Real Estate Accounting Steven M. Bragg
Chapter 1 Introduction to Accounting... 1 Learning Objectives... 1 Introduction... 1 Financial Accounting Basics... 1 Accounting Frameworks... 2 The Accounting Cycle... 3 Accounting Transactions... 4 Types of Transaction Cycles... 4 Source Documents... 5 Double Entry Accounting... 5 The Accounting Equation... 6 Journal Entries... 8 The Ledger Concept... 8 Posting to the General Ledger... 9 General Ledger Overview... 10 The Accruals Concept... 11 The Realization Concept... 11 Accrual Basis of Accounting... 12 Cash Basis of Accounting... 12 Real Estate Entities... 13 Sole Proprietorship... 13 Partnership... 14 Corporation... 15 Limited Liability Company... 16 The Following Chapters... 17 Summary... 17 Review Questions... 18 Review Answers... 19 Chapter 2 Initial Real Estate Costs... 21 Learning Objectives... 21 Introduction... 21 Relevant Accounting Sources... 21 Capitalization... 21 Real Estate Preacquisition Costs... 21 Treatment of Preacquisition Costs... 22 Operating and Non-Operating Classifications... 22 Internally-Generated Preacquisition Costs... 23 Real Estate Project Costs... 23 Real Estate Taxes and Property Insurance... 23 Real Estate Interest Costs... 24 Assets for Which Interest Must be Capitalized... 24 Assets for Which Interest is Not Capitalized... 25 The Interest Capitalization Period... 25 The Capitalization Rate... 26 Calculating Interest Capitalization... 27 Impact of Financing on Property Purchase Price... 28 Costs Allocated to Real Estate Projects... 29 Real Estate Donated to the Government... 30 Changes in Estimates... 30 Changes in Expected Use... 30 Project Abandonment... 30 Real Estate Selling Costs... 31 Capitalized Selling Costs... 31
Capitalized Advertising Costs... 31 Selling Costs Charged to Expense... 32 Real Estate Rental Costs... 32 Real Estate Incidental Operations... 33 Initial Rental Operations... 33 Real Estate Amenities... 33 Startup Costs... 34 Presentation and Disclosure Topics... 34 Classifications within the Statement of Cash Flows... 34 Public Company Disclosures... 34 Capitalized Interest Disclosures... 35 Imputed Interest Disclosures... 36 Summary... 36 Review Questions... 37 Review Answers... 38 Chapter 3 Purchase of Income-Producing Property... 39 Learning Objectives... 39 Introduction... 39 Relevant Accounting Sources... 39 Overview of Business Combinations... 39 Identifiable Assets and Liabilities, and Noncontrolling Interests... 41 Goodwill or Gain from Bargain Purchase... 42 Goodwill Calculation... 42 Bargain Purchase... 43 Purchase of Assets... 43 Amortization of Intangibles... 44 Goodwill... 44 Goodwill Amortization... 47 Presentation and Disclosure Topics... 47 General Disclosures... 48 Identifiable Assets and Liabilities, and any Noncontrolling Interest... 48 Goodwill or Gain from Bargain Purchase... 49 Goodwill Disclosures... 49 Summary... 50 Review Questions... 51 Review Answers... 52 Chapter 4 Real Estate Sales... 53 Learning Objectives... 53 Introduction... 53 Relevant Accounting Sources... 53 Replacement of the Accounting Standards... 53 Step One: Link Contract to Customer... 54 Step Two: Note Performance Obligations... 54 Step Three: Determine Prices... 54 Step Four: Allocate Prices to Obligations... 54 Step Five: Recognize Revenue... 55 What Constitutes a Real Estate Sale?... 55 Full Accrual Method Revenue Recognition... 56 Buyer s Commitment to Pay... 56 Profit Recognition Not Using the Full Accrual Method... 59 Sale is Not Completed... 59 Buyer s Initial Investment Does Not Qualify... 59 Buyer s Continuing Investment Does Not Qualify... 59 Receivable is Subject to Future Subordination... 60 Continuing Seller Involvement... 60 ii
Decision Tree for Use of Methods... 62 Revenue and Profit Recognition Methods... 63 Installment Method... 63 Cost Recovery Method... 64 Reduced-Profit Method... 65 Percentage-of-Completion Method... 66 Deposit Method... 66 Financing Method... 67 Leasing Method... 68 Profit-Sharing Method... 68 Real Estate Project Recoverability... 68 Derecognition of Real Estate Project Costs... 69 Real Estate Held-for-Sale... 69 Presentation and Disclosure Topics... 71 Summary... 71 Review Questions... 72 Review Answers... 73 Chapter 5 Retail Land Sales... 75 Learning Objectives... 75 Introduction... 75 Relevant Accounting Sources... 75 Retail Land... 75 Full Accrual Method... 76 Percentage-of-Completion Method... 77 Installment Method... 79 Deposit Method... 81 Presentation and Disclosure Topics... 82 Summary... 82 Review Questions... 83 Review Answers... 84 Chapter 6 Nonmonetary Exchanges... 85 Learning Objectives... 85 Introduction... 85 Relevant Accounting Sources... 85 Overview of Nonmonetary Transactions... 85 Exchanges Involving Monetary Consideration... 86 Exchanges of a Nonfinancial Asset for a Noncontrolling Ownership Interest... 89 Spin-off Transactions... 89 Like-Kind Exchanges... 90 Presentation and Disclosure Topics... 90 Summary... 91 Review Questions... 92 Review Answers... 93 Chapter 7 Time-Sharing Activities... 95 Learning Objectives... 95 Introduction... 95 Relevant Accounting Sources... 95 Time-Share Characteristics... 95 Criteria for Revenue Recognition... 96 Buyer s Initial Investment... 96 Buyer s Continuing Investment... 97 Sales Value... 97 Revenue Recognition Methods... 99 Full Accrual Method... 99 iii
Percentage-of-Completion Method... 99 Deposit Method... 99 Cost Recognition... 99 Additional Time-Share Transactions... 102 Additional Products and Services... 103 Treatment of Selling Costs... 103 Effects of Below-Market Financing... 104 Estimating Uncollectible Receivables... 105 Debt Restructurings... 105 Deferral of Rental Costs... 106 Upgrade Transactions... 106 Reload Transactions... 106 Payments by Seller to Support Operations... 106 Management Services... 107 Operation of Affinity Programs... 107 Holding Period... 107 Impairment... 107 Accounting Changes and Error Corrections... 107 Special-Purpose Entities... 108 Assumptions and Sales of Debt... 109 Leases... 109 Presentation and Disclosure Topics... 109 Summary... 110 Review Questions... 111 Review Answers... 112 Chapter 8 Rent Topics... 113 Learning Objectives... 113 Introduction... 113 Relevant Accounting Sources... 113 Types of Leases... 113 Contingent Rent... 114 Lease Incentives... 114 Leasehold Improvements... 114 Prepaid Rent... 115 Straight-Line Rent... 116 Operating Expense Issues... 116 Sub-Leases... 118 Presentation and Disclosure Topics... 118 Summary... 118 Review Questions... 119 Review Answers... 120 Chapter 9 Asset Retirement and Environmental Obligations... 121 Learning Objectives... 121 Introduction... 121 Relevant Accounting Sources... 121 Overview of Asset Retirement Obligations... 121 The Initial Measurement of an Asset Retirement Obligation... 122 Subsequent Measurement of an Asset Retirement Obligation... 123 Settlement of an Asset Retirement Obligation... 124 Overview of Environmental Obligations... 125 Measurement of Environmental Obligations... 126 Recoveries Related to Environmental Obligations... 127 Presentation and Disclosure Topics... 128 Asset Retirement Obligations... 128 Environmental Obligations... 129 iv
Summary... 129 Review Questions... 130 Review Answers... 131 Chapter 10 Real Estate Ventures... 133 Learning Objectives... 133 Introduction... 133 Relevant Accounting Sources... 133 Accounting for an Interest in a Real Estate Venture... 133 Consolidations... 134 Consolidation Examples... 136 Recognition of Noncontrolling Interest... 136 Sale of Shares by Subsidiary... 136 Share of Accumulated Other Comprehensive Income... 137 Full Consolidation Example... 137 Equity Method of Accounting... 138 Cost Method... 141 Changing Methods... 142 Transactions with a Real Estate Venture... 142 Contributions... 142 Loans... 142 Purchase of Real Estate from a Venture... 143 Sale of an Investment in a Real Estate Venture... 143 Real Estate Syndication... 143 Syndication Activities... 143 Syndicator Risks and Rewards... 143 Income Recognition by Syndicators... 144 Acquisition, Development, and Construction Arrangements... 145 Participating Mortgage Loans... 146 Real Estate Investment Trusts... 147 Presentation and Disclosure Topics... 148 Summary... 149 Review Questions... 150 Review Answers... 151 Chapter 11 Housing Associations... 153 Learning Objectives... 153 Introduction... 153 Common Interest Realty Associations... 153 Issues Specific to Cooperative Housing Associations... 154 Presentation and Disclosure Topics... 154 Common Interest Realty Association Presentation Requirements... 154 Common Interest Realty Association Disclosures... 155 Cooperative Housing Association Presentation Requirements... 156 Cooperative Housing Corporation Disclosures... 157 Summary... 157 Review Questions... 158 Review Answers... 159 Glossary... 161 Index... 167 v