Wiley GAAP 2008

Profit Recognition on Real Estate Sales Perspective and Issues

The substance of a sale of any asset is that the transaction unconditionally transfers the risks and rewards of ownership to the buyer. However, the economic substance of many real estate sales is that the risks and rewards of ownership have not been clearly transferred. The turbulent and cyclical environments in the real estate and debt markets have led to the evolution of many complex methods of financing real estate transactions. For example, in some transactions the seller, rather than an independent third party, finances the buyer, while in others, the seller may be required to guarantee a minimum return to the buyer or continue to operate the property for a specified period of time. In many of these complex transactions, the seller still has some association with the property even after the property has been sold. The question that must be answered in these transactions is: At what point does the seller become disassociated enough from the property that profit may be recognized on the transaction?

Accounting for sales of real estate is governed by FAS 66. FIN 43 clarifies that sales of real estate under FAS 66 include property that has improvements or integral equipment not movable without incurring significant costs. Due to the complex nature of these real estate transactions, FAS 66 is very detailed and complex. The purpose of this section is to present the guidelines that need to be considered when analyzing ...