Statements of Position



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This proposed statement of position (SOP) establishes the borrower's accounting for a participating mortgage loan if the lender participates in increases in the market value of the mortgaged real estate project, the results of operations of that mortgaged real estate project, or both. This proposed SOP requires the following: 1. At origination, the borrower should record the participating mortgage loan without allocating any of the proceeds to a liability related to the participation feature. 2. At the end of each reporting period, a participation liability should be reported equal to the amount that would be required to extinguish the participation liability if (a): the participating mortgage loan matured or was refinanced at that date, or (b) the mortgaged property was sold at that date. When establishing or adjusting the participation liability, the corresponding charge or credit should be to debt discount. 3. As estimates of the participation liability change because of changes in estimates of the market value of the property, the borrower should recalculate the effective interest rate to reflect the changes in expected future payments. The borrower should recalculate that rate assuming that (a) the amount of the expected future payment will be paid on the due date of the loan and (b) the recalculated expected future payment amount was known at the inception of the loan. The debt discount related to the participation liability should be adjusted, with a corresponding charge or credit to interest expense, to the amount that would have existed had the new effective interest rate been applied since the origination of the participating mortgage loan. 4. Certain disclosures must be included in the financial statements. This proposed SOP is effective for fiscal years beginning after June 15, 1996. Earlier application is encouraged. The effect of initially applying this proposed SOP should be reported in a manner similar to that of the cumulative effect of a change in accounting principle.

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Mortgage loans -- Accounting -- Standards -- United States; Real property -- Valuation -- Accounting -- Standards; Interest -- Accounting -- Standards -- United States; Amortization -- Accounting -- Standards -- United States


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 : accounting by participating mortgage loan borrowers ;Accounting by participating mortgage loan borrowers; Exposure draft (American Institute of Certified Public Accountants), 1995, July 5



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