Accounting for Real Estate Transactions - · PDF filePART 1 ACCOUNTING FOR REAL ESTATE TRANSACTIONS—GENERAL 1 Chapter 1: Acquisition, Development, and Construction ... Chapter 5:

Accounting for Real EstateTransactions

A Guide for Public Accountants andCorporate Financial Professionals

Second Edition

MARIA K. DAVIS

WILEYJohn Wiley & Sons, Inc.

Contents

Preface xiii

About the Author xv

List of Abbreviations xvii

PART 1 ACCOUNTING FOR REAL ESTATETRANSACTIONS—GENERAL 1

Chapter 1: Acquisition, Development, and Constructionof Real Estate 3

1.1. Overview 31.2. Acquisition, Development, and Construction Costs 4

1.2.1. Preacquisition Costs 41.2.2. Project Costs 81.2.3. Cost Allocation 151.2.4. Change in Estimates or Project Plans and Abandonments of Projects 18

1.3. Costs Incurred to Sell or Rent a Real Estate Project 201.3.1. Costs Incurred to Sell a Real Estate Project 201.3.2. Costs Incurred to Rent a Real Estate Project 23

1.4. Incidental Operations 241.5. Accounting for Costs Incurred Subsequent to Project Completion 24

1.5.1. Determining the Date of Project Completion 241.5.2. Costs Incurred Subsequent to Project Completion 25

1.6. Purchase of Income-Producing Property 261.6.1. Purchase of a Business 261.6.2. Purchase of an Asset/Asset Group 281.6.3. Recognition of Intangible Assets Acquired 291.6.4. Measurement of Property, Plant, Equipment, and Intangibles 301.6.5. Allocation of Acquisition Cost 331.6.6. Accounting for Intangibles Subsequent to Acquisition 361.6.7. Key Differences: Business versus Asset Acquisitions 37

1.7. Special Accounting Issues 381.7.1. Costs of Amenities 381.7.2. Start-up Costs 391.7.3. Land Options 411.7.4. Financing as Part of a Purchase Transaction 451.7.5. Environmental Costs and Liabilities 461.7.6. Transactions with Related Parties 54

VII

D Contents

1.8. Financial Statement Presentation and Disclosure 57

1.8.1. Cash Flow Statement Presentation 57

1.8.2. Segment Disclosures for Public Companies 57

1.8.3. Other Presentation and Disclosure Requirements 58

1.9. International Financial Reporting Standards 60

1.9.1. I AS 16, Property, Plant and Equipment 60

1.9.2. IAS 40, Investment Property 64

1.9.3. IFRS 3, Business Combinations 69

1.10. Synopsis of Authoritative Literature (Pre-Codification References) 72

Chapter 2: Nonmonetary Exchanges of Real Estate 83

2.1. Overview 83

2.2. Section 1031 Exchange 84

2.3. Nonmonetary Exchanges Not Governed by Topic 845 (APB Opinion No. 29) 88

2.3.1. Exchange with Continuing Involvement of the Transferor 89

2.3.2. In-Substance Sale and Purchase Transaction 90

2.3.3. Nonmonetary Exchange Involving Business 90

2.3.4. Involuntary Conversion 91

2.4. Accounting for Nonmonetary Exchanges 91

2.4.1. General Principle—Fair Value 91

2.4.2. Exceptions to the Fair Value Principle 92

2.5. Nonmonetary Exchange of Real Estate Involving Monetary Consideration 94

2.5.1. Accounting by Receiver of Monetary Consideration 94

2.5.2. Accounting by Payer of Monetary Consideration 96

2.6. Special Accounting Issues 97

2.6.1. Exchange-Leaseback 97

2.6.2. Transactions between Related Parties 97

2.7. Financial Statement Presentation and Disclosure 99

2.8. International Financial Reporting Standards 100

2.8.1. Commercial Substance of Exchange Transaction 101

2.8.2. Fair Value Measurement 101


Chapter 3: Real Estate Sales 107

3.1. Overview 107

3.2. Applicability of the Real Estate Sale Guidance • 110

3.3. Sale and Profit Recognition 112

3.3.1. Sale of Real Estate with Long Construction Periods 112

3.4. Profit Recognition under the Accrual Method 113

3.4.1. General Rule 113

3.4.2. Specific Criteria 114

3.5. Failure to Meet Criteria for the Application of the Accrual Method 123

3.5.1. Inadequate Initial Investment 124

3.5.2. Inadequate Continuing Investment 125

3.5.3. Receivable Subject to Future Subordination 125

3.5.4. Continuing Involvement 125

3.6. Application of Other Accounting Methods 142

3.6.1. Deposit Method 142

3.6.2. Installment Method 146

Contents a ix

3.6.3. Cost Recovery Method 1483.6.4. Reduced Profit Method 1503.6.5. Percentage-of-Completion Method 1503.6.6. Financing Method 1523.6.7. Leasing Method 1543.6.8. Profit-Sharing Method 1553.6.9. Performance-of-Services Method 156

3.7. Special Accounting Issues 1583.7.1. Impairment and Loss on Sale 1583.7.2. Extinguishment of Debt with the Sale of Property 1653.7.3. Wrap-around Mortgage 1663.7.4. Effect of Nonrecourse Financing on Profit Recognition 166

3.8. Financial Statement Presentation and Disclosure 1683.8.1. Presentation of Gain on Sale of Land Option 1683.8.2. Presentation of Properties as Held for Sale 1683.8.3. Discontinued Operations Presentation 1703.8.4. Disclosures upon Recognition of Impairment Loss 1723.8.5. Cash Flow Statement Presentation 173

3.9. International Financial Reporting Standards 1733.9.1. IAS 18, Revenue 1733.9.2. IAS 11, Construction Contracts 1753.9.3. IFRIC 15, Agreements for the Construction of Real Estate 178


Chapter 4: Real Estate Leases 191

4.1. Overview 1914.2. Definition of a Lease 195

4.2.1. Right to Use 1964.2.2. Specified Property, Plant, or Equipment 1984.2.3. Stated Period of Time 1994.2.4. Reassessment of the Arrangement 199

4.3. Lease Classification—General 2014.3.1. Lease Classification—Lessee 2024.3.2. Lease Classification—Lessor 2034.3.3. Lease Classification Criteria 204

4.4. Lease Classification—Leases Involving Real Estate 2104.4.1. Leases Involving Land Only 2114.4.2. Leases Involving Land and Building 2124.4.3. Leases Involving Equipment as Well as Real Estate 2164.4.4. Leases Involving Part of a Building 216

4.5. Accounting for Leases 2184.5.1. Accounting for Leases—Lessee 2184.5.2. Accounting for Leases—Lessor 219

4.6. Special Accounting Issues 2224.6.1. Extensions and Renewals of a Lease 2224.6.2. Modifications to the Provisions of a Lease 2254.6.3. Lease Termination 2284.6.4. Purchase and Sale of Leased Asset before the End

of the Lease Term . 230

D Contents

4.6.5. Rent Holiday and Scheduled Rent Increases/Decreases 2324.6.6. Contingent Rentals 2334.6.7. Lease Incentives in Operating Leases 2364.6.8. Subleases and Lease Substitutions 2394.6.9. Leases and Leasehold Improvements Acquired

in a Business Combination 2424.6.10. Impairment of Assets under Lease and Losses on Leasing Activities 2434.6.11. Build-to-Suit Leases 2454.6.12. Leases between Related Parties 248

4.7. Financial Statement Presentation and Disclosure 2504.7.1. Presentation and Disclosure—Lessee 250

"4.7.2. Presentation and Disclosure—Lessor 2514.8. International Financial Reporting Standards 252

4.8.1. Lease Classification 2524.8.2. Accounting and Disclosures—Lessee 2544.8.3. Accounting and Disclosures—Lessor 256


Chapter 5: Sale-Leaseback of Real Estate 275

5.1. Overview 2755.2. Accounting for Sale-Leaseback Transactions Involving Real Estate 276

5.2.1. Accounting by the Seller-Lessee 2785.2.2. Accounting by the Buyer-Lessor 292

5.3. Specific Accounting Issues 2935.3.1. Unusual Terms of Sale-Leaseback Transactions 2935.3.2. Impairment of Property 2935.3.3. Minor Subleases 2955.3.4. Sale of a Partial Interest 2965.3.5. Leasebackof a Portion of the Property Sold 2965.3.6. Sale-Leaseback of Multiple Assets 2975.3.7. Contribution-Leaseback Transactions 2985.3.8. Wrap Lease Transactions 2985.3.9. Leaseback with Fixed-Price Renewal Options

for Substantially All of the Property's Economic Life 2995.3.10. Sale-Leaseback Transactions by Regulated Enterprises 3005.3.11. Sale-Leaseback Involving Related Parties 301

5.4. Financial Statement Presentation and Disclosure 3035.5. International Financial Reporting Standards 3035.6. Synopsis of Authoritative Literature (Pre-Codification References) 305

PART 2 ACCOUNTING FOR REAL ESTATE

INDUSTRY-SPECIFIC TRANSACTIONS 311

Chapter 6: Interests in Real Estate Ventures 313

6.1. Overview 3136.2. Methods of Accounting for Interests in Real Estate Ventures 314

6.2.1. Consolidation 3156.2.2. Equity Method of Accounting 333

Contents a xi

6.2.3. Pro Rata Consolidation 3396.2.4. Cost Method 3406.2.5. Change between the Cost and Equity Method of Accounting 3406.2.6. Measuring Interests in Real Estate Ventures at Fair Value 341

6.3. Accounting for Transactions with a Real Estate Venture 3436.3.1. Capital Contributions 3446.3.2. Loans and Advances to a Venture 3456.3.3. Sales of Real Estate 3466.3.4. Service Arrangements 3486.3.5. Sale of Interest in Real Estate Venture 348

6.4. Special Accounting Issues Related to Consolidation 3496.4.1. Noncontrolling Interest 3496.4.2. Special Considerations—Real Estate Entities 353

6.5. Special Accounting Issues Related to the Equity Method of Accounting 3556.5.1. Other than Common Stock Investments in Corporate Ventures 3556.5.2. Differences between Accounting Principles of Investor and Venture 3576.5.3. Recognition of Losses by the Investor 3576.5.4. Investments in an Investee after Suspension of Loss Recognition 3596.5.5. Cash Distributions in Excess of Investment 3606.5.6. Hypothetical Liquidation at Book Value Method 3606.5.7. Impairment 3616.5.8. Interest Capitalization 362

6.6. Financial Statement Presentation and Disclosure 3646.6.1. Consolidated Investments -, 3656.6.2. Equity Method Investees ' 3666.6.3. Items Measured at Fair Value 368

6.7. International Financial Reporting Standards 3706.7.1. Investments in Subsidiaries 3736.7.2. Interests in Joint Ventures . 3746.7.3. Investments in Associates 379


Chapter 7: Time-Sharing Transactions 395

7.1. Overview 3957.2. Types of Time-Sharing Arrangements 397

7.2.1. Deeded Structures 3977.3. Accounting for the Sale of Time-Sharing Intervals 399

7.3.1. Application of the Accrual and Percentage-of-Completion Methods 4007.3.2. Accounting for Costs to Sell Time-Sharing Intervals 409

7.4. Special Accounting Issues 4117.4.1. Uncollectibility of Receivables 4117.4.2. Incentives and Inducements 4137.4.3. Incidental Operations 4157.4.4. Upgrade and Reload Transactions 4167.4.5. Seller Support of Operations 4177.4.6. Division of Project into Phases 418

7.5. Financial Statement Presentation and Disclosure 4187.6. Synopsis of Authoritative Literature (Pre-Codification References) 419

xii • Contents

Chapter 8: Retail Land Sales 421

8.1. Overview 4218.2. Accounting for Retail Land Sales 422

8.2.1. Revenue Recognition 4228.2.2. Profit Recognition 424

8.3. Special Accounting Issues 4328.3.1. Change from the Installment to the Percentage-of-

, Completion Method 4328.3.2. Accounting for Repossessed Land 432

8.4. Financial Statement Presentation and Disclosure 4348.5. Synopsis of Accounting Literature (Pre-Codification References) 434

Glossary 435

Index 455

Documents

Accounting for Real Estate Transactions - · PDF filePART 1 ACCOUNTING FOR REAL ESTATE TRANSACTIONS—GENERAL 1 Chapter 1: Acquisition, Development, and Construction ... Chapter 5: