FASB’s issuance of the final accounting standard update (ASU) on revenue from contracts with customers on May 28, 2014 will impact the recognition of real estate sale transactions.
The purpose of the revenue recognition project is to clarify and converge the revenue recognition principles under U.S. GAAP and IFRSs and to develop guidance that would streamline and enhance revenue recognition requirements. The ASU outlines five steps to recognizing revenue:
- Identify the contract(s) with a customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations in the contract.
- Recognize revenue when (or as) the entity satisfies a performance obligation.
As a result of the ASU, entities will need to reassess their current accounting for real estate disposals and determine whether accounting changes are necessary. In addition, the ASU requires significantly expanded disclosures about revenue recognition, including both quantitative and qualitative information about (1) the amount, timing, and uncertainty of revenue (and related cash flows) from contracts with customers; (2) the judgment, and changes in judgment, used in applying the revenue model; and (3) the assets recognized from costs to obtain or fulfill a contract with a customer.
The ASU retains the current guidance for contribution of real estate to a real estate joint venture, like-kind exchanges and sale-leaseback transactions. If the sale does not meet the criteria for the stated types of transactions the company will have to evaluate the terms of the contract under the new revenue recognition standards. Key items to evaluate are financing and determination of the transaction price.
The challenge that Companies will face implementing the new revenue recognition rules with real estate transactions include increased judgment needed by management to evaluate the transaction, increased disclosure necessary with the transactions, and consideration of any tax implications that need to be considered that may differ from GAAP treatment of revenue recognition.
The ASU is not effective until reporting periods beginning after December 15, 2016, with a one-year deferral period for nonpublic entities); however, entities should start to evaluate the impact of the ASU as they are entering real estate transactions.
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