New Accounting Rules For Real Estate And Joint Investments
Real estate traditionally lends itself to joint investment with various investors. Real estate deals are constantly evolving, mirroring the developments occurring in economics, markets, and investors. With the change in the structure of these arrangements, the accounting for them has become complex and at times inconsistent. This has resulted in joint investment accounting not being faithfully represented.
Like investors' confidence, which reflect the true nature of real estate deals, accounting standards also need to evolve alongside this economic reality. Currently, Canadian private investors have multiple accounting options for these investments.
The International Financial Reporting Standard for joint arrangements was recently revised and is applicable to publicly listed entities.
At the heart of this standard is the understanding of the concept of joint control – what investors actually own and owe.
The Canadian Accounting Standards Board has also undertaken the task to review this concept and a revised standard (s.3056, Joint Arrangements) is expected later in 2014.
This revised standard will apply to entities that report under Accounting Standards for Private Enterprises effective for fiscal periods starting on or after January 1, 2016. This revised standard considers the concept of joint control and investors' rights to individual assets or net assets with the objective of making the accounting treatment user friendly.
What is s. 3056 about?
Under the new standard, the classification of the investment determines the accounting treatment. Some real estate deals involve two or more investors bound by a contractual arrangement, which establishes the rights and obligations of each investor. The question to ask: are there two or more investors who jointly control the arrangement? Joint control allows investors to share power when determining strategic operating, investing and financing policies. Simply, they act together to run the business. But joint control need not be shared by all investors.
As every arrangement is structured uniquely, the assessment can only be made after careful review of the terms of the contractual arrangement. Control is not limited to the form and/or structure of the arrangement, such as partnership, co-tenancy, corporation, joint venture or undivided interest. If joint control exists then these investors follow s.3056 and elect to record all such investments...
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