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AcSEC Update

Val R. Bitton Partner, Deloitte & Touche AcSEC Member. AcSEC Update. Investors’ Interests in Unconsolidated Real Estate Investments. Scope–Use of the Equity Method Nonvoting common stock or nonredeemable preferred stock, ability to exercise significant influence ( Yes , apply equity method)

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AcSEC Update

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  1. Val R. BittonPartner, Deloitte & ToucheAcSEC Member AcSEC Update

  2. Investors’ Interests inUnconsolidated Real Estate Investments • Scope–Use of the Equity Method • Nonvoting common stock or nonredeemable preferred stock, ability to exercise significant influence (Yes, apply equity method) • “Specific ownership accounts”: GPs, LPs, LLCs, LLPs, regardless of significant influence (Yes, apply equity method) • S corporations, REITs (No, do not apply equity method)

  3. Investors’ Interests inUnconsolidated Real Estate Investments • Application of the Equity Method–HLBV (Hypothetical Liquidation at Book Value) • Balance-sheet-oriented approach to equity method accounting—determine “claim on the investee’s book value,” considering transactions and events that the investee recognizes in accordance with GAAP • Take into account all forms of financial interest—common stock, preferred stock, general or limited partnership interests, debt securities, loans, advances, notes receivable, other obligations

  4. Investors’ Interests inUnconsolidated Real Estate Investments • Basis Differences • Difference between the amount of an investor’s investment in an investee and its claim on the book value of the investee • Attribute the difference(s) to assets or liabilities of the investee, and account for as if the investee were a consolidated subsidiary • Recast Financial Statements approach • Two-Component approach

  5. Investors’ Interests inUnconsolidated Real Estate Investments • Status of Project • Project began in 1991 • In 1998 FASB asked AcSEC to continue project • AcSEC began deliberating a “fresh-start draft” in July 1999 • In January 2000, AcSEC cleared the draft for exposure • Exposure draft comment period ended April 15, 2001 • Many comment letters expressed concern over limited scope of exposure draft (i.e., real estate only) • AcSEC pursuing broad equity method project based on APB 18 • Who should apply the equity method • How should the equity method be applied

  6. PP&E Cost Capitalization Purpose • Address diversity in practice in accounting for expenditures related to PP&E • Original scope applied only to real estate • Expanded to include expenditures (e.g., betterments, overhauls) related to all PP&E • Provide guidance on which expenditures are • Capitalizable as PP&E • Repairs and maintenance to be expensed

  7. PP&E Cost Capitalization • Project stage framework • Preliminary • Preacquisition • Acquisition-or-Construction • In-Service • Capitalization model based on model in FAS 91 andSOP 98-1—more limited capitalization model

  8. PP&E Cost Capitalization • Preliminary Stage Costs • Charge to expense as incurred, except for the cost of an option to acquire PP&E • Preacquisition Stage Costs • Charge to expense as incurred, unless directly identifiable with specific PP&E • Acquisition-or-Construction Stage Costs • Capitalize if directly identifiable with specific PP&E

  9. P&E Cost Capitalization • Directly identifiable costs capitalizable in Preacquisition and Acquisition-or-Construction stages include only: • Incremental direct costs of activities incurred in transactions with independent third parties • Certain entity costs directly related to PP&E activities • Payroll and benefit-related costs of employees to the extent they directly devote time to PP&E activity • Depreciation of machinery and equipment used directly in construction or installation of PP&E • Inventory (including spare parts) used directly in construction or installation of PP&E • Costs to obtain an option to acquire PP&E

  10. PP&E Cost Capitalization • In-Service Stage Costs • Repairs and maintenance costs charged to expense as incurred, unless the costs are for (1) acquisition of additional PP&E or components of PP&E or (2) replacement of existing PP&E or components of PP&E • Removal and relocation costs charged to expense as incurred • Costs of planned major maintenance activities are not a separate PP&E asset • Elimination of accrue in advance, defer and amortize, and built-in overhaul methods

  11. PP&E Cost Capitalization

  12. PP&E Cost Capitalization

  13. PP&E Cost Capitalization • Component Accounting • Component is a part or portion of PP&E that (1) can be separately identified as an asset and depreciated over its own expected useful life and (2) is expected to provide benefit for more than one year • If component has an expected useful life that differs from the PP&E asset, cost should be separately accounted for and depreciated over its expected useful life • If a component is replaced, the new component is capitalized and the old component is written off

  14. PP&E Cost Capitalization • Status of Project • FASB cleared prospectus in February 1999 • AcSEC began deliberations in January 2000 • Revised prospectus cleared in May 2000 • Exposure draft issued June 29, 2001 – comment period ends November 15, 2001

  15. Questions

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