ASC

ASC 720-974

Real Estate—Real Estate Investment Trusts

720 Other Expenses

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In brief

IntermediateRecognitionPresentationDisclosureIndustry-specific

This subtopic governs how a real estate investment trust (REIT) accounts for "operating support" received from its external adviser — arrangements designed to guarantee the REIT a certain return, such as buying loans or property above fair value, debt forgiveness, advisory fee reductions, compensating balances, or cash payments. The REIT must adjust any transferred assets or liabilities to fair value at the transaction date and recognize the support effectively obtained as income or as a reduction of advisory fees. The effect of these transactions must be reported separately in the income statement and fully disclosed as a related party relationship.

Key points (6)
  • Adviser support methods that can produce a guaranteed return to the REIT include purchasing a loan or property above fair value, forgiving indebtedness, reducing advisory fees, providing compensating balances, and outright cash payments (720-974-25-1).
  • Accounting for operating support requires adjusting assets or liabilities transferred between the REIT and its adviser to fair value as of the transaction date (720-974-25-2(a)).
  • Alternatively (or additionally), the operating support effectively obtained is recognized as income or as a reduction of advisory fees (720-974-25-2(b)).
  • The effect of operating support transactions must be reported separately in the income statement (720-974-45-1).
  • A REIT receiving operating support must make full disclosure of the relationship between the parties and the nature and amount of the transactions (720-974-50-1).
  • Scope follows the Overall REIT Subtopic, Section 974-10-15 (720-974-15-1).

For students. The point is substance over form: an adviser cannot dress up a subsidy as an ordinary purchase or fee arrangement — the excess over fair value is income (or a fee reduction) that must be shown separately, not buried in operating results. A common misunderstanding is treating an above-fair-value asset purchase by the adviser as a normal sale rather than recognizing support income and writing the transferred asset to fair value.

real estate investment trustoperating support from adviseradvisory feesfair value adjustment on transferrelated party transactionsseparate income statement presentationdebt forgivenesscompensating balances

Machine-generated study aid for ASC 720-974. Check the source paragraphs below.

720-974-00Status

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720-974-05Overview and Background

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720-974-05-1
This Subtopic addresses recognition, disclosure, and other presentation matters for real estate investment trusts.

720-974-15Scope and Scope Exceptions

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Overall Guidance

720-974-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 974-10-15.

720-974-25Recognition

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Operating Support of the Real Estate Investment Trust by the Adviser

720-974-25-1
Various methods are employed by advisers to ensure a certain return to the real estate investment trust for certain periods. Some of these methods are:
  1. a
    Purchasing a loan or a property at an amount in excess of fair value
  2. b
    Forgiving indebtedness
  3. c
    Reducing advisory fees
  4. d
    Providing required compensating balances
  5. e
    Making outright cash payments.
720-974-25-2
Accounting by a real estate investment trust for operating support from its adviser would include either of the following:
  1. a
    Adjustment of any assets (or liabilities) which will be transferred between the entities to fair value as of the date of the transaction
  2. b
    Recognition, as income or as a reduction of advisory fees, of the operating support effectively obtained.

720-974-45Other Presentation Matters

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Operating Support of the Real Estate Investment Trust by the Adviser

720-974-45-1
The effect of the operating support transactions described in paragraphs 974-720-25-2 and 974-720-50-1 shall be reported separately in the income statement.

720-974-50Disclosure

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Operating Support of the Real Estate Investment Trust by the Adviser

720-974-50-1
A real estate investment trust with operating support from its adviser shall make full disclosure of the relationship between the parties and the nature and amount of the transactions.

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