Accounting for Real Estate Transactions

Maria Davis, CPA, Partner, Accounting Consultation Group, Deloitte, National Office, is a frequent speaker on real estate technical updates and contributor to AICPA Statement of Position, Accounting for Real Estate Time-Sharing Transactions, and AICPA Statement of Position, Accounting for Certain Costs and Activities Related to Property, Plant, and Equipment. She provides accounting guidance on technical accounting issues, primarily in the subject matters of Real Estate and Leases and joint Ventures and Consolidation, both under U.S. GAAP and IFRS. In addition to more than thirty real estate technical updates across the U.S., she has developed training materials covering accounting and real estate transactions. Over the course of her career with Deloitte, Ms. Davis has provided attest and advisory services to Deloitte's clients in a variety of industries in both the United States and Europe.

• Preface xiiiAbout the Author xvList of Abbreviations xviiPart 1 Accounting for Real Estate Transactions—General 1Chapter 1: Acquisition, Development, and Construction of Real Estate 31.1. Overview 31.2. Acquisition, Development, and Construction Costs 41.2.1. 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 181.3. 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 231.4. Incidental Operations 241.5. Accounting for Costs Incurred Subsequent to Project Completion 241.5.1. Determining the Date of Project Completion 241.5.2. Costs Incurred Subsequent to Project Completion 251.6. 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 371.7. 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 541.8. Financial Statement Presentation and Disclosure 571.8.1. Cash Flow Statement Presentation 571.8.2. Segment Disclosures for Public Companies 571.8.3. Other Presentation and Disclosure Requirements 581.9. International Financial Reporting Standards 601.9.1. IAS 16, Property, Plant and Equipment 601.9.2. IAS 40, Investment Property 641.9.3. IFRS 3, Business Combinations 691.10. Synopsis of Authoritative Literature (Pre-Codification References) 72Chapter 2: Nonmonetary Exchanges of Real Estate 832.1. Overview 832.2. Section 1031 Exchange 842.3. Nonmonetary Exchanges Not Governed by Topic 845 (APB Opinion No. 29) 882.3.1. Exchange with Continuing Involvement of the Transferor 892.3.2. In-Substance Sale and Purchase Transaction 902.3.3. Nonmonetary Exchange Involving Business 902.3.4. Involuntary Conversion 912.4. Accounting for Nonmonetary Exchanges 912.4.1. General Principle—Fair Value 912.4.2. Exceptions to the Fair Value Principle 922.5. Nonmonetary Exchange of Real Estate Involving Monetary Consideration 942.5.1. Accounting by Receiver of Monetary Consideration 942.5.2. Accounting by Payer of Monetary Consideration 962.6. Special Accounting Issues 972.6.1. Exchange-Leaseback 972.6.2. Transactions between Related Parties 972.7. Financial Statement Presentation and Disclosure 992.8. International Financial Reporting Standards 1002.8.1. Commercial Substance of Exchange Transaction 1012.8.2. Fair Value Measurement 1012.9. Synopsis of Authoritative Literature (Pre-Codification References) 101Chapter 3: Real Estate Sales 1073.1. Overview 1073.2. Applicability of the Real Estate Sale Guidance 1103.3. Sale and Profit Recognition 1123.3.1. Sale of Real Estate with Long Construction Periods 1123.4. Profit Recognition under the Accrual Method 1133.4.1. General Rule 1133.4.2. Specific Criteria 1143.5. Failure to Meet Criteria for the Application of the Accrual Method 1233.5.1. Inadequate Initial Investment 1243.5.2. Inadequate Continuing Investment 1253.5.3. Receivable Subject to Future Subordination 1253.5.4. Continuing Involvement 1253.6. Application of Other Accounting Methods 1423.6.1. Deposit Method 1423.6.2. Installment Method 1463.6.3. 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 1563.7. 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 1663.8. 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 1733.9. 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 1783.10. Synopsis of Authoritative Literature (Pre-Codification References) 182Chapter 4: Real Estate Leases 1914.1. Overview 1914.2. Definition of a Lease 1954.2.1. 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 1994.3. Lease Classification—General 2014.3.1. Lease Classification—Lessee 2024.3.2. Lease Classification—Lessor 2034.3.3. Lease Classification Criteria 2044.4. 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 2164.5. Accounting for Leases 2184.5.1. Accounting for Leases—Lessee 2184.5.2. Accounting for Leases—Lessor 2194.6. 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 2304.6.5. 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 2484.7. Financial Statement Presentation and Disclosure 2504.7.1. Presentation and Disclosure—Lessee 2504.7.2. Presentation and Disclosure—Lessor 2514.8. International Financial Reporting Standards 2524.8.1. Lease Classification 2524.8.2. Accounting and Disclosures—Lessee 2544.8.3. Accounting and Disclosures—Lessor 2564.9. Synopsis of Authoritative Literature (Pre-Codification References) 258Chapter 5: Sale-Leaseback of Real Estate 2755.1. Overview 2755.2. Accounting for Sale-Leaseback Transactions Involving Real Estate 2765.2.1. Accounting by the Seller-Lessee 2785.2.2. Accounting by the Buyer-Lessor 2925.3. 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. Leaseback of 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 3015.4. Financial Statement Presentation and Disclosure 3035.5. International Financial Reporting Standards 3035.6. Synopsis of Authoritative Literature (Pre-Codification References) 305Part 2 Accounting for Real Estate Industry-specific Transactions 311Chapter 6: Interests in Real Estate Ventures 3136.1. Overview 3136.2. Methods of Accounting for Interests in Real Estate Ventures 3146.2.1. Consolidation 3156.2.2. Equity Method of Accounting 3336.2.3. 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 3416.3. 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 3486.4. Special Accounting Issues Related to Consolidation 3496.4.1. Noncontrolling Interest 3496.4.2. Special Considerations—Real Estate Entities 3536.5. 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 3626.6. Financial Statement Presentation and Disclosure 3646.6.1. Consolidated Investments 3656.6.2. Equity Method Investees 3666.6.3. Items Measured at Fair Value 3686.7. International Financial Reporting Standards 3706.7.1. Investments in Subsidiaries 3736.7.2. Interests in Joint Ventures 3746.7.3. Investments in Associates 3796.8. Synopsis of Authoritative Literature (Pre-Codification References) 380Chapter 7: Time-Sharing Transactions 3957.1. Overview 3957.2. Types of Time-Sharing Arrangements 3977.2.1. Deeded Structures 3977.3. Accounting for the Sale of Time-Sharing Intervals 3997.3.1. Application of the Accrual and Percentage-of-Completion Methods 4007.3.2. Accounting for Costs to Sell Time-Sharing Intervals 4097.4. 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 4187.5. Financial Statement Presentation and Disclosure 4187.6. Synopsis of Authoritative Literature (Pre-Codification References) 419Chapter 8: Retail Land Sales 4218.1. Overview 4218.2. Accounting for Retail Land Sales 4228.2.1. Revenue Recognition 4228.2.2. Profit Recognition 4248.3. Special Accounting Issues 4328.3.1. Change from the Installment to the Percentage-of- Completion Method 4328.3.2. Accounting for Repossessed Land 4328.4. Financial Statement Presentation and Disclosure 4348.5. Synopsis of Accounting Literature (Pre-Codification References) 434Glossary 435Index 455