Minority interests in certain REITs and conversion of a loan into a debt security in a debt restructuring.Statement on Auditing Standards no. 69, The Meaning of "Present Fairly in Conformity With Generally Accepted Accounting Principles The standard accounting rules, regulations, and procedures used by companies in maintaining their financial records. Generally accepted accounting principles (GAAP) provide companies and accountants with a consistent set of guidelines that cover both broad accounting " in the Independent Auditor's Report Auditor's Report Recorded in the annual report, the auditor's report tests to see that a corporation's financial statements comply with GAAP. This is sometimes referred to as the clean opinion. Notes: Most auditor's reports consist of three paragraphs. , identifies Financial Accounting Standards Board Financial Accounting Standards Board (FASB) Board composed of independent members who create and interpret Generally Accepted Accounting Principles (GAAP). emerging issues task force (EITF EITF Emerging Issues Task Force EITF Edinburgh International Television Festival EITF Europe International Taekwon-Do Federation ) consensuses as sources of established generally accepted accounting principles. This month's column includes our annual roundup of EITF issues covering the January 20 through November 17, 1994, meetings (see the sidebar (1) A Windows Vista desktop panel that holds mini applications (gadgets) such as a calendar, calculator, stock ticker and Vonage phone dialer. It is the Windows counterpart to the Dashboard in the Mac. See Windows Vista and gadget. on page 86). In addition, two consensuses on the treatment of minority interests in certain real estate investment trusts (REITs) and accounting for the conversion of a loan into a debt security in a troubled debt restructuring troubled debt restructuring See debt restructuring. are summarized. The summaries are presented in the order of importance from broad to narrow applicability. EITF Abstracts, copyrighted by the FASB FASB See: Financial Accounting Standards Board FASB See Financial Accounting Standards Board (FASB). , is available in soft-cover and loose-leaf versions and may be obtained by contacting the FASB order department at 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116. Phone: (203) 847-0700. ISSUE NO. 94-2 Typical umbrella partnership real estate investment trust (UPREIT) transactions include the formation of an operating partnership by a sponsor that contributes real estate properties and related debt to the operating partnership in exchange for a limited partnership interest. At the same time, a REIT REIT See: Real Estate Investment Trust REIT See real estate investment trust (REIT). is formed that raises funds in the public market and invests the net proceeds Net Proceeds The amount received after all costs are deducted from the sale of a piece of property or security. Notes: In the case of an investor selling a security, net proceeds represent the proceeds from the sale minus any trading costs (i.e. commissions). in exchange for a majority interest (general partner) while the sponsor retains a minority interest in the operating partnership. Because of its controlling financial interest the REIT must consolidate the operating partnership. The REIT reports the assets and liabilities controlled by the sponsor in its consolidated financial statements Consolidated Financial Statements The combined financial statements of a parent company and its subsidiaries. Notes: Because consolidated financial statements present an aggregated look at the financial position of a parent and its subsidiaries, they enable you to gauge at the sponsor's historical cost basis in accordance with Securities and Exchange Commission Staff Accounting Bulletin no. 48, Transfer of Assets The conveyance of something of value from one person, place, or situation to another. The law recognizes that persons are generally entitled to transfer their assets to whomever they wish and for whatever reason. The most common means of transfer are wills, trusts, and gifts. by Promoters and Shareholders. EITF Issue no. 94-2, Treatment of Minority Interests in Certain Real Estate Investment Trusts, provides guidance for reporting, in the REIT's consolidated financial statements, the sponsor's interest in the operating partnership. Questions have been raised about whether the sponsor's minority interest should be displayed as a minority interest or as one of two classes of ownership interests reflected in shareholder's equity. A corollary corollary: see theorem. question is how to determine the amount of the sponsor's interest. Some believe that the sponsor's minority interest should be calculated after reflecting the proceeds of the REIT's purchase because the operating partnership had been 100% owned by the sponsor before the purchase of the majority interest. This would create a larger amount than if the sponsor's interest had been calculated before reflecting the proceeds. The issue is how, and at what amount, should the sponsor's interest in the operating partnership be reported in the REIT's consolidated financial statements? The EITF reached a consensus that the sponsor's interest in the operating partnership should be reported as a minority interest in the REIT's consolidated financial statements. The EITF agreed the net equity of the operating partnership, after the contributions of the sponsor and the REIT, multiplied by the sponsor's ownership percentage in the operating partnership, represents the amount to be reported to be spoken of; to be mentioned, whether favorably or unfavorably. See also: Report initially as minority interest in the REIT's consolidated financial statements. The EITF also reached a consensus that provides implementation guidance for UPREIT transactions completed before this consensus. See EITF Abstracts for details. ISSUE NO. 94-8 EITF Issue no. 94-8, Accounting for Conversion of a Loan into a Debt Security in a Debt Restructuring Debt Restructuring A method used by companies with outstanding debt obligations to alter the terms of the debt agreements in order to achieve some advantage. Notes: , addresses an issue that may arise in debt restructuring transactions in the future due to the application of FASB Statement FASB Statement A standard set by the Financial Accounting Standards Board regarding a financial accounting and reporting method. Essentially, FASB statements determine the acceptable accounting practices that Certified Public Accountants use in reporting no. 115, Accounting for Certain Investments in Debt and Equity Securities. Statement no. 115, which applies to marketable equity securities and all debt securities, requires that securities classified as available for sale or trading be reported at fair value. According to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. FASB Technical Bulletin no. 94-1, Application of Statement 115 to Debt Securities Restructured in a Troubled Debt Restructuring, securities received in connection with a debt restructuring are subject to Statement no. 115. In some restructurings the creditor receives a debt security issued by the original debtor with a fair value that differs from the creditor's basis in the loan on the date of the restructuring. Statement no. 115 does not specify how to treat a difference between the basis in the loan being restructured and the fair value of the debt security received on the date of restructuring--in other words, how to treat a recovery or further write-down in value that exists at the restructuring date. The issues are determining (1) the creditor's initial cost basis of the debt security received in the restructuring of a loan and (2) how the creditor should account for any difference between its basis in the loan and the security's fair value at the restructuring date. The EITF reached a consensus that the creditor's initial cost basis of a debt security received as part of a debt restructuring should be the security's fair value at the restructuring date. Any excess of the security's fair value received over the net carrying amount of the loan should be recorded as a recovery on the loan. Any excess of the net carrying amount of the loan over the fair value of the security received should be recorded as a charge-off to the allowance for credit losses. The EITF also reached a consensus that a security received in a restructuring in settlement of a claim for only the past-due interest on a loan should be measured at the security's fair value at the restructuring date and accounted for in a manner consistent with the entity's policy for recognizing cash received for past-due interest. For both consensuses, subsequent to the restructuring, the security should be accounted for according to the provisions of Statement no. 115. EXECUTIVE SUMMARY * EITF Issue no. 94-2 Accounting problem: Should the REIT, in its consolidated financial statements, report the sponsor's interest in the operating partnership as a minority interest? Consensus: Yes. * EITF Issue no. 94-8 Accounting problem: (1) Should the creditor's initial cost basis of a debt security received in the restructuring of a loan be the security's fair value at the restructuring date and should any excess/(deficit) of the security's fair value received over/(under) the loan's net carrying amount be recorded as a recovery of the loan or a charge-off to the allowance for credit losses? (2) Should a security received in a debt restructuring in settlement of a claim for only the past-due interest on a loan be measured at the security's fair value at the restructuring date and accounted for in a manner consistent with the entity's policy for recognizing cash received for past-due interest? Consensuses: (1) Yes. (2) Yes. ANNUAL ROUNDUP OF EITF ISSUES DISCUSSED IN 1994 (JANUARY 20, 1994 THROUGH NOVEMBER 17, 1994) Issue no. 93-17 Title Recognition of Deferred Tax Assets for a Parent Company's Excess Tax Basis in the Stock of a Subsidiary That Is Accounted for as a Discontinued Operation discontinued operation A segment of a business that has been abandoned or sold or for which plans for one or another of these actions have been approved. See also continuing operations. Status Consensus reached 1/20/94 Issue no. 93-18 Title Recognition of Impairment Impairment 1. A reduction in a company's stated capital. 2. The total capital that is less than the par value of the company's capital stock. Notes: 1. This is usually reduced because of poorly estimated losses or gains. 2. for an Investment in a Collateralized Mortgage Obligation Collateralized mortgage obligation (CMO) A security backed by a pool of pass-through rates , structured so that there are several classes of bondholders with varying maturities, called tranches. Instrucment or in a Mortgage-Backed Interest-Only Certificate Status Consensus reached on issue (1) 1/20/94; consensuses reached on issues (2) and (3) 3/24/94 Issue no. 94-1 Title Accounting for Tax Benefits Resulting from Investments in Affordable Housing Projects Status Tentative conclusions reached 9/21-22/94; consensuses reached on certain of the tentative conclusions 11/17/94; to be discussed at a future meeting Issue no. 94-2 Title Treatment of Minority Interests in Certain Real Estate Investment Trusts Status Consensus reached 9/21-22/94; consensus reached 11/17/94 on applicability of the 9/21-22/94 consensus; implementation issues In the Business world, companies frequently set-up a connection between which they transfer data. When the connection is being set-up, it is referred to as implementation. When issues occur during this phase, they are known as implementation issues. to be discussed at a future meeting Issue no. 94-3 Title Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) Status Consensuses reached 5/19/94 on employee termination costs; 5/19/94 consensuses modified 11/17/94; consensuses reached 11/17/94 on other exit costs Issue no. 94-4 Title Classification of an Investment in a Mortgage-Backed Interest-Only Certificate as Held-to-Maturity Status No consensus reached Issue no. 94-5 Title Determination of What Constitutes All Risks and Rewards and No Significant Unresolved Contingencies in a Sale of Mortgage Loan Servicing Loan servicing is the process by which a mortgage bank or subservicing firm collects the timely payment of interest and principal from borrowers. The level of service varies depending on the type loan and the terms negotiated between the firm and the investor seeking their services. Rights under Issue No. 89-5 Status Consensuses reached 9/21-22/94; implementation issues to be discussed at a future meeting Issue no. 94-6 Title Accounting for the Buyout of Compensatory Stock Options Status Consensus reached 9/21-22/94; 9/21-22/94 consensus extended and consensus reached 11/17/94 Issue no. 94-7 Title Accounting for Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock Status To be discussed at a future meeting Issue no. 94-8 Title Accounting for Conversion of a Loan into a Debt Security in a Debt Restructuring Status Consensuses reached 9/21-22/94 Issue no. 94-9 Title Determining a Normal Servicing Fee Rate for the Sale of an SBA SBA abbr. Small Business Administration Noun 1. SBA - an independent agency of the United States government that protects the interests of small businesses and ensures that they receive a fair share of government Loan Status To be discussed at a future meeting Issue no. 94-10 Title Accounting for the Income Tax Effects of Transactions between (and with) Stockholders That Have Tax Effects for the Company Status To be discussed at a future meeting The application of EITF consensuses (category c of the GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). hierarchy) effective after March 15, 1992, is mandatory under SAS (1) (SAS Institute Inc., Cary, NC, www.sas.com) A software company that specializes in data warehousing and decision support software based on the SAS System. Founded in 1976, SAS is one of the world's largest privately held software companies. See SAS System. no. 69. EITF consensuses issued before March 16, 1992, become effective in the hierarchy for initial application of an accounting principle after March 15, 1993. See the JofA, May92, pages 103--110, for a complete discussion of the new GAAP hierarchy and EITF consensuses. Accounting changes from another accounting principle to an EITF consensus may be reported in accordance with Accounting Principles Board The Accounting Principles Board (APB) is the former authoritative body of the American Institute of Certified Public Accountants (AICPA). It was created by the American Institute of Certified Public Accountants in 1959 and issued pronouncements on accounting principles until 1973, Opinion no. 20, Accounting Changes, or may be applied prospectively to future transactions unless otherwise stated in the consensus. |
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