ASC 835-970
Real Estate—General
835 Interest
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This Subtopic governs when an investor-lender may recognize interest income on loans or advances made to a real estate venture (e.g., a joint venture in which the investor holds an equity interest). The core rule is that interest income must be deferred where collectibility is doubtful or other investors may not bear their share of losses; it is recognized in full only where the venture has expensed the interest (or the investor adjusts its equity pickup as if it had); otherwise a portion is deferred in proportion to the investor's interest in the venture's profits and losses (835-970-35-1).
Key points (7)
- The guidance applies to an investor-lender that does not capitalize interest on its own real estate construction and development projects, and only to loans or advances that are not in substance capital contributions (835-970-35-1).
- All interest income must be deferred if collectibility of principal or interest is in doubt — which may be indicated by the absence of adequate collateral or other terms an independent lender would require (835-970-35-1(a)(1)).
- All interest income must also be deferred if there is a reasonable expectation that the other investors will not bear their shares of losses, creating uncertainty about the lender's share of the venture's interest expense (835-970-35-1(a)(2)).
- Full interest income is recorded as earned if neither deferral condition exists and the venture has expensed the interest, or the venture capitalized it but the investor records its equity in venture income or loss as if the interest had been expensed (835-970-35-1(b)).
- Otherwise, interest income is deferred in proportion to the investor's percentage interest in the profits and losses of the venture (835-970-35-1(c)).
- Even under the partial-deferral approach, the investor must perform an evaluation like that in 970-323-35-8 through 35-10 to avoid recognizing interest income on amounts it will ultimately bear as losses (835-970-35-1(c)).
- Certain interest amounts may have to be accounted for as distributions rather than interest income (see 970-323-35-22); Subtopic 835-20 governs interest capitalization.
For students. The point is to stop an equity investor from booking interest income on money it is effectively lending to itself; the common mistake is treating a loan to a venture like any third-party receivable and accruing 100% of the interest, when the codification requires deferral of the investor's proportionate share unless the venture has expensed the interest. Also watch for advances that are "in substance capital contributions," which fall outside this guidance entirely.
Machine-generated study aid for ASC 835-970. Check the source paragraphs below.
835-970-05Overview and Background
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835-970-15Scope and Scope Exceptions
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Overall Guidance
835-970-35Subsequent Measurement
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Income from Loans or Advances to a Venture
- a All interest income on the investor's loans or advances to the venture shall be deferred if either of the following conditions is present:
- 1 Collectibility of the principal or interest is in doubt. This condition may exist if adequate collateral and other terms normally required by an independent lender are not present.
- 2 There is a reasonable expectation that the other investors will not bear their shares of losses, resulting in uncertainty as to the lender's share of the venture's related interest expense.
- 1
- b If neither of the conditions in (a) is present and either the venture has recorded interest as an expense or the venture has capitalized the interest but in order to conform to the investor's accounting policies, the investor has recorded its equity in the income or loss of the venture as if the venture had charged the interest to expense, the entire interest income accrued on loans or advances to a venture shall be recorded as earned.
- c If the conditions in (a) or (b) are not present, a portion of interest income from loans and advances to a venture shall be deferred based on the investor's percentage interest in the profits and losses of the venture. However, an evaluation similar to that discussed in paragraphs for recording the investor's share of losses should be made to avoid recording as interest income amounts that may ultimately be borne as losses by the investor making the loan.