Academic journal article Journal of Accountancy

Participating Mortgage Loans Addressed - Finally

Academic journal article Journal of Accountancy

Participating Mortgage Loans Addressed - Finally

Article excerpt

The American Institute of CPAs accounting standards executive committee has issued a Statement of Position, Accounting by Participating Mortgage Loan Borrowers, which is the culmination of a project originating with the AICPA real estate committee in 1979. The SOP establishes the borrower's accounting for a participating mortgage loan in which the lender is entitled to participate in the appreciation in the market value or the results of operations of the mortgaged real estate project. Entities are required to accrete a liability for the participation feature and charge a part of that to expense every period, according to John M. Lacey, professor and Ernst & Young research fellow at California State University, Long Beach, who drafted the SOP for AcSEC. Lacey, the immediate past chairman of the AICPA real estate committee, said practice in this area has long been diverse.

During the SOP's exposure period, many comment letters said the payment to the borrower under the participation clause should be added to the value of the asset instead of charged to expense. "Some people believe there is objective evidence of the increase in the value of the asset as a consequence of the participation payment to a third party, which is based solely on the appreciation of the asset" said Lacey. …

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