APB Opinion No 18 In response to the wide variation in accounting for investments, the in Visual Studio .NET

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APB, in March 1971, issued Opinion No 18, The Equity Method of Accounting for Investments in Common Stock This opinion became applicable to investments in unincorporated ventures, including partnerships, because of an interpretation promulgated in November 1971 AICPA Statement of Position SOP No 78-9 The AICPA recognized the continuing diversity of practice and in December 1978 issued SOP 78-9, Accounting for Investments in Real Estate Ventures This statement was issued to narrow the range of alternative practices used in accounting for investments in real estate ventures and to establish industry uniformity The AICPA currently is reconsidering the guidance in SOP 78-9 as part of a broader project, Equity Method Investments SFAS No 94 In response to the perceived problem of off-balance sheet nancing, of which unconsolidated majority-owned subsidiaries were deemed to be the most signi cant aspect, the FASB issued SFAS No 94, Consolidation of All Majority-Owned Subsidiaries, in October 1987 SFAS No 94 eliminates the concept of not consolidating nonhomogeneous operations and replaces it with the concept that the predominant factor in determining whether an investment requires consolidation should primarily be control rather than ownership of a majority voting interest This Statement is also applicable to investments in unincorporated ventures, including partnerships AICPA Notice to Practitioners, ADC acquisition, development, and construction (ADC ) Loans, February 1986 Recognizing that nancial institutions needed guidance on accounting for real estate acquisition, development, and construction (ADC) arrangements, the AICPA issued this notice (also known as the Third Notice) The notice provides accounting guidance on ADC arrangements that have virtually the same risks and potential rewards as those of joint ventures It determined that accounting for such arrangements as loans would not be appropriate and provides guidance on the appropriate accounting The SEC incorporated the notice into SAB No 71 Views Regarding Financial Statements of Properties Securing Mortgage Loans SAB No 71, and its amendment SAB No 71A, provide guidance to registrants on the required reporting under this notice Also, EITF Issue Nos 84-4 and 86-21, as well as SAB No 71, extend the provisions of this notice to all entities, not just nancial institutions Proposed FASB Interpretation, Consolidation of Certain Special-Purpose Entities (SPEs) The FASB has approved for issuance an Exposure Draft of a proposed Interpretation that establishes accounting guidance for consolidation of SPEs The proposed Interpretation, Consolidation of Certain Special-Purpose Entities, would apply to any business enterprise both public and private companies that has an ownership interest, contractual relationship, or other business relationship with an SPE Under current practice, two enterprises generally have been included in consolidated nancial statements because one enterprise controls the
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308 ACCOUNTING FOR INVESTMENTS IN REAL ESTATE VENTURES
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other through voting ownership interests The proposed Interpretation would explain how to identify an SPE that is not subject to control through voting ownership interests and would require each enterprise involved with such an SPE to determine whether it provides nancial support to the SPE through a variable interest Variable interests may arise from nancial instruments, service contracts, nonvoting ownership interests, or other arrangements If an enterprise holds (1) a majority of the variable interests in the SPE or (2) a signi cant variable interest that is signi cantly more than any other party s variable interest, that enterprise would be the primary bene ciary The primary bene ciary would be required to include the assets, liabilities, and results of the activities of the SPE in its consolidated nancial statements (c) INVESTOR ACCOUNTING ISSUES The accounting literature mentioned above covers many of the special issues investors encounter in practice The major areas are:
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Investor accounting for results of operations of ventures Special accounting issues related to venture losses Investor accounting for transactions with a real estate venture, including capital contributions Financial statement presentation and disclosures
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A controlling investor should account for its income and losses from real estate ventures under the principles that apply to investments in subsidiaries, which usually require consolidation of the venture s operations A noncontrolling investor should account for its share of income and losses in real estate ventures by using the equity method Under the equity method, the initial investment is recorded by the investor at cost; thereafter, the carrying amount is increased by the investor s share of current earnings and decreased by the investor s share of current losses or distributions In accounting for transactions with a real estate venture, a controlling investor must eliminate all intercompany pro t When the investor does not control the venture, some situations require that all intercompany pro t be eliminated, whereas in others, intercompany pro t is eliminated by the investor only to the extent of its ownership interest in the venture For example, as set forth in AICPA SOP 78-9, even a noncontrolling investor is precluded from recognizing any pro t on a contribution of real estate or services to the venture Accounting for other transactions covered by SOP 78-9 includes sales of real estate and services to the venture, interest income on loans and advances to the venture, and venture sales of real estate or services to an investor With regard to nancial statement presentation, a controlling investor is usually required to consolidate venture operations A noncontrolling investor should use the equity method, with the carrying value of the investment presented as a single amount in the balance sheet and the investor s share of venture earnings or losses as a single amount in the income statement The proportionate share approach, which records the investor s share of each item of income, expense, asset, and liability, is not considered acceptable except for legal undivided interests The material above is only a very brief summary of comprehensive publications, and there are exceptions to some of those guidelines In accounting for real estate venture operations and transactions, judgment must be exercised in applying the principles to ensure that economic substance is fairly re ected no matter how complex the venture arrangements (d) ACCOUNTING FOR TAX BENEFITS RESULTING FROM INVESTMENTS IN AFFORDABLE HOUSING PROJECTS The Revenue Reconciliation Act of 1993 provides tax bene ts to investors in entities operating quali ed affordable housing projects The bene ts take the form of tax deductions from operating loses and tax credits In EITF Issue No 94-1, Accounting for Tax Bene ts Resulting from Investments in Affordable Housing Projects, the EITF reached a consensus that a limited partner in a quali ed low income housing project may elect to use the effective yield method (described below) if the following three conditions are met: 1 The availability of the limited partner s share of the tax credits is guaranteed by a creditworthy entity through a letter of credit, tax indemnity agreement or other arrangement
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