audit committees and oversight boards better understand the applicable accounting literature, assess the proper application of the accounting rules, and evaluate the conclusions reached by their companies' management.

The book is divided into two parts:

Part I of Accounting for Real Estate Transactions explains the rules governing a variety of real estate transactions applicable to companies of all industries, the acquisition and development of real estate properties, real estate sales and exchanges, and lease and sale-leaseback transactions.

Part II of the guide covers accounting for interests in real estate ventures, time-sharing transactions, and retail land sales, which are specific to companies operating in the real estate industry.

Accounting is not static. New revenue and leasing standards are on the horizon—both are joint projects of the Financial Accounting Standards Board and the International Accounting Standards Board, and both standards will replace a myriad of rules under U.S. Generally accepted accounting principles (GAAP). The accounting for financial instruments is being overhauled, and fair value measurement is expected to increase in importance. This guide will be updated periodically to reflect new authoritative guidance and address emerging issues faced by practitioners.

Readers are welcome to provide feedback and input on accounting issues they believe are prevalent and should be addressed in this guide; these issues will be considered for inclusion in future editions.

Acknowledgments

I wish to sincerely thank my husband, Richard, and my family for their continual encouragement, and all of the friends and professionals who provided comments and suggestions during the research, writing, and production process.

Maria DavisWashington, DCDecember 2011

About the Author

Maria Davis is an associate director in the Division of Registration and Inspections of the Public Company Accounting Oversight Board (PCAOB). Before Ms. Davis joined the PCAOB in 2010, she was a partner in the Accounting Consultation Group at Deloitte & Touche LLP's National Office in Wilton, Connecticut. As the leader of the Leases and Real Estate subject matter team, she provided guidance on complex technical accounting issues, primarily in the subject matters of real estate and leases and joint ventures and consolidation, both under U.S. Generally accepted accounting principles and International Financial Reporting Standards.

A native German, Ms. Davis has published on U.S. accounting standards in the preeminent German accounting journal, Der Betrieb.1

Ms. Davis received a master's degree in accounting from the University of North Florida as well as a degree in finance from the Hochschule Muenchen, Germany. In addition to her CPA qualification, she also holds professional qualifications as a German certified public accountant and a German certified tax advisor. Ms. Davis is a member of several professional organizations, including the American Institute of Certified Public Accountants, the Florida Institute of CPAs, and the German Institute of Certified Public Accountants.

Note

1. Ms. Davis wrote the first edition of Accounting for Real Estate Transactions in her personal capacity prior to joining the PCAOB. The views expressed in this updated second edition are her own personal views and do not necessarily reflect the views of the Board as a whole or other staff of the PCAOB.

List of Abbreviations

AcSECAICPA Accounting Standards Executive CommitteeADCAcquisition, development, constructionAICPAAmerican Institute of Certified Public AccountantsAINFASB Accounting InterpretationAPBAccounting Principles BoardARBAccounting Research BulletinARDAAmerican Resort Development AssociationASCAccounting Standards CodificationASUFASB Accounting Standards UpdateCONFASB Statements of Financial Accounting ConceptsCPIConsumer price indexEDExposure draftEITFEmerging Issues Task ForceFASFASB StatementFASBFinancial Accounting Standards BoardFHAFederal Housing AdministrationFINFASB InterpretationFFOFunds from operationsFSPFASB Staff PositionFTBFASB Technical BulletinFVFair valueGAAPGenerally accepted accounting principlesHLBVHypothetical liquidation at book valueIASInternational Accounting StandardIASBInternational Accounting Standards BoardIASCInternational Accounting Standards CommitteeIASCFInternational Accounting Standards Committee FoundationIFRICInternational Financial Reporting Interpretations CommitteeIFRSInternational Financial Reporting StandardsIRCInternal Revenue CodeLLCLimited liability companyIRSInternal Revenue ServiceMLPMaster limited partnershipMLPMinimum lease paymentsNAREITNational Association of Real Estate Investment TrustsPCAOBPublic Company Accounting Oversight BoardPP&EProperty, plant, and equipmentPVPresent valueREITReal estate investment trustSABSEC Staff Accounting BulletinSECSecurities and Exchange CommissionSICStanding Interpretations CommitteeSOPAICPA Statement of PositionSPESpecial-purpose entityTBFASB Technical BulletinTISAICPA Technical Inquiry ServiceTPAAICPA Technical Practice AidUPREITUmbrella partnership real estate investment trustU.S. GAAPU.S. generally accepted accounting principlesVIEVariable interest entity

Part 1

Accounting for Real Estate Transactions—General

Chapter 1

Acquisition, Development, and Construction of Real Estate

1.1 Overview

Investments in real estate projects require significant amounts of capital. For real estate properties that are developed and constructed, rather than purchased, project costs include the costs of tangible assets, such as land and other hard costs (sometimes referred to as “bricks and mortar”); intangible assets and other soft costs, such as architectural planning and design; and interest and taxes. Costs are often incurred before the actual acquisition of the project, which raises certain questions—for example, from what point in time should costs be capitalized? What types of costs are capitalizable?

Determining what types of costs to capitalize in the preacquisition, acquisition, development, and construction stages of a real estate project has been an issue for many years. Several decades ago, in reaction to significant diversity in practice, the American Institute of Certified Public Accountants (AICPA) issued this accounting guidance related to cost capitalization:

Industry Accounting Guide, Accounting for Retail Land Sales, issued in 1973

Statement of Position (SOP) No. 78-3, Accounting for Costs to Sell and Rent, and Initial Rental Operations of, Real Estate Projects, issued in 1978

SOP 80-3, Accounting for Real Estate Acquisition, Development, and Construction Costs, issued in 1980

In 1982, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 67, Accounting for Costs and Initial Operations of Real Estate Projects, codified in Topic 970, Real Estate—General, extracting the accounting principles provided by these AICPA pronouncements. Nevertheless, diversity in practice has continued to exist in some areas, including the capitalization of indirect costs during the development and construction period and the treatment of repair and major maintenance costs incurred subsequent to the completion of real estate projects.

The AICPA undertook another project to develop a comprehensive framework for cost capitalization and, in 2003, issued for public comment the proposed SOP, Accounting for Certain Costs and Activities Related to Property, Plant, and Equipment. That proposed SOP was approved by the AICPA Accounting Standards Executive Committee (AcSEC) in September 2003; however, a final SOP was never issued. In April 2004, the FASB decided not to clear that proposed SOP, mainly for these stated reasons:

Lack of convergence with International Accounting Standards

The concept of componentization, particularly the amount of judgment allowed, which could potentially result in lack of comparability

Implications for the capitalization of major overhaul expenses

1.2 Acquisition, Development, and Construction Costs

The Real Estate Project Costs guidance of Topic 970 (FASB Statement No. 67) provides the primary authoritative guidance for the cost capitalization of real estate project costs. That Statement divides the costs incurred to acquire, develop, and construct a real estate project into preacquisition and project costs. Preacquisition costs encompass costs incurred in connection with, but prior to the acquisition of, real estate. Project costs include costs incurred at the time of the real estate acquisition as well as costs incurred during the subsequent development and construction phase (see Exhibit 1.1).

Exhibit 1.1 Illustration of Cost Classification

Real estate developed by a company for use in its own operations other than for sale or rental is not within the scope of the Real Estate Project Costs Subsections of Topic 970 (Statement No. 67).1 Because—aside from the proposed SOP, Accounting for Certain Costs and Activities Related to Property, Plant, and Equipment—there is no authoritative literature related to the capitalization of costs for properties used by an enterprise in its own operations, the guidelines in the Real Estate Project Costs Subsections of Topic 970 (Statement No. 67) are generally also applied to properties used by an entity in its own operations.

1.2.1 Preacquisition Costs

Preacquisition costs are costs related to a real estate property that are incurred for the express purpose of, but prior to, obtaining that property.2 They may include a variety of costs, such as:

Payments to obtain an option

Legal fees

Architectural fees

Other professional fees

Costs of environmental studies

Costs of feasibility studies

Costs of appraisals

Costs of surveys

Planning and design costs

Costs for zoning and traffic studies

1.2.1.1 Principles for the Capitalization of Preacquisition Costs

Options to Acquire Real Property.

Payments for options to acquire real property are capitalized.3

Preacquisition Costs Other than Options to Acquire Real Property.

Preacquisition costs other than the cost of options can only be capitalized if the acquisition of the property (or an option to acquire the property) is probable,4 and if the costs meet these two criteria:

1. The costs must be directly identifiable with the property.

2. The costs would be capitalized if the property were already acquired.5

The guidance in Accounting Standards Codification (ASC) 970-340-25-1 through 25-3 (FASB Statement No. 67) has established a high threshold for the capitalization of preacquisition costs with the requirement that the acquisition of real property be probable. If the purchaser is not actively seeking to acquire the real estate property or does not have the ability to finance or obtain financing for the property, or if there is an indication that the real estate property the purchaser seeks to acquire will not be available for sale, the project is not considered probable.6 Any costs (other than costs related to an option to acquire real estate) incurred before a project is considered probable have to be expensed as incurred. If the project becomes probable at a later point in time, costs incurred prior to the project becoming probable cannot subsequently be capitalized.