Reporting Requirements for Annual Financial Reports of State Agencies and Universities

Specialized Accounting

Sale of Real Estate

General Summary

GASB 62 modifies or supersedes FASB and AICPA pronouncements prior to Nov. 30, 1989. GASB 62 establishes accounting standards for recognizing profit or loss on sales of real estate. For retail land sales, GASB 62 requires:

• The seller’s receivables from the land sales are collectible.
• The seller has no significant remaining obligations for construction or development before profits are recognized by the full accrual method.

For Real Estate Sales Other Than Retail Land Sales, GASB 62 provides for profit recognition by the full accrual and several other methods, depending on the following factors:

• Whether a sale has been consummated
• The extent of the buyer’s investment in the property being sold
• Whether the seller’s receivable is subject to future subordination
• The degree of the seller’s continuing involvement with the property after the sale

Report Retail Land Sales projects under either the percentage-of-completion or the installment method, for which GASB 62 establishes the following criteria:

• Collectability of the seller’s receivables from the land sales
• The seller’s remaining obligations

Description of Specific Methods of Accounting for Real Estate Sales Transactions

Installment Method — The installment method allocates each cash receipt and principal payment by the buyer on debt assumed between the cost recovered and the gain. The apportionment is in the same ratio as the total cost and total gain to the sales value.

Cost Recovery Method — Under the cost recovery method, no gain is recognized until the cash payments remitted by buyer (including principal and interest on debt due to the seller and on existing debt assumed by the buyer) exceed the seller’s cost of the property sold. Any receivable less the unrecognized gain must not exceed what the depreciated property value would be if the property had not sold.

Deposit Method — The seller does not recognize any gain (nor record notes receivable) and continues to report the property and the related existing debt in its financial statements even if it has been assumed by the buyer. The seller also discloses those items that are subject to a sales contract. The seller can continue to recognize depreciation expense for the property for which deposits have been received.

Reduced Gain Method — This method is determined by discounting the receivable from the buyer to the present value of the lower level of annual payments required by the sales contract over no more than 20 years and excluding requirements to pay lump sums. Calculate the present value using an appropriate interest rate — but not less than the rate stated in the sales contract.

Full Accrual Method — Retail Land Sales

Account for revenues and costs under the full accrual method by:

• Discounting the net receivable to the present value of the payments required. Determine the present value using an appropriate interest rate — not less than the rate stated in the sales contract.
• Providing an allowance for receivables that are not expected to be collected because of the cancellation in subsequent periods. Charge receivable balances applicable to cancelled contracts in its entirety to the allowance for contract cancellations when those contracts are cancelled.
• Basing the costs of sales (land and improvement costs incurred, carrying costs, etc.) on the sales net of those sales expected to be cancelled in future periods.

Percentage-of-Completion Method — Retail Land Sales

Measure the amount of revenue recognized (the discounted contract price) at the time a sale is recognized by the relationship of the costs already incurred to the total estimated costs to be incurred — including costs of the marketing effort. If performance is incomplete, recognize the portion of revenue related to costs not yet incurred as the costs are incurred.

Real Estate Sales Other Than Retail Land Sales

Use the full accrual method and recognize gain until the sale is consummated — where the earnings process is virtually complete, and the seller is not obligated to perform significant activities after the sale.

• Buyer’s initial and continuing investments are adequate to demonstrate a commitment to pay for the property.
• Ensure that the seller’s receivable will not be subject to future subordination.
• Seller has transferred (to the buyer) the usual risks and rewards of ownership in a transaction that is, in substance, a sale and does not have a substantial continuing involvement with the property.

If a real estate sales transaction does not satisfy the above criteria for recognition of gain by the full accrual method, account for the transaction using the deposit method until a sale has been consummated. A sale is consummated when the following conditions are met:

• Contract is binding
• Considerations have been exchanged
• Permanent financing has been arranged
• Closing conditions have been met

Some initial or continuing investments may not qualify for the recognition of gain by the full accrual method. If recovery of the cost of the property is reasonably assured if the buyer defaults, the installment method is used. In this case, if the recovery of the cost of the property is not reasonably assured if the buyer defaults or the cost has already been recovered and collection of additional amounts is uncertain, use the cost recovery method or the deposit method. Use the cost recovery method to account for sales of real estate for which the installment method would be appropriate. The cost recovery method is also used if the seller’s receivable is subject to future subordination. If the seller has some form of continuing involvement with the property, account for the transaction according to the nature of the involvement.

Retail Land Sales

Apply a single method of recognizing a gain to all sales transactions within a project that have been completed. That method of recognizing a gain changes when certain conditions are met for the entire project.

Apply the full accrual method of recognizing a gain to all sales transactions within a project that have been completed and the following conditions exist:

• The refund period has expired as required by local law in the seller’s policy or specified in contract.
• Cumulative payments of principal and interest equal or exceed 10 percent of the contract sales price.
• Collection experience for this project in which the sale is made indicates a high level of collectability of the receivables. A down payment of 20 percent is an acceptable indication of collectability.
• The receivable from the sale is not subject to subordination to new loans on the property.
• If the collection experience on subordination contracts is the same as the collection experience on contracts not subordinated, then contract subordination is permissible on new loan contracts of individual lot buyers for home construction purposes.
• The seller is not obligated to complete the improvements of lots sold or to construct amenities or other facilities applicable to lots sold.

If the above conditions are not met, apply the percentage-of-completion method to a sale that meets all the following conditions:

• The period of cancellation regarding the refund has expired.
• The cumulative payments equal or exceed 10 percent.
• Applicable receivables are collectable.
• Such receivables are not subject of subordination.
• The project’s improvements have progressed beyond preliminary stages.
• Development of the land is practical for the purposes represented.

Apply the installment method of accounting to a sale that has all the following conditions:

• The period of cancellation regarding the refund has expired.
• Cumulative payments of principal and interest equal or exceed 10 percent of the contract sales price.
• The seller is financially capable of meeting all financial representations made in the contract and is able to fund planned improvements in the project when required.