Statement on Auditing Standards no. 69, The Meaning of "Present Fairly in Conformity With Generally Accepted Accounting Principles" in the Independent Auditor's Report, identifies statements of position (SOPs) as sources of established GAAP This month's column summarizes American Institute of CPAs SOPs no. 92-1, Accounting for Real Estate Syndication Income, and no. 92-3, Accounting for Foreclosed Assets.
Both SOPs are available as sepa| rate pamphlets (SOP no. 92-1, product no. 014853; SOP 92-3, product no. 014855) and also are included in the AICPA Technical Practice Aids loose-leaf service. To obtain these publications, contact the AICPA order department, P.O. Box 1003, New York, New York 10108-1003. Telephone: (800) 334-6961 [(800) 2480445 in New York State].
SOP NO. 92-1
On February 6, 1992, the AICPA accounting standards division released SOP no. 92-1, which is an established source of GAAP for income recognition from syndication activities--efforts to directly or indirectly sponsor the formation of limited partnerships, trusts, joint ventures or entities acquiring interests in real estate by raising funds from investors. If the initial closing with investors occurred after March 15, 1992, the SOP is effective. Earlier application is encouraged for financial statements not previously issued.
The FASB's emerging issues task force (EITF) identified the need for guidance on real estate syndications in Issue no. 85-37, Recognition of Notes Received for Real Estate Syndication Activities. The EITF was unable to reach a consensus and referred the issue to the AICPA real estate committee. The resulting SOP concludes the following:
a. Applicability of FASB Statement no. 66, Accounting for Sales of Real Estate, to syndication activities. Statement no. 66 applies to the recognition of profit from real estate sales by syndicators to partnerships, although it does not apply to the recognition of fees excluded from sales value. SOP no. 92-1 concludes that the guidance in Statement no. 66 should be applied to profit recognition for all real estate syndication transactions, even when the syndicators never had ownership interests in the properties acquired by the real estate partnerships.
b. Determining sales value of property and fee income. In applying Statement no. 66, all fees charged by syndicators should be included in determining sales value, except fees for which future services must be performed (which should be recognized at the time they're performed) and syndication fees.
c. Syndication fees. Syndicalors should not recognize syndicalion fees until the earnings process is complete and collectibility is reasonably assured. If a syndicator receives or retains a partnership interest as compensation for syndicating a deal, the amount of profit that may be recognized as syndication fee should not exceed the proportionate cost of the partnership interest, using partial sale accounting, as described in Statement no. 66.
d. Exposure to losses or costs from syndicator involvement and collectibility risk. Material involvement with the properties, partnerships or partners or uncertainties regarding the collectibility of partnership notes may expose syndicators to future losses or costs. If so, they should defer income recognition on syndication fees and fees for future services until the losses or costs can be estimated reasonably.
e. Allocating cash payments. In determining whether buyers' initial and continuing investments satisfy the requirements for full profit recognition, cash received by syndicators should be allocated to unpaid syndication fees before being allocated to initial and continuing investment. After the syndication fee is fully paid, additional cash received should be allocated to unpaid fees for future services (to the extent those services have been performed by the time the cash is received) before being allocated to …