Accounting for Real Estate Time Sharing Transactions SOP 04-2

Addresses diversity in practice caused by a lack of guidance specific to real estate time-sharing transactions.

Concurrently the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards no. 152, Accounting for Real Estate Time-Sharing Transactions—an amendment of FASB Statements No. 66 and 67, which includes amendments to FASB pronouncements being made in conjunction with issuance of the SOP, which is effective for financial statements issued for fiscal years beginning after June 15, 2005, with earlier application encouraged.

Note: This product is an electronic download file that will be accessible immediately after completing your purchase. Access to this file – from the My Download page – expires 90 days from purchase date.

Please note this product purchase is non-refundable. For more information about this product or service concerns, please contact the AICPA Service Center at service@aicpa.org or call 888-777-7077.

Accounting for Real Estate Time-Sharing Transactions

Background

1. The real estate time-sharing industry has experienced significant growth since its inception, both in terms of sales volumes and in the variety of time-sharing structures used by sellers.  The accounting for real estate time-sharing transactions (also referred to in this Statement of Position [SOP] as time-sharing transactions) is based principally on Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 66, Accounting for Sales of Real Estate. Time-sharing   transactions are characterized by the following:
   
   
   1. Volume-based, homogeneous sales
   2. Seller financing
   3. Relatively high selling and marketing costs
   4. Upon default, recovery of the time-sharing interval by the seller and some forfeiture of principal by the buyer


2. The FASB issued FASB Statement No. 66 in 1982. The FASB concluded at that time that time-sharing transactions should be accounted for in accordance with the provisions of that Statement. However, the FASB noted that sales of time-sharing interests were not addressed in the specialized AICPA Industry Accounting Guides and SOPs whose principles were extracted in that Statement and decided not to provide specific additional guidance on time-sharing transactions as part of the ex- traction project leading to the issuance of that Statement.

3. The time-sharing industry has certain characteristics that affect the evaluation of financial performance. Most sales of time-sharing intervals are to retail consumers, who often choose to use seller-provided financing. Although certain financial institutions will participate in the securitization or hypothecation of portfolios of time-sharing receivables, financial institutions typically will not finance the purchase of individual time-sharing intervals. Therefore, a majority of the sales price is often financed by the time-share seller through a promissory note (generally, with a term of five to ten years) signed by the buyer. The promissory note is typically a recourse note secured by the time-sharing interval. Delinquency and default rates on promissory notes vary widely among individual timesharing companies and tend to fluctuate in line with the general state of the economy. Selling and marketing costs are significant in relation to sales revenue, and sales incentives and inducements are common.

4. The time-sharing industry has introduced a variety of transaction structures to differentiate its products and enhance sales volumes. For example, buyers often have the right to exchange periodic use of their time-sharing intervals for use of other time-sharing intervals or for various consumer products, frequently through a third-party ex- change company. Time-sharing transactions include the sale of fixed time and floating time, points (which may be redeemed so that a buyer may occupy a specific property), vacation clubs, and fractional interests; the use of time- sharing special-purpose entities (SPEs) to hold title to real estate; and providing the right to use real estate for a specified period.

5. In an effort to manage cash flows, many time-share sellers will sell, hypothecate, securitize, or otherwise monetize their receivables through another party. In general, those transactions are completed with some recourse to the time-share seller (that is, if receivables are uncollectible, the seller is liable for the bad debts up to stated limits).