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Real Estate Sales, ASC 360

Real Estate Sales
SFAS 66, October 1982
“Accounting for Sales of Real Estates”

FASB Interpretation (FIN) 43, June 1999
“Real Estate Sales
an interpretation of FASB Statement No. 66”

Full accrual method
–> profit is recognized in full
–> when real estate is sold

Installment method
–> allocates each cash receipt
–> between “cost recovered” and “profit”

Cost recovery method
–> profit is not recognized
–> until cash payments exceed the seller’s cost of property

Deposit method
–> cash receipts are recorded as a “deposit”
–> until the sale is consummated

Reduced profit method
–> receivable from buyer is discounted to present value
–> profit is recognized from level payment on the buyer’s debt
–> over the maximum term

Two types of real estate sales
1. Retail land sales
2. Real estate sales “other than retail land sales”

Retail land sales
1. Full accrual method is used
–> if all of the conditions (A) are satisfied

2. Percentage-of-completion method is used
–> if all of the conditions (B) are satisfied
3. Installment method is used
–> if all of the conditions (C) are satisfied

Conditions (A)
a1. Refund period has expired
a2. Cumulative payments are sufficient
a3. Receivable are collectible
a4. Receivables are not subject to subordination
a5. Seller is not obligated to complete improvements

Conditions (B)
b1. Refund period has expired
b2. Cumulative payments ≥ 10%
b3. Receivables are collectible
b4. Receivables are not subject to subordination
b5. Progress on improvements
b6. Development is practical

Conditions (C)
c1. Refund period has expired
c2. Cumulative payments ≥ 10%
c3. Seller is financially capable

Real estate sales “other than land sales”
1. Full accrual method is used
–> if all of the conditions (D) are satisfied

2. Deposit method is used
–> if the sale is not consummated
–> sale is consummated when the conditions (E) are satisfied

3. When the buyer’s initial investment
–> does not meet the conditions (F)

3a. if the recovery of the property cost is reasonably assured
–> use installment method

3b. if the recovery of the property cost is not reasonably assured
–> use cost recovery method or deposit method

4. When the buyer’s initial investment
–> meets the conditions (F)

4a. if buyer’s continuing investment is qualified
–> but meets the conditions (G)
–> use reduced profit method

4b. if buyer’s continuing investment is not qualified
–> and does not meet the conditions (G)
–> use installment method or cost recovery method

5. If seller’s receivable is subject to future subordination
–> use cost recovery method

6. If seller has continuing involvement with the property
–> use appropriate method
–> to reflect the nature of extent of the seller’s continuing involvement

Conditions (D)
d1. Sale is consummated
d2. Buyer’s initial and continuing investments are adequate
d3. Receivable is not subject to future subordination
d4. “Risks and rewards” of ownership have been transferred

Conditions (E)
e1. the contract is binding
e2. considerations have been exchanged
e3. permanent financing has been arranged
e4. closing conditions have been met

Conditions (F)
f1. buyer’s initial investment is adequate
f2. buyer’s initial investment includes appropriate items only

Conditions (G)
buyer’s payments cover both g1 and g2
g1. “principal and interest” amortization on the maximum first mortgage loan
g2. “interest” on the debt in excess of first mortgage loan

 

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Property, Plant and Equipment, ASC 360

Initial measurement of property, plant and equipment
1. Measured at cost
2. Cost includes (A)
(A) all costs necessary to make the asset ready for intended use
3. During the construction period
–> certain interest costs are also capitalized

Subsequent measurement of property, plant and equipment
1. Depreciation
2. Impairment of long-lived assets
3. Disposal of long-lived assets

Impairment and disposal of long-lived assets
SFAS 144, August 2001
“Accounting for the Impairment or Disposal of Long-Lived Assets”

Classification of long-lived assets
1. Long-lived assets held for sale
2. Long-lived assets to be held and used

Long-lived assets “held for sale”
1. Presented separately in the statement of financial position
2. An asset is not depreciated while classified as “held for sale”
3. Measured at the lower of (B) and (C)
(B) carrying amount
(C) fair value less cost to sell
4. Newly acquired long-lived assets held for sale
–> measured at fair value less cost to sell, at the acquisition date
5. If (C) < (B)
–> a loss is recognized
6. If (B) > (C)
–> a gain is recognized up to “the cumulative loss” previously recognized
7. A gain or loss
–> adjusts the carrying amount of the asset

Discontinued operations
The results of operations of (1) and (2) are
–> reported separately as discontinued operations
(1) component that has been disposed of
(2) component that is classified as “held for sale”

Long-lived assets to be ‘held and used” are
–> tested for impairment

Impairment test
1. Step 1: Test for recoverability
–> when there is an indication that carrying amount may not be recoverable
2. Step 2: Measurement of impairment loss
–> if Step 1 shows that carrying amount is not recoverable

Recoverability test
Carrying amount is not recoverable
–> if (D) < (B)
(B) carrying amount
(D) sum of “undiscounted” cash flows from the asset

Impairment loss
1. An asset is impaired when (E) < (B)
2. Impairment loss = (B) – (E)
(B) carrying amount
(E) fair value

Impairment loss is not reversed
1. If an impairment loss is recognized
–> adjusted carrying amount becomes “new cost basis”
2. Impairment loss is “not” reversed
–> when there is a subsequent increase in fair value

 

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