EITF ABSTRACTS. Title: Accounting by a Real Estate Investment Trust for an Investment in a Service Corporation

Transcription

1 EITF ABSTRACTS Issue No Title: Accounting by a Real Estate Investment Trust for an Investment in a Service Corporation Dates Discussed: July 20-21, 1995; September 20-21, 1995 References: FASB Statement No. 13, Accounting for Leases FASB Statement No. 57, Related Party Disclosures FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects FASB Statement No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases FASB Statement No. 94, Consolidation of All Majority-Owned Subsidiaries FASB Statement No. 154, Accounting Changes and Error Corrections FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R) FASB Interpretation No. 35, Criteria for Applying the Equity Method of Accounting for Investments in Common Stock FASB Interpretation No. 46, Consolidation of Variable Interest Entities FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities FASB Preliminary Views, Consolidation Policy, dated August 26, 1994 FASB Special Report, A Guide to Implementation of Statement 91 on Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases: Questions and Answers FASB Staff Position FIN46-6, Effective Date of FASB Interpretation No. 46 AICPA Accounting Research Bulletin No. 51, Consolidated Financial Statements APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock APB Opinion No. 20, Accounting Changes AICPA Accounting Interpretation 1, Intercompany Profit Elimination under Equity Method, of APB Opinion No. 18 AICPA Audit and Accounting Guide, Audits of Investment Companies AICPA Statement of Position 78-9, Accounting for Investments in Real Estate Ventures SEC Regulation S-X, Rule 3A-02(a), Consolidated Financial Statements of the Registrant and Its Subsidiaries Page 1

2 ISSUE Real estate investment trusts (REITs) generally are formed as trusts, associations, or corporations. REITs must distribute substantially all of their taxable income to their shareholders annually in order to retain their favorable tax status (that is, dividends paid are treated as deductions in arriving at taxable income). The Internal Revenue Code imposes certain restrictions on the types of operating activities that a REIT can perform and still retain its qualification as a REIT. Accordingly, in some cases, a REIT will establish a service corporation (SC) to perform services for the REIT or for third parties. SCs may provide property management and leasing services, as well as services to acquire, develop, construct, finance, or sell real estate projects. For federal income tax purposes, a REIT is not permitted to own more than 10 percent of the voting stock of an SC. A REIT may own a minimal voting interest and a substantial nonvoting preferred stock or nonvoting common stock interest in the SC, thereby enabling substantially all of the economic benefits of the SC to flow to the REIT. The majority owners of the voting stock of the SC may be the sponsors, officers, or affiliates of the REIT, but generally there are no restrictions on the transfer of the voting stock. Generally, the owners of the majority of the SC's voting common stock contribute minimal amounts of equity to the SC. The issues are: 1. Whether the SC is an independent third party, as that term is used in Statement 91 for purposes of determining the amount of costs to be capitalized by the REIT for leasing services 2. How a REIT should account for its investment in an SC (cost method, equity method, or consolidation) when substantially all of the economic benefits generated by the SC are for the benefit of the REIT. Page 2

3 EITF DISCUSSION The Task Force reached a consensus that, regardless of the method of accounting used by a REIT for its investment in an SC, the SC should not be considered an independent third party and the amount of costs capitalized by the REIT for leasing services provided by the SC should be no greater than the amount of costs that would have been capitalized under Statement 13, as amended by Statement 91, had the REIT incurred the costs directly. The Task Force also reached a consensus that the existence of some or all of the following factors indicates that the REIT has the ability to exercise at least significant influence over the SC and that, accordingly, the REIT should not account for its investment in the SC using the cost method. 1. The SC performs activities primarily for the REIT. 2. Substantially all of the economic benefits in the SC flow to the REIT. 3. The REIT has the ability to designate a seat on the board of directors of the SC. 4. The REIT and the SC have common board members. 5. The REIT and the SC have common officers, employees, or both. 6. The owners of the majority voting stock of the SC have not contributed substantial equity to the SC. 7. The views of the REIT's management influence the operations of the SC. 8. The REIT is able to obtain financial information from the SC that is needed to apply the equity method of accounting to its investment in the SC. Task Force members agreed that the determination of whether the REIT should use the equity method of accounting for its investment in the SC or consolidate the SC in its financial statements should be based on facts and circumstances. [Note: This consensus has been partially nullified by Interpretation 46 and Interpretation 46(R). See STATUS section.] Task Force members observed that the guidance in Opinion 20 for reporting a change in a reporting entity should be followed if the application of the second consensus in this Issue results in a change in the method of accounting by a REIT for its investment in an SC. [Note: See STATUS section.] The Task Force reached a consensus that a restatement Page 3

4 should be reported in the next annual financial statements issued by the REIT after September 21, Task Force members agreed that the first consensus in this Issue should be applied prospectively as of July 21, STATUS Interpretation 46 and Interpretation 46(R) nullify the consensus in this Issue for service corporations that are variable interest entities as described in Interpretation 46 and Interpretation 46(R). If a service corporation is a variable interest entity, it is subject to the requirements of the applicable Interpretation, and the consensus in this Issue does not apply. If a service corporation is not a variable interest entity, the consensus in this Issue continues to apply. Interpretation 46 was issued in January The consolidation requirements of Interpretation 46 apply immediately to variable interest entities created after January 31, The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, Certain of the disclosure requirements apply to all financial statements issued after January 15, 2003, regardless of when the variable interest entity was established. FSP FIN46-6 deferred the effective date for applying the provisions of Interpretation 46 for: 1. Interests held by a public entity in variable interest entities created before February 1, 2003, if the public entity has not issued financial statements reporting that interest in accordance with Interpretation 46. The application of Interpretation 46 to those interests is deferred until the end of the first period ending after December 15, Nonregistered investment companies accounting for their investments in accordance with the specialized accounting guidance in the investment company Guide. Page 4

5 Interpretation 46(R) was issued on December 24, 2003, and replaced Interpretation 46. An enterprise with an interest in an entity to which the provisions of Interpretation 46 were not applied as of December 24, 2003, must apply the effective date and transitions provisions in Interpretation 46(R) to that entity. Application by public companies of Interpretation 46 or Interpretation 46(R) to entities commonly referred to as specialpurpose entities is required no later than as of the end of the first reporting period that ends after December 15, Public enterprises must apply Interpretation 46(R) to all entities no later than the end of the first reporting period that ends after March 15, 2004 (public enterprises other than small business issuers) or December 15, 2004 (small business issuers). Nonpublic enterprises must apply Interpretation 46(R) to entities created after December 31, 2003, immediately and to all other entities by the beginning of the first annual period beginning after December 15, An enterprise that has applied Interpretation 46 to an entity prior to the effective date of Interpretation 46(R) shall either continue to apply Interpretation 46 until the effective date of Interpretation 46(R) or apply Interpretation 46(R) at an earlier date. Statement 167 was issued in June 2009 and amends Interpretation 46(R). Statement 167 shall be effective as of the beginning of each reporting entity s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. Interpretation 46(R), as amended by Statement 167, addresses consolidation of variable interest entities. Statement 154, issued in May 2005, supersedes Opinion 20. Statement 154 carries forward many provisions of Opinion 20 without change, including the provisions related to the reporting of a change in accounting estimate, a change in the reporting entity, and the correction of an error. Page 5

6 No further EITF discussion is planned. Page 6

7 Index Entries for Issue No LEASES Real Estate.. Capitalization of Fees Paid to a Service Corporation 95-6 PARTNERSHIPS Real Estate Investment Trust (REIT).. Accounting by a REIT for an Investment in a Service Corporation 95-6 REAL ESTATE Real Estate Investment Trusts (REITs).. Accounting by a REIT for an Investment in a Service Corporation 95-6 Page 7