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Val R. Bitton Partner, Deloitte & Touche AcSEC Member. AcSEC Update. Investors’ Interests in Unconsolidated Real Estate Investments. Scope–Use of the Equity Method Nonvoting common stock or nonredeemable preferred stock, ability to exercise significant influence ( Yes , apply equity method)

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Val R. BittonPartner, Deloitte & ToucheAcSEC Member

AcSEC Update


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Investors’ Interests inUnconsolidated Real Estate Investments

  • Scope–Use of the 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)

    • S corporations, REITs (No, do not apply equity method)


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Investors’ Interests inUnconsolidated Real Estate Investments

  • Application of the Equity Method–HLBV

    (Hypothetical Liquidation at Book Value)

    • Balance-sheet-oriented approach to equity method accounting—determine “claim on the investee’s 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


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Investors’ Interests inUnconsolidated Real Estate Investments

  • Basis Differences

    • Difference between the amount of an investor’s 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

      • Recast Financial Statements approach

      • Two-Component approach


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Investors’ Interests inUnconsolidated Real Estate Investments

  • Status of Project

    • Project began in 1991

    • In 1998 FASB asked AcSEC to continue project

    • AcSEC began deliberating a “fresh-start draft” in July 1999

    • In January 2000, AcSEC cleared the draft for exposure

    • Exposure draft comment period ended April 15, 2001

    • 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

      • Who should apply the equity method

      • How should the equity method be applied


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PP&E Cost Capitalization

Purpose

  • Address diversity in practice in accounting for expenditures related to PP&E

  • Original scope applied only to real estate

  • Expanded to include expenditures (e.g., betterments, overhauls) related to all PP&E

  • Provide guidance on which expenditures are

    • Capitalizable as PP&E

    • Repairs and maintenance to be expensed


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PP&E Cost Capitalization

  • Project stage framework

    • Preliminary

    • Preacquisition

    • Acquisition-or-Construction

    • In-Service

  • Capitalization model based on model in FAS 91 andSOP 98-1—more limited capitalization model


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PP&E Cost Capitalization

  • Preliminary Stage Costs

    • Charge to expense as incurred, except for the cost of an option to acquire PP&E

  • Preacquisition Stage Costs

    • Charge to expense as incurred, unless directly identifiable with specific PP&E

  • Acquisition-or-Construction Stage Costs

    • Capitalize if directly identifiable with specific PP&E


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P&E Cost Capitalization

  • 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

    • 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

      • 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

    • Costs to obtain an option to acquire PP&E


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PP&E Cost Capitalization

  • 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

    • Removal and relocation costs charged to expense as incurred

    • 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




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PP&E Cost Capitalization

  • 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

    • 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


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PP&E Cost Capitalization

  • Status of Project

    • FASB cleared prospectus in February 1999

    • AcSEC began deliberations in January 2000

    • Revised prospectus cleared in May 2000

    • Exposure draft issued June 29, 2001 – comment period ends November 15, 2001



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