ASC

ASC 323-974

Real Estate—Real Estate Investment Trusts

323 Investments—Equity Method and Joint Ventures

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In brief

IntermediateRecognitionConsolidationIndustry-specificSubsequent measurement

This Subtopic tells a REIT how to account for its investment in a "service corporation" — an affiliated entity, typically holding non-qualifying REIT activities, whose voting stock is largely held by others. Even without a voting majority, listed factors (activities performed primarily for the REIT, economic benefits flowing to the REIT, common board members/officers, nominal outside equity, management influence, access to financial information) indicate the REIT has at least significant influence, requiring the equity method or consolidation based on facts and circumstances (323-974-25-1). Service corporations that are variable interest entities are excluded and are instead evaluated under the VIE Subsections of Section 810-10.

Key points (6)
  • The Subtopic addresses recognition and measurement for REIT investments, including accounting for related service corporations (323-974-05-1).
  • Scope follows Section 974-10-15 and covers only service corporations that are not variable interest entities (323-974-15-2); service corporations that are VIEs are scoped out and evaluated under the Variable Interest Entities Subsections of Section 810-10 (323-974-15-3).
  • Presence of some or all of eight enumerated factors indicates the REIT has the ability to exercise at least significant influence over the service corporation, so the REIT must apply the equity method or consolidate (323-974-25-1).
  • Indicative factors include: the service corporation performs activities primarily for the REIT; substantially all economic benefits flow to the REIT; the REIT can designate a board seat; common board members, officers, or employees (323-974-25-1(a)–(e)).
  • Additional factors include: majority voting stockholders of the service corporation have not contributed substantial equity; REIT management's views influence operations; and the REIT can obtain the financial information needed to apply the equity method (323-974-25-1(f)–(h)).
  • The choice between equity method and consolidation is a facts-and-circumstances determination, not a bright-line voting-percentage test (323-974-25-1).

For students. Classic trap: students assume that because a REIT holds only nonvoting or minority stock in a service corporation, cost or fair value accounting applies — but the listed influence indicators usually force equity method or consolidation. Always check first whether the service corporation is a VIE, because if it is, this Subtopic does not apply and ASC 810-10's VIE model governs.

real estate investment trustservice corporationsignificant influenceequity methodconsolidationvariable interest entitynominal outside equityfacts and circumstances assessment

Machine-generated study aid for ASC 323-974. Check the source paragraphs below.

323-974-00Status

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323-974-00-1
The following table identifies the changes made to this Subtopic.
ParagraphActionAccounting Standards UpdateDate
974-323-25-1AmendedAccounting Standards Update No. 2016-0101/05/2016

323-974-05Overview and Background

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323-974-05-1
This Subtopic addresses recognition and measurement issues for investments of real estate investment trusts, including the accounting for related service corporations.

323-974-15Scope and Scope Exceptions

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Overall Guidance

323-974-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 974-10-15, with specific exceptions noted below.

Entities

323-974-15-2
The guidance in this Subtopic applies to the following entities:
  1. a
    Service corporations that are not variable interest entities (VIEs).
323-974-15-3
The guidance in this Subtopic does not apply to the following entities:
  1. a
    Service corporations that are VIEs (see the Variable Interest Entities Subsections of Section 810-10).

323-974-25Recognition

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Service Corporations

323-974-25-1
The existence of some or all of the following factors indicates that the real estate investment trust has the ability to exercise at least significant influence over the service corporation and that, accordingly, the real estate investment trust should either account for its investment under the equity method or should consolidate the investee.
  1. a
    The service corporation performs activities primarily for the real estate investment trust.
  2. b
    Substantially all of the economic benefits in the service corporation flow to the real estate investment trust.
  3. c
    The real estate investment trust has the ability to designate a seat on the board of directors of the service corporation.
  4. d
    The real estate investment trust and the service corporation have common board members.
  5. e
    The real estate investment trust and the service corporation have common officers, employees, or both.
  6. f
    The owners of the majority voting stock of the service corporation have not contributed substantial equity to the service corporation.
  7. g
    The views of the real estate investment's management influence the operations of the service corporation.
  8. h
    The real estate investment trust is able to obtain financial information from the service corporation that is needed to apply the equity method of accounting to its investment in the service corporation.
The determination of whether the real estate investment trust should use the equity method of accounting for its investment in the service corporation or consolidate the service corporation in its financial statements should be based on facts and circumstances.

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