ASC

ASC 340-970

Real Estate—General

340 Other Assets and Deferred Costs

Download JSONDownload Markdown31 paragraphs · 6 sectionsJump to summary

Source downloaded: .Record version 592f10f1d0c9. Effective date must be checked in the source.

In brief

IntermediateInitial measurementSubsequent measurementInventory and PP&EIndustry-specific

ASC 340-970 (the Real Estate Project Costs Subsections) governs when costs of real estate projects may be capitalized, how they are subsequently measured and amortized, and when they must be written off. Preacquisition costs are capitalized only if directly identifiable with a specific property, capitalizable if the property were owned, and acquisition is probable; option payments are always capitalized. Once a project is substantially completed and held available for occupancy, carrying and rental operating costs are expensed, depreciation begins, and capitalized rental costs are amortized.

Key points (7)
  • Payments to obtain an option to acquire real property are capitalized as incurred; other preacquisition costs are capitalized only if they are directly identifiable with the specific property, would be capitalizable if the property were already acquired, and acquisition of the property or option is probable (340-970-25-3).
  • Capitalized preacquisition costs become project costs upon acquisition, or are charged to expense (to the extent not recoverable by selling options, plans, etc.) when it is probable the property will not be acquired (340-970-25-4).
  • Internal preacquisition costs are capitalized only for property that will be nonoperating at acquisition, are directly identifiable with it, and were incurred after acquisition became probable; blanket deferral of all internal acquisition costs is not appropriate (340-970-25-5 through 25-6); classification changes do not permit later capitalization of previously expensed internal costs (340-970-35-3 through 35-4).
  • Property taxes and insurance are capitalized only while activities necessary to get the property ready for its intended use are in progress, using the same meaning as for interest capitalization under 835-20; afterwards they are expensed (340-970-25-8).
  • Amenity costs are allocated as common costs among benefited parcels for which development is probable—costs in excess of anticipated proceeds if the amenity is sold with units, or costs in excess of estimated fair value at substantial physical completion if sold separately or retained (340-970-25-9 through 25-10).
  • Incremental revenues from incidental operations in excess of incremental costs reduce capitalized project costs; an excess of incremental costs is charged to expense as incurred (340-970-25-12).
  • Rental costs other than initial direct costs (Topic 842) are capitalized if recovery is reasonably expected from future rental operations and amortized over the lease term or expected benefit period beginning when the project is substantially completed and held available for occupancy—no later than one year after cessation of major construction activity (340-970-25-16, 25-18 through 25-19, 35-2); unrecoverable amounts are expensed when lease termination becomes probable (340-970-40-2).

For students. This is the classic real estate developer cost-capitalization checklist: watch the "probable acquisition" gate for preacquisition costs and the sharp cutoff at substantial completion, after which taxes, insurance, and rental operating costs must be expensed. A common error is assuming all internal costs of hunting for properties can be deferred and rolled into successful acquisitions—340-970-25-5 expressly rejects that.

preacquisition costsreal estate project costscapitalization of option paymentscommon costs allocationamenitiesincidental operationssubstantially completed and held available for occupancycapitalized rental costs

Machine-generated study aid for ASC 340-970. Check the source paragraphs below.

340-970-00Status

Source downloaded: .Record version 4e58bc0377d4. Effective date must be checked in the source.

340-970-00-1
The following table identifies the changes made to this Subtopic.
ParagraphActionAccounting Standards UpdateDate
ContractAddedAccounting Standards Update No. 2016-0202/25/2016
Direct Financing LeaseAmendedAccounting Standards Update No. 2021-0507/19/2021
Direct Financing LeaseAddedAccounting Standards Update No. 2016-0202/25/2016
Finance LeaseAddedAccounting Standards Update No. 2016-0202/25/2016
Initial Direct CostsAddedAccounting Standards Update No. 2016-0202/25/2016
LeaseAddedAccounting Standards Update No. 2016-0202/25/2016
Lease TermAddedAccounting Standards Update No. 2016-0202/25/2016
LesseeAddedAccounting Standards Update No. 2016-0202/25/2016
LessorAddedAccounting Standards Update No. 2016-0202/25/2016
Operating LeaseAddedAccounting Standards Update No. 2016-0202/25/2016
Phase (1st def.)SupersededAccounting Standards Update No. 2014-0603/14/2014
Phase (2nd def.)AddedAccounting Standards Update No. 2014-0603/14/2014
Sales-Type LeaseAmendedAccounting Standards Update No. 2021-0507/19/2021
Sales-Type LeaseAddedAccounting Standards Update No. 2016-0202/25/2016
Underlying AssetAddedAccounting Standards Update No. 2016-0202/25/2016
970-340-25-10AmendedAccounting Standards Update No. 2014-0603/14/2014
970-340-25-13AmendedAccounting Standards Update No. 2014-0905/28/2014
970-340-25-14SupersededAccounting Standards Update No. 2014-0905/28/2014
970-340-25-15SupersededAccounting Standards Update No. 2014-0905/28/2014
970-340-25-16AmendedAccounting Standards Update No. 2016-0202/25/2016
970-340-25-18AddedAccounting Standards Update No. 2014-0905/28/2014
970-340-25-19AddedAccounting Standards Update No. 2014-0905/28/2014
970-340-35-1AmendedAccounting Standards Update No. 2014-0905/28/2014
970-340-35-2AmendedAccounting Standards Update No. 2016-0202/25/2016
970-340-35-2AmendedAccounting Standards Update No. 2014-0905/28/2014
970-340-40-1SupersededAccounting Standards Update No. 2014-0905/28/2014

340-970-05Overview and Background

Source downloaded: .Record version e1ed58ce2853. Effective date must be checked in the source.

340-970-05-1
The content in this Subtopic is contained in the Real Estate Project Costs Subsections.

Real Estate Project Costs

340-970-05-2
The Real Estate Project Costs Subsections of this Subtopic provide accounting guidance concerning the capitalization, measurement, and derecognition of certain real estate project costs.
340-970-05-3
See also Subtopic 835-20 for additional guidance related to interest costs that can be capitalized into project costs.

340-970-15Scope and Scope Exceptions

Source downloaded: .Record version e5190e7e5c7c. Effective date must be checked in the source.

Overall Guidance

340-970-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 970-10-15.

Real Estate Project Costs

340-970-15-2
The Real Estate Project Costs Subsections follow the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see the Real Estate Project Costs Subsection of Section 970-10-15.

340-970-25Recognition

Source downloaded: .Record version afc7245d7cf4. Effective date must be checked in the source.

Real Estate Project Costs

Acquisition, Development, and Construction Costs

340-970-25-1
This Subsection does not address the accounting for costs incurred for acquisitions of property that will be used in the entity's own operations, other than for sale or rental.
340-970-25-2
Paragraphs
310-20-55-9 through 55-10
provides guidance on how to distinguish between internal and external costs. The capitalization provisions of this Section for preacquisition costs apply to internally generated costs.
340-970-25-3
Payments to obtain an option to acquire real property shall be capitalized as incurred. All other costs related to a property that are incurred before the entity acquires the property, or before the entity obtains an option to acquire it, shall be capitalized if all of the following conditions are met and otherwise shall be charged to expense as incurred:
  1. a
    The costs are directly identifiable with the specific property.
  2. b
    The costs would be capitalized if the property were already acquired.
  3. c
    Acquisition of the property or of an option to acquire the property is probable (that is, likely to occur). This condition requires that the prospective purchaser is actively seeking to acquire the property and has the ability to finance or obtain financing for the acquisition and that there is no indication that the property is not available for sale.
340-970-25-4
Capitalized preacquisition costs either:
  1. a
    Shall be included as project costs upon the acquisition of the property
  2. b
    To the extent not recoverable by the sale of the options, plans, and so forth, shall be charged to expense when it is probable that the property will not be acquired.
340-970-25-5
The view that all internal costs of identifying and acquiring commercial properties should be deferred and, in some manner, capitalized as part of the cost of successful property acquisitions is not appropriate.
340-970-25-6
Internal costs of preacquisition activities incurred in connection with the acquisition of a property that will be classified as nonoperating at the date of acquisition that are directly identifiable with the acquired property and that were incurred subsequent to the time that acquisition of that specific property was considered probable (that is, likely to occur) shall be capitalized as part of the cost of that acquisition.
340-970-25-7
Paragraph 970-340-25-17 is also applicable in situations in which the acquired property is partially operating and partially nonoperating.
340-970-25-8
Costs incurred on real estate for property taxes and insurance shall be capitalized as property cost only during periods in which activities necessary to get the property ready for its intended use are in progress. The phrase activities necessary to get the property ready for its intended use are in progress is used here with the same meaning as it has for interest capitalization in paragraphs
835-20-25-3 through 25-4
and 835-20-25-8. Costs incurred for such items after the property is substantially complete and ready for its intended use shall be charged to expense as incurred. The phrase substantially complete and ready for its intended use is used here with the same meaning as it has for interest capitalization in paragraph 835-20-25-5.
340-970-25-9
Accounting for costs of amenities shall be based on management's plans for the amenities in accordance with the following:
  1. a
    If an amenity is to be sold or transferred in connection with the sale of individual units, costs in excess of anticipated proceeds shall be allocated as common costs because the amenity is clearly associated with the development and sale of the project. The common costs include expected future operating costs to be borne by the developer until they are assumed by buyers of units in a project.
  2. b
    If an amenity is to be sold separately or retained by the developer, capitalizable costs of the amenity in excess of its estimated fair value as of the expected date of its substantial physical completion shall be allocated as common costs. For the purpose of determining the amount to be capitalized as common costs, the amount of cost previously allocated to the amenity shall not be revised after the amenity is substantially completed and available for use. A later sale of the amenity at more or less than its estimated fair value as of the date of substantial physical completion, less any accumulated depreciation, results in a gain or loss that shall be included in net income in the period in which the sale occurs.
340-970-25-10
Costs of amenities shall be allocated among land parcels benefited and for which development is probable. A land parcel may be considered to be an individual lot or unit, an amenity, or a phase. The fair value of a parcel is affected by its physical characteristics, its highest and best use, and the time and cost required for the buyer to make such use of the property considering access, development plans, zoning restrictions, and market absorption factors.
340-970-25-11
Before an amenity is substantially completed and available for use, operating income (or loss) of the amenity shall be included as a reduction of (or an addition to) common costs. When an amenity to be sold separately or retained by the developer is substantially completed and available for use, current operating income and expenses of the amenity shall be included in current operating results.
340-970-25-12
Incremental revenues from incidental operations in excess of incremental costs of incidental operations shall be accounted for as a reduction of capitalized project costs. Incremental costs in excess of incremental revenue shall be charged to expense as incurred, because the incidental operations did not achieve the objective of reducing the costs of developing the property for its intended use.

Costs Incurred to Sell and Rent Real Estate Projects, Including Initial Rental Operations

340-970-25-16
If costs incurred to rent real estate projects, other than initial direct costs, under operating leases or direct financing leases are related to and their recovery is reasonably expected from future rental operations, they shall be capitalized. Examples are costs of model units and their furnishings, rental facilities, semipermanent signs, grand openings, and unused rental brochures. Costs that do not meet the criteria for capitalization shall be expensed as incurred, for example, rental overhead. Initial direct costs are defined in Topic 842 and the accounting for initial direct costs is prescribed in that Topic.
340-970-25-17
If portions of a rental project are substantially completed and occupied by tenants or held available for occupancy and other portions have not yet reached that stage, the substantially completed portions shall be accounted for as a separate project. Costs incurred shall be allocated between the portions under construction and the portions substantially completed and held available for occupancy.

Initial Rental Operations

340-970-25-18
When a real estate project is substantially completed and held available for occupancy:
  1. a
    Rental operating costs shall be charged to expense when incurred.
  2. b
    All carrying costs (such as real estate taxes) shall be charged to expense when incurred, depreciation on the cost of the project shall be provided.
  3. c
    Costs to rent the project shall be amortized in accordance with paragraph 970-340-35-2.
340-970-25-19
A real estate project shall be considered substantially completed and held available for occupancy upon completion of tenant improvements by the developer but no later than one year from cessation of major construction activity (as distinguished from activities such as routine maintenance and cleanup).

340-970-35Subsequent Measurement

Source downloaded: .Record version 745361c42572. Effective date must be checked in the source.

Real Estate Project Costs

Determining Amounts to Be Capitalized or Expensed

340-970-35-1
Estimates and cost allocations shall be reviewed at the end of each financial reporting period until a project is substantially completed and available for sale. Costs shall be revised and reallocated as necessary for material changes on the basis of current estimates. Changes in estimates shall be reported in accordance with paragraphs
250-10-45-17 through 45-20
and 250-10-50-4.
340-970-35-2
Capitalized rental costs directly related to revenue from a specific operating lease or direct financing lease, other than initial direct costs, shall be amortized over the lease term. Capitalized rental costs, other than initial direct costs, not directly related to revenue from a specific lease shall be amortized over the period of expected benefit. The amortization period shall begin when the project is substantially completed and held available for occupancy. See paragraphs
970-340-25-18 through 25-19
for the definition of substantially completed and held available for occupancy. Initial direct costs are defined in Topic 842 on leases, and the accounting for initial direct costs is prescribed in that Topic. Topic 842 does not address whether a lessee that accounts for the sale or rental of real estate projects under Topic 970 should capitalize rental costs associated with ground and building leases.
340-970-35-3
If an entity subsequently determines that a property will be classified as operating at the date of acquisition, the internal costs of preacquisition activities shall be charged to expense and any additional costs shall be expensed as incurred.
340-970-35-4
If an entity subsequently determines that a property will be classified as nonoperating at the date of acquisition, previously expensed internal costs of preacquisition activities shall not be capitalized as part of the cost of that acquisition.

340-970-40Derecognition

Source downloaded: .Record version dee889f77da7. Effective date must be checked in the source.

Real Estate Project Costs

Rental Costs

340-970-40-2
Estimated unrecoverable amounts of unamortized capitalized rental costs associated with a lease or group of leases shall be charged to expense when it becomes probable that the lease(s) will be terminated.

Related subtopics