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held and used into “asset groups” and assets being held for sale into “disposal groups” for the
purpose of the evaluation of recoverability and impairment computations. ASC 360 applies to real
estate held for development and sale, property to be developed in the future, and property currently
undergoing development.
Generally, under ASC 360, recoverability is evaluated at the “lowest level for which identifiable
cash flows are largely independent of the cash flows of other assets and liabilities.” If a project has
identifiable elements with separate cash flows such as residential and commercial, or houses and
condominiums, then each element is evaluated separately and not combined for the whole project.
Projects are not combined in order to avoid recognizing impairment of one of the components.
Once impairment losses are recognized on property, similar to inventory, a new cost basis is
adopted and future recoveries in value are not recognized.
Real estate special assessments. The laws of various states permit the formation of Tax
Increment Financing Entities (TIFEs). Although their structure and characteristics differ between
jurisdictions, TIFEs are generally special taxing districts established to finance and operate
infrastructure owned by the municipality, such as roads, water mains, electric lines, sewers, and
the like. These infrastructure improvements are used to revitalize a discrete geographic area by
facilitating the private development of adjoining residential and commercial real estate. The TIFE
or, absent a TIFE, the municipality typically issues bonds to finance the construction of the
infrastructure improvements. The bonds may offer investors favorable after-tax yields by
qualifying for tax-exempt status under IRC §141. Generally, the bonds are repaid from special
assessments specifically designated for this purpose by the TIFE (or the municipality) such as user
fees, tolls, sales taxes, real estate taxes, hotel bed taxes, and the like.
Besides paying for the debt service, these special assessments also fund ongoing operating
costs, such as routine infrastructure repairs and maintenance. The infrastructure improvements made
with the bond proceeds directly benefit the adjoining property owners and, in fact, the terms of these
arrangements are often jointly negotiated between residential and commercial real estate developers
and the municipality as an inducement to the developers to invest in a local development project.
Depending on an analysis of the specific facts and circumstances, including the relevant
statute, ordinance, bond indenture, and other legal documents, the property owner or developer
may potentially be required to record:
1. A liability for a special assessment by the TIFE or municipality if that assessment is levied
on each individual property owner at an amount that is fixed or determinable and that
covers a determinable period of time. (ASC 970-470)
2. A guarantee liability under ASC 460 if, for example, it has:
a. Contractually agreed to cover all or a portion of any shortfalls in the required annual
debt service of the bond obligations of the issuing TIFE or municipality.
b. Pledged company assets as collateral for the bond obligations.
c. Provided a letter of credit or other credit enhancements to support all or a portion of the
bond obligations.
Other Guidance to Accounting for Real Estate Operations
ASC 970-360 holds that when a seller of real estate agrees to make up any rental shortfalls for
a period of time, payments to and receipts from the seller are adjustments to the cost of the property
and will affect future depreciation charges.
ASC 974-323-25 addresses the accounting by a REIT in a service corporation (SC). In
determining a REIT’s accounting for its investment in an SC, the SC must be evaluated as a
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potential VIE under ASC 810. If the SC is subject to ASC 810, this codification section does not
apply to the determination of the REIT’s accounting. If, however, the SC is not subject to ASC
810, this section continues to apply to the determination of the method of accounting that the REIT
should use to record its investment (consolidation, equity method, or cost method). The
codification includes a list of factors that indicate that the equity method of accounting is to
be used. Regardless of the method of accounting used by a REIT for its investment in an SC, the
SC is not considered an independent third party for the purpose of capitalizing lessor initial direct
costs under ASC 310-20. Consequently, leasing costs capitalized by a REIT as initial direct costs
may not exceed the amounts allowable if the REIT had incurred the costs directly.
As noted in the preceding section of this chapter, ASC 978 addresses the accounting for time­
share operations. ASC 978 also establishes accounting requirements for incidental operations. In
particular, rental and other operations during holding periods, including sampler programs and
minivacations, are to be accounted for as incidental operations. The excess, if any, of revenue over
costs of such operations is to be recorded as a reduction of inventory costs.

REAL ESTATE—RETAIL LAND (ASC 976)26

PERSPECTIVE AND ISSUES

The substance of a sale of any asset is that the transaction unconditionally transfers the risks
and rewards of ownership to the buyer. However, the economic substance of many real estate sales
is that the risks and rewards of ownership have not been clearly transferred. The turbulent and
cyclical environments in the real estate and debt markets have led to the evolution of many
complex methods of financing real estate transactions. For example, in some transactions the
seller, rather than an independent third party, finances the buyer, while in others, the seller may be
required to guarantee a minimum return to the buyer or continue to operate the property for a
specified period of time. In many of these complex transactions, the seller still has some
association with the property even after the property has been sold. The question that must be
answered in these transactions is: At what point does the seller become disassociated enough from
the property that profit may be recognized on the transaction?
Accounting for sales of real estate is governed by ASC 976. The purpose of this section is to
present the guidelines that need to be considered when analyzing nonretail real estate transactions.
ASC 840-40 dealing with sales-type real estate leases and sales-leaseback real estate transactions
is covered in the chapter on ASC 840.
A specialized situation involving the sale of real estate pertains to time-share projects, which
are addressed by ASC 978, as discussed in this chapter.

DEFINITIONS OF TERMS

Buy-Sell Agreement. A contractual arrangement that gives both investors in a jointly owned
entity the ability to offer to buy the other’s interest.
Continuing Investment. Payments that the buyer is contractually required to pay on its total
debt for the purchase price of the property.
Cost Recovery Method. A method which defers the recognition of gross profit on a real
estate sale until the seller recovers the cost of the property sold.

26 See footnote 20.

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Deposit Method. A method which records payments by the buyer as deposits rather than a
sale. The seller continues to report the asset and related debt on the statement of financial position
until the contract is canceled or until the sale has been achieved.
First Mortgage (Primary Debt). The senior debt the seller has on the property at the time the
buyer purchases the property. A first mortgage lender (mortgagee) has foreclosure rights superior
to those of second (or junior) mortgage lenders (i.e., proceeds from sale of the foreclosed property
are used first to repay the first mortgage lender in full with only the remainder available to satisfy
the junior lenders’ balances).
Full Accrual Method. A method that recognizes all profit from a real estate sale at the time of
sale.
Initial Investment. The sales value received by the seller at the time of sale. It includes a cash
down payment, buyer’s notes supported by an irrevocable letter of credit, and payments by the
buyer to third parties to reduce or eliminate the seller’s indebtedness on the property.
Installment Method. A method that recognizes revenue on the basis of payments made by
the buyer on debt owed to the seller and payments by the buyer to the holder of primary debt. Each
payment is apportioned between profit and cost recovery.
Lien. A claim or charge a creditor has on property which serves as security for payment of
debt by the debtor.
Minimum Initial Investment. The minimum amount that an initial investment must equal or
exceed so that the criterion for using the full accrual method is met.
Partial Sale. A sale in which the seller retains an equity interest in the property or has an
equity interest in the buyer.
Property Improvements. An addition made to real estate, usually consisting of buildings but that
may also include any permanent structure such as streets, sidewalks, sewers, utilities, and the like.
Reduced Profit Method. A method which recognizes profit at the point of sale, but only a
reduced amount. The remaining profit is deferred to future periods.
Release Provision. An agreement that provides for the release of property to the buyer. This
agreement releases the property to the buyer free of any previous liens.
Sales Value. The sales price of the property increased or decreased for other consideration in
the sales transaction that are, in substance, additional sales proceeds to the seller.
Subordination. The process by which a party’s rights are ranked below the rights of others.

CONCEPTS, RULES, AND EXAMPLES

Real Estate Sales—Land Sales27

ASC 976 scope. ASC 976, Real Estate—Retail Land, contains standards applicable to all
real estate sales for all types of businesses.
ASC 360-20-15 explicitly states that real estate sales transactions under ASC 976 include real
estate with property enhancements or integral equipment. This defines property improvements and
integral equipment as “any physical structure or equipment attached to real estate or other parts
thereof, that cannot be removed and used separately without incurring significant cost.” Examples
include an office building or manufacturing plant.

27 Upon implementation of ASU 2014-09 on revenue recognition, guidance for revenue for this topic can be found in
ASC 606 or ASC 610.
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Transactions excluded from the provisions of ASC 976 are as follows:

1. A sale of improvements or integral equipment with no sale or plans for a sale of the land.
2. A sale of stock, net assets of a business, or a segment of a business which contain real
estate except in cases in which an “in-substance” real estate sale occurs.
3. Securities accounted for under ASC 320.
Profit recognition methods. Profit from real estate sales is recognized in full, provided the
following:
1. The profit is determinable (i.e., the collectibility of the sales price is reasonably assured or
the amount that will not be collectible can be estimated).
2. The earnings process is virtually complete, that is, the seller is not obliged to perform
significant activities after the sale to earn the profit.
When both of these conditions are satisfied, the method used to recognize profits on real estate
sales is referred to as the full accrual method. If both of these conditions are not satisfied,
recognition of all or part of the profit is postponed.
For real estate sales, the collectibility of the sales price is reasonably assured when the buyer
has demonstrated a commitment to pay. This commitment is supported by a substantial initial
investment, along with continuing investments that give the buyer a sufficient stake in the property
such that the risk of loss through default motivates the buyer to honor its obligations to the seller.
Collectibility of the sales price is also assessed by examining the conditions surrounding the sale
(e.g., credit history of the buyer; age, condition, and location of the property; and history of cash
flows generated by the property).
The full accrual method is appropriate and profit is recognized in full at the point of sale for
real estate transactions when all of the following criteria are met:
1. A sale is consummated.
2. The buyer’s initial and continuing investments are adequate to demonstrate a commitment
to pay for the property.
3. The seller’s receivable is not subject to future subordination.
4. The seller has transferred to the buyer the usual risks and rewards of ownership in a
transaction that is in substance a sale, and the seller does not have a substantial continuing
involvement in the property.
On sales in which an independent third party provides all of the financing for the buyer, the
seller is most concerned that criterion 1 is met. For such sales, the sale is usually consummated on
the closing date. When the seller finances the buyer, the seller must analyze the economic
substance of the agreement to ascertain that criteria 2, 3, and 4 are also met (i.e., whether the
transaction clearly transfers the risks and rewards of ownership to the buyer).
ASC 360-20 provides the following guidelines for a seller of real estate to follow when
considering the various forms of financing that may be applicable to the transaction:
1. The ASC 976 conditions for obtaining sufficient initial and continuing investment from
the buyer before full accrual profit recognition is allowed must be applied unless the seller
receives as the full sales value of the property:
a. Cash without any seller contingent liability on any debt on the property incurred or
assumed by the buyer,
b. The buyer’s assumption of the seller’s existing nonrecourse debt on the property,