As we reach the midpoint of the winter peak audit season, we have been working closely with clients on a range of matters as they navigate an evolving real estate landscape. We have also seen several significant transactions and recurring themes, and we have compiled a list of topics we are discussing most frequently with management teams and audit committees.
1. Treatment and disclosure of significant construction-related commitments.
These commitments are often disclosure-only items in the footnotes; however, management should assess whether any portion meets the definition of a liability that must be recognized under U.S. GAAP. In addition, it is important to evaluate the appropriate statement of cash flows classification for related cash payments, so users of the financial statements have a clear view of how cash was used during the period.
2. Expiring debt and related interest rate swaps.
We are seeing many entities with upcoming debt maturities and associated interest rate swaps approaching settlement. Key considerations to evaluate at period end include:
- Management’s plans and ability to extend or refinance the debt, particularly when refinancing is not completed by year end or the debt matures within the next 12-month period immediately after the date of the audit report.
- The expected impact on future cash flows and liquidity based on the terms of any new or modified debt (for example, changes in interest rate, amortization, or covenant requirements).
- The accounting for swap settlement or termination (including the income statement impact, related cash flow classification, and whether hedge accounting continues to apply through the settlement date).
3. Navigating dispositions: when does held-for-sale accounting apply?
Transaction activity is beginning to pick up again in the real estate market. As dispositions become more common, it is important to assess whether held-for-sale accounting applies to a property (or disposal group) that management intends to sell. Under U.S. GAAP, entities should evaluate the applicable criteria in the guidance, including the following six considerations:
- Management, with appropriate authority, commits to a plan to sell the asset.
- The asset is available for immediate sale in its present condition, subject only to terms that are usual and customary for such sales.
- An active program to locate a buyer and complete the plan has been initiated (for example, marketing efforts).
- The sale is probable and is expected to be completed within one year, subject to limited exceptions in the guidance.
- The asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value.
- Actions required to complete the plan indicate that it is unlikely the plan will be significantly changed or withdrawn.
If all criteria are met, held-for-sale classification may trigger additional measurement, presentation, and disclosure requirements. If management plans to exit a property through a transaction other than an outright sale (for example, a contribution, foreclosure, or other restructuring), different accounting considerations may apply. Lastly, an important distinction, that if the project is being constructed for the express purpose of a sale to another party, the presumption is that the asset is held for sale and entities should apply the guidance accordingly.
About Schneider Downs Real Estate Services
The Schneider Downs Real Estate industry group provides accounting, tax and consulting services to clients nationally and internationally. Our real estate group meets our clients’ needs by providing value-added solutions in all areas of real estate ownership, including commercial, industrial, residential, multi-family, student housing, hotel and land development.
To learn more, visit our Real Estate Industry Group page.
