{"schema_version":2,"canonical_url":"https://asc.understandingaccounting.org/asc/323/970/#35-subsequent-measurement","source":"FASB Accounting Standards Codification, Basic View","usage":"Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective.","topic":"323","topic_title":"Investments—Equity Method and Joint Ventures","subtopic":"323-970","subtopic_title":"Real Estate—General","section":{"number":"35","label":"35 Subsequent Measurement","anchor":"35-subsequent-measurement","is_sec":false,"groups":[{"block":null,"heading":"Applying the Equity Method","paragraphs":[{"citation":"323-970-35-1","para":"35-1","html":"The guidance in this Section applies to investments accounted for by the equity method.
Investors shall record their share of the real estate venture's losses, determined in conformity with generally accepted accounting principles (GAAP), without regard to unrealized increases in the estimated fair value of the venture's assets.
An investor that is liable for the obligations of the venture or is otherwise committed to provide additional financial support to the venture shall record its equity in real estate venture losses in excess of its investment, including loans and advances. The following are examples of such circumstances: - a
The investor has a legal obligation as a guarantor or general partner.
- b
The investor has indicated a commitment, based on considerations such as business reputation, intra-entity relationships, or credit standing, to provide additional financial support. Such a commitment might be indicated by previous support provided by the investor or statements by the investor to other investors or third parties of the investor's intention to provide support.
An investor, though not liable or otherwise committed to provide additional financial support, shall provide for losses in excess of investment when the imminent return to profitable operations by the venture appears to be assured. For example, a material nonrecurring loss of an isolated nature, or start-up losses, may reduce an investment below zero though the underlying profitable pattern of an investee is unimpaired.
An investor in a real estate venture shall report its recorded share of losses in excess of its investment, including loans and advances, as a liability in its financial statements.
If an investor does not recognize venture losses in excess of its investment, loans, and advances and the venture subsequently reports net income, the investor shall resume applying the equity method only after its share of such net income equals the share of net losses not recognized during the period in which equity accounting was suspended.
If it is probable that one or more investors cannot bear their share of losses, the remaining investors shall record their proportionate shares of venture losses otherwise allocable to investors considered unable to bear their share of losses. This does not apply for real property jointly owned and operated as undivided interests in assets if the claims or liens of investors' creditors are limited to investors' respective interests in such property.
When the venture subsequently reports income, those remaining investors shall record their proportionate share of the venture's net income otherwise allocable to investors considered unable to bear their share of losses until such income equals the excess losses they previously recorded. An investor who is deemed by other investors to be unable to bear its share of losses shall continue to record its contractual share of losses unless it is relieved from the obligation to make payment by agreement or operation of law.
The accounting by an investor for losses otherwise allocable to other investors shall be governed by the provisions of Subtopic 450-20 relating to loss contingencies. Accordingly, the investor shall record a proportionate share of the losses otherwise allocable to other investors if it is probable that they will not bear their share. In this connection, each investor shall look primarily to the fair value of the other investors' interests in the venture and the extent to which the venture's debt is nonrecourse in evaluating their ability and willingness to bear their allocable share of losses. An investor may not be able to apply the general rule to an investment in an undivided interest because the extent to which the interests of other investors are encumbered by liens may not be known. However, there may be satisfactory alternative evidence of an ability and willingness of other investors to bear their allocable share of losses. Such evidence might be, for example, that those investors previously made loans or contributions to support cash deficits, possess satisfactory financial standing (as may be evidenced by satisfactory credit ratings), or have provided adequately collateralized guarantees. See Section
323-10-35 for additional guidance regarding accounting by equity method investor for investee losses when the investor has both loans and equity interest.
A loss in value of an investment other than a temporary decline shall be recognized. Such a loss in value may be indicated, for example, by a decision by other investors to cease providing support or reduce their financial commitment to the venture.
If a transaction with a real estate venture confirms that there has been a loss in the value of the asset sold that is other than temporary and that has not been recognized previously, the loss shall be recognized on the books of the transferor.
Intra-entity profit shall be eliminated by the investor in relation to the investor's noncontrolling interest in the investee, unless one of the exceptions in paragraph 323-10-35-7 applies. An investor that controls the investee and enters into a transaction with the investee shall eliminate all of the interentity profit on assets remaining within the group. (See Subsection
323-30-35 for accounting guidance concerning partnership ownership interest.)
A sale of property in which the seller holds or acquires a noncontrolling interest in the buyer shall be evaluated in accordance with the guidance in paragraphs . No profit shall be recognized if the seller controls the buyer. Venture agreements may designate different allocations among the investors for any of the following: - a
Profits and losses
- b
Specified costs and expenses
- c
Distributions of cash from operations
- d
Distributions of cash proceeds from liquidation.
Such agreements may also provide for changes in the allocations at specified times or on the occurrence of specified events. Accounting by the investors for their equity in the venture's earnings under such agreements requires careful consideration of substance over form and consideration of underlying values as discussed in paragraph 970-323-35-10. To determine the investor's share of venture net income or loss, such agreements or arrangements shall be analyzed to determine how an increase or decrease in net assets of the venture (determined in conformity with GAAP) will affect cash payments to the investor over the life of the venture and on its liquidation. Specified profit and loss allocation ratios shall not be used to determine an investor's equity in venture earnings if the allocation of cash distributions and liquidating distributions are determined on some other basis. For example, if a venture agreement between two investors purports to allocate all depreciation expense to one investor and to allocate all other revenues and expenses equally, but further provides that irrespective of such allocations, distributions to the investors will be made simultaneously and divided equally between them, there is no substance to the purported allocation of depreciation expense. See Section
323-30-25 for guidance concerning partnership profit recognition.
See the
Acquisition, Development, and Construction Subsection of Section 310-10-35 for additional guidance concerning subsequent measurement of
acquisition, development, and construction arrangements that are required to be accounted for as real estate joint ventures under that guidance.
In the real estate industry, the accounts of a venture may reflect accounting practices, such as those used to prepare tax basis data for investors, that vary from GAAP. If the financial statements of the investor are to be prepared in conformity with GAAP, such variances that are material shall be eliminated in applying the equity method.
See Section
323-30-35 regarding income tax to be provided on profits accrued by investor-partners and tax liabilities applicable to partnership interests.
Interest on loans and advances that are in substance capital contributions (for example, if all the investors are required to make loans and advances proportionate to their equity interests) shall be accounted for as distributions rather than as interest income by the investors.