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AcSEC Update Val R. Bitton Partner, Deloitte & Touche AcSEC Member.

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Presentation on theme: "AcSEC Update Val R. Bitton Partner, Deloitte & Touche AcSEC Member."— Presentation transcript:

1 AcSEC Update Val R. Bitton Partner, Deloitte & Touche AcSEC Member

2 Investors Interests in Unconsolidated Real Estate Investments Scope–Use of the Equity Method Scope–Use of the Equity Method Nonvoting common stock or nonredeemable preferred stock, ability to exercise significant influence (Yes, apply equity method) Nonvoting common stock or nonredeemable preferred stock, ability to exercise significant influence (Yes, apply equity method) Specific ownership accounts: GPs, LPs, LLCs, LLPs, regardless of significant influence (Yes, apply equity method) Specific ownership accounts: GPs, LPs, LLCs, LLPs, regardless of significant influence (Yes, apply equity method) S corporations, REITs (No, do not apply equity method) S corporations, REITs (No, do not apply equity method)

3 Investors Interests in Unconsolidated Real Estate Investments Application of the Equity Method–HLBV Application of the Equity Method–HLBV (Hypothetical Liquidation at Book Value) Balance-sheet-oriented approach to equity method accounting determine claim on the investees book value, considering transactions and events that the investee recognizes in accordance with GAAP Balance-sheet-oriented approach to equity method accounting determine claim on the investees book value, considering transactions and events that the investee recognizes in accordance with GAAP Take into account all forms of financial interest common stock, preferred stock, general or limited partnership interests, debt securities, loans, advances, notes receivable, other obligations Take into account all forms of financial interest common stock, preferred stock, general or limited partnership interests, debt securities, loans, advances, notes receivable, other obligations

4 Investors Interests in Unconsolidated Real Estate Investments Basis Differences Basis Differences Difference between the amount of an investors investment in an investee and its claim on the book value of the investee Difference between the amount of an investors investment in an investee and its claim on the book value of the investee Attribute the difference(s) to assets or liabilities of the investee, and account for as if the investee were a consolidated subsidiary Attribute the difference(s) to assets or liabilities of the investee, and account for as if the investee were a consolidated subsidiary Recast Financial Statements approach Recast Financial Statements approach Two-Component approach Two-Component approach

5 Investors Interests in Unconsolidated Real Estate Investments Status of Project Status of Project Project began in 1991 Project began in 1991 In 1998 FASB asked AcSEC to continue project In 1998 FASB asked AcSEC to continue project AcSEC began deliberating a fresh-start draft in July 1999 AcSEC began deliberating a fresh-start draft in July 1999 In January 2000, AcSEC cleared the draft for exposure In January 2000, AcSEC cleared the draft for exposure Exposure draft comment period ended April 15, 2001 Exposure draft comment period ended April 15, 2001 Many comment letters expressed concern over limited scope of exposure draft (i.e., real estate only) Many comment letters expressed concern over limited scope of exposure draft (i.e., real estate only) AcSEC pursuing broad equity method project based on APB 18 AcSEC pursuing broad equity method project based on APB 18 Who should apply the equity method Who should apply the equity method How should the equity method be applied How should the equity method be applied

6 Purpose Address diversity in practice in accounting for expenditures related to PP&E Address diversity in practice in accounting for expenditures related to PP&E Original scope applied only to real estate Original scope applied only to real estate Expanded to include expenditures (e.g., betterments, overhauls) related to all PP&E Expanded to include expenditures (e.g., betterments, overhauls) related to all PP&E Provide guidance on which expenditures are Provide guidance on which expenditures are Capitalizable as PP&E Capitalizable as PP&E Repairs and maintenance to be expensed Repairs and maintenance to be expensed PP&E Cost Capitalization

7 Project stage framework Project stage framework Preliminary Preliminary Preacquisition Preacquisition Acquisition-or-Construction Acquisition-or-Construction In-Service In-Service Capitalization model based on model in FAS 91 and SOP 98-1more limited capitalization model Capitalization model based on model in FAS 91 and SOP 98-1more limited capitalization model PP&E Cost Capitalization

8 Preliminary Stage Costs Preliminary Stage Costs Charge to expense as incurred, except for the cost of an option to acquire PP&E Charge to expense as incurred, except for the cost of an option to acquire PP&E Preacquisition Stage Costs Preacquisition Stage Costs Charge to expense as incurred, unless directly identifiable with specific PP&E Charge to expense as incurred, unless directly identifiable with specific PP&E Acquisition-or-Construction Stage Costs Acquisition-or-Construction Stage Costs Capitalize if directly identifiable with specific PP&E Capitalize if directly identifiable with specific PP&E PP&E Cost Capitalization

9 P&E Cost Capitalization Directly identifiable costs capitalizable in Preacquisition and Acquisition-or-Construction stages include only: Directly identifiable costs capitalizable in Preacquisition and Acquisition-or-Construction stages include only: Incremental direct costs of activities incurred in transactions with independent third parties Incremental direct costs of activities incurred in transactions with independent third parties Certain entity costs directly related to PP&E activities Certain entity costs directly related to PP&E activities Payroll and benefit-related costs of employees to the extent they directly devote time to PP&E activity Payroll and benefit-related costs of employees to the extent they directly devote time to PP&E activity Depreciation of machinery and equipment used directly in construction or installation of PP&E Depreciation of machinery and equipment used directly in construction or installation of PP&E Inventory (including spare parts) used directly in construction or installation of PP&E Inventory (including spare parts) used directly in construction or installation of PP&E Costs to obtain an option to acquire PP&E Costs to obtain an option to acquire PP&E

10 In-Service Stage Costs In-Service Stage Costs Repairs and maintenance costs charged to expense as incurred, unless the costs are for (1) acquisition of additional PP&E or components of PP&E or (2) replacement of existing PP&E or components of PP&E Repairs and maintenance costs charged to expense as incurred, unless the costs are for (1) acquisition of additional PP&E or components of PP&E or (2) replacement of existing PP&E or components of PP&E Removal and relocation costs charged to expense as incurred Removal and relocation costs charged to expense as incurred Costs of planned major maintenance activities are not a separate PP&E asset Costs of planned major maintenance activities are not a separate PP&E asset Elimination of accrue in advance, defer and amortize, and built-in overhaul methods Elimination of accrue in advance, defer and amortize, and built-in overhaul methods PP&E Cost Capitalization

11 Preliminary Stage Preacquisition Stage Acquisition-or- Construction Stage In-Service Stage Timeline Prior to time when acquisition of PP&E becomes probable Acquisition of specific PP&E is probable but has not yet occurred Acquisition has occurred or construction has commenced but PP&E is not yet substantially complete and ready for its intended use Subsequent to when PP&E is substantially complete and ready for its intended use Sample Activities Consideration of alternatives, feasibility studies, activities occurring prior to decision to select specific PP&E Surveying, zoning, engineering, design layouts, traffic studies (these may also occur during the preliminary stage) Acquisition, construction, or installation of PP&E; engineering work, design work Replacements, additions to existing PP&E, repairs and maintenance

12 PP&E Cost Capitalization Preliminary Stage Preacquisition Stage Acquisition-or- Construction Stage In-Service Stage Accounting for costs directly identifiable with specific PP&E Expense Capitalize certain costs Capitalize replacements and additions; expense repairs and maintenance; expense net book value of replaced PP&E Accounting for general and administrative, overhead, and support function costs ExpenseExpenseExpenseExpense

13 Component Accounting Component Accounting Component is a part or portion of PP&E that (1) can be separately identified as an asset and depreciated over its own expected useful life and (2) is expected to provide benefit for more than one year Component is a part or portion of PP&E that (1) can be separately identified as an asset and depreciated over its own expected useful life and (2) is expected to provide benefit for more than one year If component has an expected useful life that differs from the PP&E asset, cost should be separately accounted for and depreciated over its expected useful life If component has an expected useful life that differs from the PP&E asset, cost should be separately accounted for and depreciated over its expected useful life If a component is replaced, the new component is capitalized and the old component is written off If a component is replaced, the new component is capitalized and the old component is written off PP&E Cost Capitalization

14 Status of Project Status of Project FASB cleared prospectus in February 1999 FASB cleared prospectus in February 1999 AcSEC began deliberations in January 2000 AcSEC began deliberations in January 2000 Revised prospectus cleared in May 2000 Revised prospectus cleared in May 2000 Exposure draft issued June 29, 2001 – comment period ends November 15, 2001 Exposure draft issued June 29, 2001 – comment period ends November 15, 2001 PP&E Cost Capitalization

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