Below are a few points concerning potential impacts of the new revenue recognition standard (ASC 606) on the real estate industry. The information presented here does not represent a comprehensive assessment of the outcome of applying the new standard, but these points may help when considering how ASC 606 could impact you.
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REAL ESTATE REVENUE RECOGNITION
Step(s) within Five-Step Model: Scope
Description and Examples: Entities must consider whether certain arrangements are fully or partially subject to Topic 606, including but not limited to:
- Sales of real estate—consider definition of a business in Topic 805 and gains and losses from derecognition of nonfinancial assets per Subtopic 610-20
- Interaction with leasing guidance in Topics 840 and 842
Issue: Identify the contract with a customer and the performance obligations
Step(s) within Five-Step Model: 1, 2
Description and Examples: Entities must consider collectability, commitment to perform, contract combination and modification guidance when identifying the contract with a customer. Judgment is also required in identifying the number and nature of performance obligations.
Example arrangements include:
- Construct a number of buildings with a single customer (e.g. contract with a government to construct three prisons)
- Construct different elements of a project (e.g., a road and bridges; building, landscaping, construct a swimming pool and garage, interior design)
Issue: Common area maintenance (CAM)
Step(s) within Five-Step Model: Scope, 2
Description and Examples: The accounting treatment of CAM will depend on timing of adoption of Topic 842, Leases. Entities need to carefully apply Topic 840 and/or 842 to determine if such services are considered non-lease components and therefore subject to Topic 606. Examples include cleaning the lobby and hallways of a building, parking lot snow removal and landscaping.
Real estate revenue recognition and the implications of the new standard can be complicated to navigate. Please consult your Warren Averett advisor for more information specific to your business and real estate revenue recognition.