Perspectives

Real Estate & Construction

Accounting and Financial Reporting Update (2017)

The 2017 edition of our annual update highlights selected accounting and reporting developments that may be of interest to entities in the real estate and construction sector. Among other topics, the publication discusses (1) issues related to implementation of the new leasing and revenue recognition standards and (2) application of the new guidance that clarifies the definition of a business.

Introduction

The real estate and construction sector is increasingly influenced by rapid technological advancements and significant demographic shifts, including growing urbanization, longevity of baby boomers, and differentiated lifestyle patterns of millennials. In addition, macroeconomic and regulatory developments continue to affect profitability. Executives have their hands full as they look to find ways to respond to these changes, gain a competitive advantage, and drive top- and bottom-line growth.

Accounting Changes

In January 2017, the FASB issued ASU 2017-01 to clarify the definition of a business in ASC 805. The standard was issued in response to stakeholder feedback that the existing definition of a business was difficult and costly to apply and was being applied too broadly. As a result of the standard, it is likely that more acquisitions will qualify as asset acquisitions rather than business combinations.

In February 2017, the FASB issued ASU 2017-05, which clarifies the scope of the recently established guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets, which include real estate assets. The ASU conforms the derecognition guidance on nonfinancial assets with the accounting model for transactions within the scope of the new revenue standard. Once implemented, the nonfinancial asset derecognition guidance in ASC 610-20 will govern the accounting for real estate sales.

Six months after the release of ASU 2017-05, the FASB issued ASU 2017-12, which amends the hedge accounting recognition and presentation requirements in ASC 815. This standard is intended to simplify hedge accounting as well as improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities.

In addition to ASUs 2017-01, 2017-05, and 2017-12, real estate and construction entities should continue to focus on major accounting standards with approaching implementation dates. These include the new revenue recognition standard, the new leases standard, and the new standards on restricted cash and cash flow classification.

Real Estate & Construction — Accounting and Financial Reporting Update (2017)
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