Statements of Position



Download Full Text (1.2 MB)


This proposed statement of position (SOP) applies to all entities that make or acquire real estate loans. It provides guidance on identifying and accounting for real estate loans that qualify as real estate investments for financial reporting purposes. Such loans may include real estate acquisition, development, and construction (ADC) loans, loans on operating real estate, convertible mortgages, and shared appreciation (participating) mortgages. It requires real estate loans that do not meet certain criteria to be classified and accounted for as real estate investments. For purposes of applying this proposed SOP, a loan classified and accounted for as a real estate investment is considered the equivalent of an investment by the lender in a hypothetical partnership, the assets of which include the subject real estate. This proposed SOP does not apply to (1) troubled debt restructurings, foreclosures, or in-substance foreclosures relating to real estate loans accounted for as loans using the criteria set forth in this proposed SOP, (2) debtors, (3) real estate loans resulting from the lender's sale of real estate, (4) permanent mortgage real estate loans on one-to four-family residential properties, or (5) small real estate loans evaluated for impairment by the lender in the aggregate. The proposed SOP supersedes the guidance in the February 10, 1986, AICPA Notice to Practitioners, ADC Arrangements (the third Notice), which was carried forward in the AICPA Accounting Standards Executive Committee (AcSEC) Practice Bulletin 1, Purpose and Scope of AcSEC Practice Bulletins and Procedures for Their Issuance. This proposed SOP should be applied to real estate loans entered into or purchased after December 31, 1994. Earlier application is encouraged. The following highlights significant differences between the provisions of the proposed SOP and the third Notice. The proposed SOP clarifies the scope by stating that it applies to all entities that make or acquire real estate loans. The proposed SOP incorporates the consensus reached in the Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) Issue No. 86-21, Application of the AICPA Notice to Practitioners Regarding Acquisition, Development, and Construction Arrangements to Acquisition of an Operating Property, that extends the concepts of the third Notice to operating properties. The third Notice applies to ADC arrangements in which the lender participates in expected residual profits from the underlying real estate project. The proposed SOP's primary focus is on the assumption of risk. In this regard, while the presence of an expected residual sharing arrangement typically will coincide with classifying a loan as an investment in real estate, it is not a specific criterion for determining the classification. Both the third Notice and the proposed SOP refer to a borrower's equity investment that is "substantial" to the project. Among other revisions, the proposed SOP clarifies that substantial should be evaluated in terms of the minimum initial investment tests described in FASB Statement of Financial Accounting Standards No. 66, Accounting for Sales of Real Estate. The proposed SOP, similar to the third Notice, provides that a loan initially classified as an investment may be reclassified as a loan if one or more of the loan characteristics in paragraph 12 of the proposed SOP are met. However, unlike the third Notice, the proposed SOP does not permit or require reclassification from loans to investments unless the underlying loans are renegotiated in other than a troubled debt restructuring.

Publication Date


Relational Format



Real estate business -- United States -- Accounting


Accounting | Taxation


Originally published by: American Institute of Certified Public Accountants; Copyright and permission to reprint held by: American Institute of Certified Public Accountants.

Proposed statement of position : Identifying and accounting for real estate loans that qualify as real estate investments;Identifying and accounting for real estate loans that qualify as real estate investments; Exposure draft (American Institute of Certified Public Accountants), 1993, Oct. 27



To view the content in your browser, please download Adobe Reader or, alternately,
you may Download the file to your hard drive.

NOTE: The latest versions of Adobe Reader do not support viewing PDF files within Firefox on Mac OS and if you are using a modern (Intel) Mac, there is no official plugin for viewing PDF files within the browser window.