ASC 470-970
Real Estate—General
470 Debt
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This subtopic tells a real estate developer when it must record a liability for infrastructure debt issued by a municipality (special assessments) or by a tax increment financing (TIF) entity. The core rule is a presumption of liability recognition when the assessment levied on each individual property owner is a fixed or determinable amount for a fixed or determinable period (470-970-25-1); if the assessment is not fixed or determinable, no obligation is recorded, but credit support features (shortfall make-up, pledged assets, letters of credit) must be evaluated as contingencies under Topic 450 and possibly as guarantees under Topic 460.
Key points (7)
- A special assessment or TIF assessment that is a fixed or determinable amount for a fixed or determinable period creates a presumption that the property owner recognizes an obligation (470-970-25-1).
- Factors indicating contingent liability for TIF debt—obligation to satisfy annual debt service shortfalls, pledge of entity assets, or a letter of credit or other credit enhancement—require evaluation of recognition under Topic 450 (470-970-25-1).
- If the entity is constructing facilities for its own use or operation, the presence of any of those factors creates a presumption that the TIF debt must be recognized as the entity's obligation (470-970-25-2).
- Agreements to make up debt service shortfalls or to guarantee TIF debt may be guarantees under 460-10-15-4 and subject to Topic 460 initial recognition, initial measurement, and disclosure (470-970-25-3).
- Case A: a municipal special assessment fixed at $5,000 per parcel per year plus interest for 20 years is recognized as an obligation, and a purchaser assuming it recognizes the obligation on the parcels bought (470-970-55-3 through 55-4); Case B reaches the same result for TIF debt with a determinable annual levy even absent a guarantee (470-970-55-8).
- Cases C and D: where the levy depends on the rate of development or on current tax rates and assessed values, it is not fixed or determinable and no obligation is recognized—assessments are treated like property taxes—unless the entity must fund shortfalls or has guaranteed the debt, in which case Subtopic 450-20 applies (470-970-55-11, 55-14).
- TIF entities are often special-purpose entities that may require consolidation analysis under the Variable Interest Entities Subsections of Subtopic 810-10 (470-970-05-3).
For students. The decisive question is not who issued the bonds but whether the assessment on each individual parcel is fixed or determinable in amount and period; students often wrongly assume that because the developer did not guarantee the TIF bonds, no liability can arise—Case B shows recognition without any guarantee, and Cases C–D show that shortfall make-up promises still trigger Topic 450/460 analysis.
tax increment financing entityspecial assessmentfixed or determinable amountdebt service shortfallguaranteeloss contingencyinfrastructure developmentvariable interest entity
Machine-generated study aid for ASC 470-970. Check the source paragraphs below.
470-970-00Status
Source downloaded: .Record version bb975f07ea91. Effective date must be checked in the source.
470-970-00-1
The following table identifies the changes made to this Subtopic.
| Paragraph | Action | Accounting Standards Update | Date |
| 970-470-25-5 | Amended | Accounting Standards Update No. 2014-09 | 05/28/2014 |
470-970-05Overview and Background
Source downloaded: .Record version 6e8717e273cc. Effective date must be checked in the source.
470-970-05-1
This Subtopic provides recognition and implementation guidance on tax increment financing entities.
470-970-05-2
Municipalities often levy special assessments to finance the construction of certain infrastructure assets or improvements or may levy special assessments for other specified purposes. Alternatively, an entity that intends to develop real estate it owns or leases may form a tax increment financing entity to finance and operate the project infrastructure. Tax increment financing entities are authorized under various state statutes to issue bonds to finance the construction of road, water, and other utility infrastructure for a specific project. Usually, all of the debt is issued by the tax increment financing entity and will be repaid by future user fees or taxes assessed to cover operating costs, such as repairs and maintenance, as well as debt service.
470-970-05-3
The Variable Interest Entities Subsections of Subtopic 810-10 address consolidation by business entities of variable interest entities (VIEs), which may include many special-purpose entities of the type used as tax increment financing entities.
470-970-15Scope and Scope Exceptions
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Entities
470-970-15-1
The guidance in this Subtopic applies to tax increment financing entities.
470-970-25Recognition
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Liability for Tax Increment Financing Entity Debt
470-970-25-1
If the special assessment or the assessment to be levied by the tax increment financing entity on each individual property owner is a fixed or determinable amount for a fixed or determinable period, there is a presumption that an obligation shall be recognized by the property owner. Further, with respect to tax increment financing entities, factors such as the following indicate that an entity may be contingently liable for tax increment financing entity debt, and recognition of an obligation shall be evaluated under Topic 450:
- a The entity must satisfy any shortfall in annual debt service obligations.
- b There is a pledge of entity assets.
- c The entity provides a letter of credit in support of some or all of the tax increment financing entity debt or provides other credit enhancements.
470-970-25-2
If the entity is constructing facilities for its own use or operation, the presence of any of the factors in the preceding paragraph creates a presumption that the tax increment financing entity debt must be recognized as an obligation of the entity.
470-970-25-3
An entity's agreement to either make up shortfalls in the annual debt service requirements or guarantee the tax increment financing entity's debt, as described in Example 1, Cases C through D (see paragraphs ), may be guarantees under the characteristics found in paragraph 460-10-15-4 and subject to the initial recognition, initial measurement, and disclosure requirements of Topic 460.
470-970-25-4
See Section 970-470-55 for examples of accounting for special assessments and tax increment financing entities.
470-970-25-5
See Section 974-720-25 for adjustment of assets (or liabilities) transferred between a real estate investment trust and its adviser.
470-970-55Implementation Guidance and Illustrations
Source downloaded: .Record version ce4e752d3637. Effective date must be checked in the source.
Illustrations
470-970-55-1
This Example illustrates the guidance in paragraph 970-470-25-4. The following Cases illustrate the use of municipal bonds and tax increment financing entities for financing the construction of development project infrastructure assets with differing entity obligation impact:
- aMunicipal bonds, entity obligation for special assessment amount (Case A)
- bTax increment financing entity, entity obligation for tax increment financing entity debt (Case B)
- cTax increment financing entity, assessment to individual property owners not fixed or determinable, no entity obligation (Case C)
- dTax increment financing entity, assessment to individual property owners is not fixed or determinable, no entity obligation (Case D).
470-970-55-2
Cases A, B, C, and D share all of the following assumptions:
- aThe entity owns 100 percent of the land under development.
- b$10 million of bonds are issued for construction of the development infrastructure.
- cThe interest rate on the bonds is 6 percent and the term is 20 years.
- dThe annual debt service requirement is $500,000 principal repayment plus interest accrued during the year.
- eThe project is expected to take 10 years to complete, and no significant sales of property are expected until the third year. All of the property under development is intended for sale.
- fThe property under development is subject to lien if there is a default on the assessment.
470-970-55-3
A municipality issues bonds to finance construction of the infrastructure assets. The municipality levies a special assessment on the property that is equal to the face amount of the bonds. The special assessment bears interest at the same rate as the bonds. In this Case, if there are 100 equal-sized parcels in the development, each parcel will be assessed $5,000 per year plus accrued interest for 20 years. The assessment remains with the property. Accordingly, upon sale or partial sale of the development, the entity must pay the remaining assessment on the property sold or the purchaser must assume the obligation.
470-970-55-4
The entity must recognize an obligation for the special assessment because the amount is fixed for a fixed period of time. Subsequent property owners that assume the obligation must recognize the obligation related to the parcels purchased.
470-970-55-5
A tax increment financing entity is formed to issue bonds. On completion of construction of the infrastructure assets, title to such assets (including any land upon which the infrastructure is constructed) passes from the tax increment financing entity to the municipality. The entity does not guarantee the tax increment financing entity debt.
470-970-55-6
Property owners will be subject to a tax on an equal basis determined by the number of lots in the district. The tax will be levied annually, based on the tax increment financing entity's debt service requirement for that year. Accordingly, if there are 100 parcels in the development, $5,000 plus interest accrued for the year is expected to be levied on each parcel annually for the 20 years the debt is outstanding. Additional assessments may be levied by the tax increment financing entity for maintenance or other services. These assessments are in addition to normal property tax assessments.
470-970-55-7
Upon sale of a portion of the property, either the entity must repay a pro rata portion of the tax increment financing entity debt or the purchaser must assume the obligation.
470-970-55-8
The entity must recognize an obligation for the tax increment financing entity debt because the assessment in this example is a determinable amount for a determinable period of time.
470-970-55-9
A tax increment financing entity is formed to issue bonds. On completion of construction of the infrastructure assets, title to such assets (including any land upon which the infrastructure is constructed) passes from the tax increment financing entity to the municipality. The entity does not guarantee the tax increment financing entity debt.
470-970-55-10
The rates for annual assessments are determined prior to issuance of the debt and are limited to a maximum annual tax rate based on anticipated debt service requirements. The rate levied is dependent on the land use category of each parcel of property in the district. Developed property is taxed at the maximum rate, unless a lesser amount is needed to meet current year debt service and maintenance obligations. If the amount levied for developed property is not sufficient, undeveloped property is subject to tax up to the maximum rate. If the maximum rate applied to both developed and undeveloped property is insufficient, additional taxes may be assessed only if approved by eligible voters.
470-970-55-11
Because the assessment on each individual property owner is dependent on the rate of development and, therefore, is not fixed or determinable, an obligation is not required to be recognized. However, if the entity must satisfy any shortfall in annual debt service requirements, recognition of an obligation must be evaluated pursuant to Subtopic 450-20.
470-970-55-12
A tax increment financing entity is formed to issue bonds. On completion of construction of the infrastructure assets, title to such assets (including any land upon which the infrastructure is constructed) passes from the tax increment financing entity to the municipality. The entity does not guarantee the tax increment financing entity debt.
470-970-55-13
The debt service requirements of the tax increment financing entity will be met by normal property tax assessments. The increased value of the developed property is expected to generate sufficient taxes to meet the debt service and other obligations. If such assessments are not sufficient, the municipality must satisfy the shortfall.
470-970-55-14
The assessment on each individual property is not determinable because it is based on the current tax rate and the assessed value of the property. Accordingly, the entity is not required to recognize an obligation. The assessments will be treated as property taxes. If, however, the entity had guaranteed the tax increment financing entity debt or must satisfy any shortfall in annual debt service requirements, the recognition of an obligation would be evaluated pursuant to Subtopic 450-20.