Accounting, Financial, Taxation

Investments in real estate projects require significant amounts of capital. For real estate properties that are developed and constructed, rather than purchased, project costs include the costs of tangible assets, such as land and other hard costs (sometimes referred to as “bricks and mortar”); intangible assets and other soft costs, such as architectural planning and design; and interest and taxes. Costs are often incurred before the actual acquisition of the project, which raises certain questions — for example: from what point in time should costs be capitalized? What types of costs are capitalizable?

Determining what types of costs to capitalize in the pre-acquisition, acquisition, development, and construction stages of a real estate project has been an issue for many years. Several decades ago, the “American Institute of Certified Public Accountants (AICPA)” issued the following accounting guidance relating to cost capitalization, reacting to significant diversity in practice:

1. Industry Accounting Guide, Accounting for Retail Land Sales , issued in 1973
2. Statement of Position (SOP) 78 - 3, Accounting for Costs to Sell and Rent, and Initial Rental Operations of, Real Estate Projects , issued in 1978 SOP 80 - 3, Accounting for Real Estate Acquisition, Development, and Construction Costs , issued in 1980
3. In 1982, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 67, Accounting for Costs and Initial Operations of Real Estate Projects , extracting the accounting principles provided by these AICPA pronouncements.

Nevertheless, diversity in practice has continued to exist in some areas, including the capitalization of indirect costs during the development and construction period and the treatment of repair and major maintenance costs incurred subsequent to the completion of real estate projects.

The AICPA undertook another project to develop a comprehensive framework for cost capitalization and, in 2003, issued for public comment the proposed Statement of Position, Accounting for Certain Costs and Activities Related to Property, Plant, and Equipment. That proposed SOP was approved by the AICPA Accounting Standards Executive Committee (AcSEC), in September 2003; however, a fi nal SOP was never issued. In April 2004, the FASB decided not to clear that proposed SOP, mainly for the following stated reasons:

1. Lack of convergence with International Accounting Standards
2. The concept of componentization, particularly the amount of judgment allowed, which could potentially result in lack of comparability
3. Implications for the capitalization of major overhaul expenses

FASB Statement No. 67 provides the primary authoritative guidance for the cost capitalization of real estate project costs. That Statement divides the costs incurred to acquire, develop, and construct a real estate project into pre-acquisition and project costs. Pre-acquisition costs encompass costs incurred in connection with, but prior to the acquisition of, real estate. Project costs include costs incurred at the time of the real estate acquisition, as well as costs incurred during the subsequent development and construction phase.

Real estate developed by a company for use in its own operations other than for sale or rental is not within the scope of Statement 67. 1.  Because — aside from the proposed SOP, Accounting for Certain Costs and Activities Related to Property, Plant, and Equipment — there is no authoritative literature relating to the capitalization of costs for properties used by an enterprise in its own operations, the guidelines in Statement 67 are generally also applied to properties used by an enterprise in its own operations.

On the next post, we are going talk in more detail about “PREACQUISITION COST”

In 1984, the FASB issued Concept Statement 5, which included discussion of assets. However, it was limited in scope, as one would expect in a concept statement. The discussion emphasized the following issues:

1. Recognition assumption of assets, clearly indicating that assets are consumed by their use and the cost should be recognized in the accounting periods of their life.
2. Consumption of economic benefits during a period may be recognized either directly or by relating it to revenues recognized during the period.
3. Some expenses such as depreciation and insurance are allocated by systematic and rational procedures to the period during which the related assets are expected to provide benefits:

Any expense or loss (in future benefits) is recognized if it becomes evident that previously recognized future economic benefits of an asset have been reduced or eliminated.

Since its creation, the FASB has entertained considerable discussion about assets, but the only statements issued cover specific assets:

1. Expensing versus capitalizing research and development
2. The accounting for software
3. Depreciation in not-for-profit organization financial statements
4. Impairment of Assets
5. Involuntary Conversions

FASB Concept Statement 6, Elements of Financial Statements, has more material than any other on the accounting for long-term tangible assets. However, it addresses itself primarily to the definition, the purpose of accrual accounting, and the characteristics of an asset.

In 1985, Concept Statement 6 added a definition of assets:

Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

Concept Statement 6 continues, enumerating the three essential characteristics of an asset:

1. It embodies a probable future benefit that involves a capacity, singly or in combination with other assets, to combine directly or indirectly to future net cash in flows.
2. A particular entity can obtain the benefit and control others’ access to it.
3. The transaction or other event giving rise to the entity’s right to or control of the benefit has already occurred.

This is the first discussion in promulgated accounting rules discussing the definition and characteristics of an asset. The major thrust is that probable future benefit is the definition of an asset. To reflect it on the balance sheet, the entity must be able to obtain benefit from the asset and control others’ access to the asset. This statement also reviews the concept of future economic benefit and service potential as it relates to not-for-profit organizations. It states:

In a not-for-profit organization, the service potential or future economic benefit is used to provide desired or needed goods or services to beneficiaries or other constituents, which may or may not directly result in net cash inflows to the organizations. Some not-for-profit organizations rely significantly on contributions or donations of cash to supplement selling prices. This discussion introduces the argument that depreciation of tangible assets is an appropriate expense of not-for-profit organizations.

In a discussion of accrual accounting, Concept Statement 6 discusses assets under a heading “Recognition, Matching, and Allocation.” In paragraph 145, it states:

Accrual accounting uses accrual, deferral, and allocation procedures whose goal is to relate revenues, expenses, gains, and losses to periods to reflect an entity’s performance during a period instead of merely listing its cash receipts and outlays . . . the goal of accrual accounting is to account in the periods in which they occur for the effects on an entity of transactions and other events and circumstances, to the extent that those financial effects are recognizable and measurable.

There is a discussion of costs and revenues to determine profits for periods. Depreciation and assets are excluded from the matching concept. Paragraph 149 of Concept Statement 6 explains:

However, many assets yield their benefit to an entity over several periods, for example, prepaid insurance, buildings, and various kinds of equipment. Expenses resulting from their use are normally allocated to the periods of the estimated useful lives (the periods over which they are expected to provide benefits) by a rational allocation procedure, for example, by recognizing depreciation or other amortization. Although the purpose of expense allocation is the same as that of other expense recognition—to reflect the using up of assets as a result of transactions or other events or circumstances affecting an entity—allocation is applied if causal relations are generally, but not specifically, identified. For example, wear and tear from use is known to be a major cause of the expense called depreciation, but the amount of depreciation caused by wear and tear in a period normally cannot be measured.

This discussion appears to make the distinction between the matching principle for revenues and expenses and the allocation of the cost of using up future benefits. Although this distinction is subtle, it is the point of basic disagreement between those who argue for inflation accounting and the depreciating of assets based on current market value and those who argue for depreciating using a lesser historical cost.

Appendix B of Concept Statement 6 further discusses characteristics of assets, defining assets as “probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.”

Most of this discussion relates to intangible or nonphysical assets. The FASB, in issuing its Statement 2, Accounting for Research and Development Costs, also gives us some information on “what makes up tangible physical assets“. In their concern for the appropriate accounting for research and development costs, they conclude that all should be charged to expense accounts. However, they do give us their thoughts about which tangible assets should and should not be included in research and development costs. A prime consideration is that materials, equipment, and facilities that have an alternative future use (in research and development projects or otherwise) shall be capitalized as tangible assets when acquired or constructed.

However, the costs of such materials, equipment, or facilities that are acquired or constructed for a particular research and development project and have no alternative future uses and therefore no separate economic values are research and development costs at the time the costs are incurred. All research and development costs encompassed by the statement are charged to expense when incurred. This reflects the concept that research and development costs will be used up during the span of the research project. Tangible assets that have a life beyond the current project, however, should be capitalized and depreciated over their useful lives.

The preceding paragraphs summarize the present state of GAAP relating to property, plant, and equipment.

Many subjects in accounting have not been covered at length within the promulgated statements. Most with the significance of long term tangible assets have been covered in more detail in secondary accounting material, but few secondary publications provide any in depth discussion on fixed assets.

I have not followed FASB for quiet age and wondering “what is new at FASB?” Found lots of things are published recently: New exposure draft for “Conceptual Framework for Financial Reporting” issued on May 29’ 08, Selected Issues Relating to Assets and Liabilities “issued on March 01’06, Merger and acquisition issue and some new proposed statements. Some amendments on FASB Statements No. 5 and 141(R) (Disclosure of Certain Loss Contingencies), 128 (Earnings per Share), 133 (Accounting for Hedging Activities), 142 (Goodwill and Other Intangible Assets Acquired in a Merger or Acquisition) and many more.

Ternyata banyak statement-statement baru, project-project baru yang telah di terbitkan di FASB, mulai dari exposure darft sampai statement-statament yang baru di usulkan, meliputi berbagai hal: dari financial reporting framework hingga merger and acquisition issue. Issue-issue sekitar “Non-for-Profit Organization” juga ada. Yang yang di ubah (amend) juga lumayan banyak: FASB Statements No. 5 and 141(R) (Disclosure of Certain Loss Contingencies), 128 (Earnings per Share), 133 (Accounting for Hedging Activities), 142 (Goodwill and Other Intangible Assets Acquired in a Merger or Acquisition) dan banyak lagi. Berikut ini adalah item-item baru dari FASB:

New Statement Proposed:

1. New—Exposure Draft, Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics and Constraints of Decision-Useful Financial Reporting Information (issued 5/29/08).
2. New—Preliminary Views, Conceptual Framework for Financial Reporting: The Reporting Entity (issued 5/29/08).
3. Selected Issues Relating to Assets and Liabilities with Uncertainties (issued 9/30/05- 1/3/06).
4. Invitation to Comment, Reducing Complexity in Reporting Financial Instruments
   (Including IASB Discussion Paper, Reducing Complexity in Reporting Financial Instruments) (issued 03/28/08).
5. Preliminary Views, Financial Instruments with Characteristics of Equity (issued 11/30/07-5/30/08).
6. Proposed Statement, Earnings per Share—an amendment of FASB Statement No. 128 (issued 9/30/05 - 11/30/05).

FASB Projects:

1. New—Proposed Statement, Accounting for Hedging Activities—an amendment of FASB Statement No. 133 (issued 6/6/08 - 8/15/08)
2. New—Proposed Statement, Disclosure of Certain Loss Contingencies—an amendment of FASB Statements No. 5 and 141(R) (issued 6/5/08-8/8/08)
3. Proposed Statement, Not-for-Profit Organizations: Mergers and Acquisitions (issued 10/9/06-1/29/07)
4. The FASB and its Staff Request Additional Comments on a Potential Revision to the October 2006 Proposed Statement, Not-for-Profit Organizations: Mergers and Acquisitions, and Seek Field Visit Volunteers (posted 5/9/08-7/8/08).
5. Proposed Statement, Not-for-Profit Organizations: Goodwill and Other Intangible Assets Acquired in a Merger or Acquisition—an amendment of FASB Statement No. 142 (issued 10/9/06-1/29/07).
6. Proposed Statement, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140 (issued 8/11/05-10/10/05).
7. Proposed Statement, Consolidated Financial Statements: Purpose and Policy (issued 2/23/99).
8. Front Matter through Appendix A, Appendix B and C. Some issues were addressed in FIN 46(R). Other issues will be addressed in the joint FASB/IASB consolidations research project after related issues are addressed in the joint.

FASB/IASB conceptual framework project:

1. New—Proposed FSP FAS 133-b and FIN 45-c—Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45 (issued 05/30/08-Out for Comment).
2. Proposed FSP ARB 43-a—Amendment of the Inventory Provisions of Chapter 4 of
   ARB No. 43 (issued 05/01/08-6/16/08 Out for Comment).
3. Proposed FSP FAS 132(R)-a—Employers’ Disclosures about Postretirement Benefit Plan Assets (issued 03/18/08-5/02/08).
4. Proposed FSP FAS 117-a—Endowments of Not-for-Profit Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act, and Enhanced Disclosures (issued 02/22/08-4/18/08).
5. Proposed FSP FAS 157-c—Measuring Liabilities under FASB Statement No. 157 (issued 01/18/08-2/18/08).
6. Proposed FSP FAS 154-a—Considering the Effects of Prior-Year Misstatements When Quantifying Misstatements in Current-Year Financial Statements (issued 03/13/07) The Board decided not to issue a final FSP at this time and removed this item from its agenda.
7. Proposed FSP FAS 128-a—Computational Guidance for Computing Diluted EPS under the Two-Class Method (issued 01/26/07). The Board agreed to codify the guidance in the proposed FSP into Statement 128 through its agenda project on Earnings per Share, rather than that guidance being issued in the form of a final FSP.
8. Proposed FSP FAS 144-c—Classifying and Accounting for a Depreciable Asset as Held-for-Sale When an Equity Method Investment Is Obtained (issued 10/26/06). The Board decided not to finalize the proposed FSP.

Proposed Statement 133 Implementation:

1. Issue No. C21, Whether Options (Including Embedded Conversion Options) Are Indexed to both an Entity’s Own Stock and Currency Exchange Rates (issued 04/19/07-5/24/07). The Board deferred making a decision on confirming its tentative conclusions in proposed Issue C21 and asked that it be subsumed into EITF Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock.” Discussion of that EITF issue is expected to continue at the March 12, 2008 EITF meeting.
2. Proposed Statement 133 Implementation Issue No. H17, Foreign Currency Hedges: Hedging Functional-Currency- Equivalent Proceeds to Be Received from a Forecasted
   Foreign-Currency-Denominated Debt Issuance (issued 12/28/06). The Board decided not to issue a final Implementation Issue and removed this project from its agenda. The Board will consider at a future date whether to address the application of cash flow hedging and other issues within a broader derivatives project.
3. Proposed Statement 133 Implementation Issue No. F9, Hedging a Portion of a Portfolio of Fixed-Rate Loans (issued 1/01-2/23/01).
4. Proposed Statement 133 Implementation Issue No. B12, Beneficial Interests Issued by Qualifying Special-Purpose Entities (issued 10/99-7/1/02) Revised 6/16/06.
5. An FASB Agenda Proposal: Accounting for Insurance Contracts by Insurers and Policyholders, Including the IASB Discussion Paper, Preliminary Views on Insurance Contracts (issued 08/02/07)-11/16/07.

If any of you interested in any of those items, go and download the details at www.fasb.org . Jika anda tidak ada masalah dengan bahasa inggris, silahkan download detialnya dalam pdf file di sana.