AcSEC Update Val R. Bitton Partner, Deloitte & Touche AcSEC Member

AcSEC UpdateAcSEC Update

Val R. BittonPartner, Deloitte & ToucheAcSEC Member

Investors’ Interests inInvestors’ Interests inUnconsolidated Real Estate InvestmentsUnconsolidated Real Estate Investments

Scope–Use of the Equity MethodScope–Use of the Equity Method Nonvoting common stock or nonredeemable preferred stock, Nonvoting common stock or nonredeemable preferred stock,

ability to exercise significant influence (ability to exercise significant influence (YesYes, apply equity method), apply equity method)

““Specific ownership accounts”: GPs, LPs, LLCs, LLPs, regardless Specific ownership accounts”: GPs, LPs, LLCs, LLPs, regardless of significant influence (of significant influence (YesYes, apply equity method), apply equity method)

S corporations, REITs (S corporations, REITs (NoNo, do not apply equity method), do not apply equity method)


Application of the Equity Method–HLBV Application of the Equity Method–HLBV

(Hypothetical Liquidation at Book Value)(Hypothetical Liquidation at Book Value)

Balance-sheet-oriented approach to equity method Balance-sheet-oriented approach to equity method accountingaccounting——determine “claim on the investee’s book determine “claim on the investee’s book value,” considering transactions and events that the value,” considering transactions and events that the investee recognizes in accordance with GAAPinvestee recognizes in accordance with GAAP

Take into account all forms of financial interestTake into account all forms of financial interest——common common stock, preferred stock, general or limited partnership stock, preferred stock, general or limited partnership interests, debt securities, loans, advances, notes interests, debt securities, loans, advances, notes receivable, other obligationsreceivable, other obligations


Basis DifferencesBasis Differences Difference between the amount of an investor’s investment in an Difference between the amount of an investor’s investment in an

investee and its claim on the book value of the investeeinvestee and its claim on the book value of the investee

Attribute the difference(s) to assets or liabilities of the investee, Attribute the difference(s) to assets or liabilities of the investee, and account for as if the investee were a consolidated subsidiaryand account for as if the investee were a consolidated subsidiary

• Recast Financial Statements approachRecast Financial Statements approach

• Two-Component approachTwo-Component approach


Status of ProjectStatus of Project Project began in 1991Project began in 1991

In 1998 FASB asked AcSEC to continue projectIn 1998 FASB asked AcSEC to continue project

AcSEC began deliberating a “fresh-start draft” in July 1999AcSEC began deliberating a “fresh-start draft” in July 1999

In January 2000, AcSEC cleared the draft for exposureIn January 2000, AcSEC cleared the draft for exposure

Exposure draft comment period ended April 15, 2001Exposure draft comment period ended April 15, 2001

Many comment letters expressed concern over limited scope of Many comment letters expressed concern over limited scope of exposure draft (i.e., real estate only)exposure draft (i.e., real estate only)

AcSEC pursuing broad equity method project based on APB 18AcSEC pursuing broad equity method project based on APB 18

• Who should apply the equity methodWho should apply the equity method

• How should the equity method be appliedHow should the equity method be applied

PurposePurpose

Address diversity in practice in accounting for expenditures Address diversity in practice in accounting for expenditures related to PP&E related to PP&E

Original scope applied only to real estateOriginal scope applied only to real estate

Expanded to include expenditures (e.g., betterments, overhauls) Expanded to include expenditures (e.g., betterments, overhauls) related to all PP&Erelated to all PP&E

Provide guidance on which expenditures are Provide guidance on which expenditures are

Capitalizable as PP&ECapitalizable as PP&E

Repairs and maintenance to be expensedRepairs and maintenance to be expensed

PP&E Cost CapitalizationPP&E Cost Capitalization

Project stage frameworkProject stage framework

PreliminaryPreliminary

PreacquisitionPreacquisition

Acquisition-or-ConstructionAcquisition-or-Construction

In-ServiceIn-Service

Capitalization model based on model in FAS 91 andCapitalization model based on model in FAS 91 andSOP 98-1—more limited capitalization modelSOP 98-1—more limited capitalization model


Preliminary Stage CostsPreliminary Stage Costs Charge to expense as incurred, except for the cost of an option to Charge to expense as incurred, except for the cost of an option to

acquire PP&Eacquire PP&E

Preacquisition Stage CostsPreacquisition Stage Costs

Charge to expense as incurred, unless directly identifiable with Charge to expense as incurred, unless directly identifiable with specific PP&Especific PP&E

Acquisition-or-Construction Stage CostsAcquisition-or-Construction Stage Costs

Capitalize if directly identifiable with specific PP&ECapitalize if directly identifiable with specific PP&E


P&E Cost CapitalizationP&E Cost Capitalization

Directly identifiable costs capitalizable in Preacquisition Directly identifiable costs capitalizable in Preacquisition and Acquisition-or-Construction stages include only:and Acquisition-or-Construction stages include only:

Incremental direct costs of activities incurred in Incremental direct costs of activities incurred in transactions with independent third partiestransactions with independent third parties

Certain entity costs directly related to PP&E activitiesCertain entity costs directly related to PP&E activities

• Payroll and benefit-related costs of employees to the extent Payroll and benefit-related costs of employees to the extent they directly devote time to PP&E activitythey directly devote time to PP&E activity

• Depreciation of machinery and equipment used directly in Depreciation of machinery and equipment used directly in construction or installation of PP&Econstruction or installation of PP&E

• Inventory (including spare parts) used directly in construction Inventory (including spare parts) used directly in construction or installation of PP&Eor installation of PP&E

Costs to obtain an option to acquire PP&ECosts to obtain an option to acquire PP&E

In-Service Stage CostsIn-Service Stage Costs

Repairs and maintenance costs charged to expense as Repairs and maintenance costs charged to expense as incurred, unless the costs are for (1) acquisition of incurred, unless the costs are for (1) acquisition of additional PP&E or components of PP&E or (2) additional PP&E or components of PP&E or (2) replacement of existing PP&E or components of PP&Ereplacement of existing PP&E or components of PP&E

Removal and relocation costs charged to expense as Removal and relocation costs charged to expense as incurredincurred

Costs of planned major maintenance activities are not a Costs of planned major maintenance activities are not a separate PP&E assetseparate PP&E asset

Elimination of accrue in advance, defer and amortize, and Elimination of accrue in advance, defer and amortize, and built-in overhaul methodsbuilt-in overhaul methods



Preliminary Preliminary StageStage

Preacquisition Preacquisition StageStage

Acquisition-or-Acquisition-or-Construction Construction

StageStageIn-ServiceIn-Service

StageStage

TimelineTimeline Prior to time Prior to time when acquisition when acquisition of PP&E of PP&E becomes becomes probableprobable

Acquisition of Acquisition of specific PP&E is specific PP&E is probable but has probable but has not yet occurrednot yet occurred

Acquisition has Acquisition has occurred or occurred or construction has construction has commenced but commenced but PP&E is not yet PP&E is not yet substantially substantially complete and complete and ready for its ready for its intended useintended use

Subsequent to Subsequent to when PP&E is when PP&E is substantially substantially complete and complete and ready for its ready for its intended useintended use

Sample ActivitiesSample Activities Consideration of Consideration of alternatives, alternatives, feasibility studies, feasibility studies, activities activities occurring prior to occurring prior to decision to select decision to select specific PP&Especific PP&E

Surveying, Surveying, zoning, zoning, engineering, engineering, design layouts, design layouts, traffic studies traffic studies (these may also (these may also occur during the occur during the preliminary preliminary stage)stage)

Acquisition, Acquisition, construction, or construction, or installation of installation of PP&E; PP&E; engineering engineering work, design work, design workwork

Replacements, Replacements, additions to additions to existing PP&E, existing PP&E, repairs and repairs and maintenancemaintenance


Preliminary Preliminary StageStage

Preacquisition Preacquisition StageStage

Acquisition-or-Acquisition-or-Construction Construction

StageStageIn-ServiceIn-Service

StageStage

Accounting for Accounting for costs directly costs directly identifiable with identifiable with specific PP&Especific PP&E

ExpenseExpense Capitalize Capitalize certain costscertain costs

Capitalize Capitalize certain costscertain costs

Capitalize Capitalize replacements and replacements and additions; expense additions; expense repairs and repairs and maintenance; maintenance; expense net book expense net book value of replaced value of replaced PP&EPP&E

Accounting for Accounting for general and general and administrative, administrative, overhead, and overhead, and support function support function costscosts

ExpenseExpense ExpenseExpense ExpenseExpense ExpenseExpense

Component AccountingComponent Accounting

Component is a part or portion of PP&E that (1) can be Component is a part or portion of PP&E that (1) can be separately identified as an asset and depreciated over its separately identified as an asset and depreciated over its own expected useful life and (2) is expected to provide own expected useful life and (2) is expected to provide benefit for more than one yearbenefit for more than one year

If component has an expected useful life that differs from If component has an expected useful life that differs from the PP&E asset, cost should be separately accounted for the PP&E asset, cost should be separately accounted for and depreciated over its expected useful lifeand depreciated over its expected useful life

If a component is replaced, the new component is If a component is replaced, the new component is capitalized and the old component is written offcapitalized and the old component is written off


Status of ProjectStatus of Project

FASB cleared prospectus in February 1999FASB cleared prospectus in February 1999

AcSEC began deliberations in January 2000AcSEC began deliberations in January 2000

Revised prospectus cleared in May 2000Revised prospectus cleared in May 2000

Exposure draft issued June 29, 2001 – Exposure draft issued June 29, 2001 – comment period ends November 15, 2001comment period ends November 15, 2001


QuestionsQuestions

Documents

AcSEC Update Val R. Bitton Partner, Deloitte & Touche AcSEC Member