Statements of Position

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This proposed Statement of Position (SOP) provides guidance on accounting for investors' interests in unconsolidated real estate investments. It provides guidance on when and how the equity method of accounting should be applied to such investments. It is intended to supersede SOP 78-9, Accounting for Investments in Real Estate Ventures. This proposed SOP would require the following: 1. An investor holding an equity investment (including nonvoting common stock or nonredeemable preferred stock) in an investee should follow the equity method of accounting for that investee when the investor has the ability to exercise significant influence over the investee, unless the investment is in nonvoting common stock or nonredeemable preferred stock that meets the definition in Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, of an equity security having a readily determinable fair value. If the stock meets that definition, the investor should apply FASB Statement No. 115. For investees such as general partnerships, limited partnerships, limited liability companies (LLCs), and limited liability partnerships (LLPs) that are organized in a "specific ownership account"-like structure and over which the investor does not have the ability to exercise significant influence, the investor's accounting depends on whether its ownership interest meets the definition in FASB Statement No. 115 of an equity security having a readily determinable fair value. If the ownership interest meets that definition, the investor should apply FASB Statement No. 115; if it does not, the investor should apply the equity method. 2. The hypothetical liquidation at book value (HLBV) method should be followed when applying the equity method. HLBV is a balance-sheet-oriented approach to equity method accounting. Under HLBV, an investor determines its share of the earnings or losses of an investee by determining the difference between its "claim on the investee's book value" at the end and beginning of the period. This claim is calculated as the amount that the investor would receive (or be obligated to pay) if the investee were to liquidate all of its assets at recorded amounts determined in accordance with generally accepted accounting principles (GAAP) and distribute the resulting cash to creditors and investors in accordance with their respective priorities. 3. HLBV takes into account all forms of financial interest that an investor has with respect to an investee, including common stock, preferred stock, general or limited partnership interests, debt securities, loans, advances, notes receivable, and other obligations. 4. In applying HLBV, an investor should report a negative investment only to the extent it has guaranteed obligations of the investee, is otherwise committed to provide further financial support for the investee, or when the imminent return to profitable operations by the investee appears to be assured. When the amount an investor would receive or pay upon the hypothetical liquidation of an investee at book value depends on the ability of another investor to fund its negative investment, an investor's claim on the book value of an investee should include only those amounts that it is probable the other investor would fund. 5. An investor has a "basis difference" when there is a difference between the amount of its investment in an investee and its claim on the book value of the investee. Generally, a basis difference should be attributed to assets or liabilities of the investee and accounted for as if the investee were a consolidated subsidiary. 6. In applying HLBV, an investor may recognize more income from an investee than the investee's net income under GAAP. That can occur if an investor has a priority return on its investment and there is sufficient equity of other investors that is subordinate to the preferred investor such that the preferred investor's claim on the book value of the investee increases. 7. An investor's claim on the book value of an investee can change when another investor purchases new equity interests for cash directly from the investee. Any change in the investor's claim on the book value of an investee in these situations should be recognized through the income statement or directly in paid-in capital by the investor in accordance with its accounting policy. 8. An investor should report its share of an investee's prior period adjustments, items of other comprehensive income (OCI), gain or loss from discontinued operations, extraordinary items, and cumulative effect of a change in accounting principle by measuring the incremental effect of each item on the investor's claim on the book value of the investee. 9. Cash distributions received by an investor during a period represent cash from operating activities except to the extent that the distributions cause an increase in the excess of cumulative distributions over cumulative share of earnings. 10. Investors in real estate investees should make the disclosures required by paragraph 20 of Accounting Principles Board (APB) Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. Investors also should provide a summary of key provisions of the ownership agreements that govern how the investee's assets are distributed to the investors and that form the basis for the investor's application of HLBV. This SOP provides examples throughout the text, immediately following the section to 771 which they pertain, to make the SOP as understandable as possible. The provisions of the proposed SOP would be effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The cumulative effect of changes caused by adopting the provisions of this proposed SOP would be recognized in the period of adoption. Restatement of financial statements issued before adoption would be prohibited.

ISBN

ed00-11-21t

Publication Date

2000

Relational Format

Book

Keywords

Real estate investment -- United States -- Accounting

Disciplines

Accounting | Taxation

Comments

Originally published by: American Institute of Certified Public Accountants; Copyright and permission to reprint held by: American Institute of Certified Public Accountants; Exposure draft (American Institute of Certified Public Accountants), 2000, Nov. 21

Proposed statement of position : Accounting for investors' interests in unconsolidated real estate investments;Accounting for investors' interests in unconsolidated real estate investments

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