1. Val R. Bitton Partner, Deloitte & Touche AcSEC Member
AcSEC Update
Val R. Bitton Partner, Deloitte & Touche AcSEC Member

2. Investors’ Interests in Unconsolidated Real Estate Investments
Scope–Use of the Equity Method
Nonvoting common stock or nonredeemable preferred stock, ability to exercise significant influence (Yes, apply equity method)
“Specific ownership accounts”: GPs, LPs, LLCs, LLPs, regardless of significant influence (Yes, apply equity method)
S corporations, REITs (No, do not apply equity method)

3. Investors’ Interests in Unconsolidated Real Estate Investments
Application of the Equity Method–HLBV
(Hypothetical Liquidation at Book Value)
Balance-sheet-oriented approach to equity method accounting—determine “claim on the investee’s book value,” considering transactions and events that the investee recognizes in accordance with GAAP
Take into account all forms of financial interest—common stock, preferred stock, general or limited partnership interests, debt securities, loans, advances, notes receivable, other obligations

4. Investors’ Interests in Unconsolidated Real Estate Investments
Basis Differences
Difference between the amount of an investor’s investment in an investee and its claim on the book value of the investee
Attribute the difference(s) to assets or liabilities of the investee, and account for as if the investee were a consolidated subsidiary
Recast Financial Statements approach
Two-Component approach

5. Investors’ Interests in Unconsolidated Real Estate Investments
Status of Project
Project began in 1991
In 1998 FASB asked AcSEC to continue project
AcSEC began deliberating a “fresh-start draft” in July 1999
In January 2000, AcSEC cleared the draft for exposure
Exposure draft comment period ended April 15, 2001
Many comment letters expressed concern over limited scope of exposure draft (i.e., real estate only)
AcSEC pursuing broad equity method project based on APB 18
Who should apply the equity method
How should the equity method be applied
Note to Presenter:
The following slides are based on the proposed Statement of Position, Accounting for Investors’ Interests in Unconsolidated Real Estate Investments, which was issued for exposure and comment in November 2000; the comment period deadline was April 15, The slides have not been updated to reflect any redeliberations by AcSEC subsequent to the June 2001 meeting summarized above.

6. PP&E Cost Capitalization
Purpose
Address diversity in practice in accounting for expenditures related to PP&E
Original scope applied only to real estate
Expanded to include expenditures (e.g., betterments, overhauls) related to all PP&E
Provide guidance on which expenditures are
Capitalizable as PP&E
Repairs and maintenance to be expensed

7. PP&E Cost Capitalization
Project stage framework
Preliminary
Preacquisition
Acquisition-or-Construction
In-Service
Capitalization model based on model in FAS 91 and SOP 98-1—more limited capitalization model

8. PP&E Cost Capitalization
Preliminary Stage Costs
Charge to expense as incurred, except for the cost of an option to acquire PP&E
Preacquisition Stage Costs
Charge to expense as incurred, unless directly identifiable with specific PP&E
Acquisition-or-Construction Stage Costs
Capitalize if directly identifiable with specific PP&E

9. P&E Cost Capitalization
Directly identifiable costs capitalizable in Preacquisition and Acquisition-or-Construction stages include only:
Incremental direct costs of activities incurred in transactions with independent third parties
Certain entity costs directly related to PP&E activities
Payroll and benefit-related costs of employees to the extent they directly devote time to PP&E activity
Depreciation of machinery and equipment used directly in construction or installation of PP&E
Inventory (including spare parts) used directly in construction or installation of PP&E
Costs to obtain an option to acquire PP&E

10. PP&E Cost Capitalization
In-Service Stage Costs
Repairs and maintenance costs charged to expense as incurred, unless the costs are for (1) acquisition of additional PP&E or components of PP&E or (2) replacement of existing PP&E or components of PP&E
Removal and relocation costs charged to expense as incurred
Costs of planned major maintenance activities are not a separate PP&E asset
Elimination of accrue in advance, defer and amortize, and built-in overhaul methods

11. Acquisition-or-Construction Stage
PP&E Cost Capitalization
Preliminary Stage
Preacquisition Stage
Acquisition-or-Construction Stage
In-Service Stage
Timeline
Prior to time when acquisition of PP&E becomes probable
Acquisition of specific PP&E is probable but has not yet occurred
Acquisition has occurred or construction has commenced but PP&E is not yet substantially complete and ready for its intended use
Subsequent to when PP&E is substantially complete and ready for its intended use
Sample Activities
Consideration of alternatives, feasibility studies, activities occurring prior to decision to select specific PP&E
Surveying, zoning, engineering, design layouts, traffic studies (these may also occur during the preliminary stage)
Acquisition, construction, or installation of PP&E; engineering work, design work
Replacements, additions to existing PP&E, repairs and maintenance

12. Acquisition-or-Construction Stage
PP&E Cost Capitalization
Preliminary Stage
Preacquisition Stage
Acquisition-or-Construction Stage
In-Service Stage
Accounting for costs directly identifiable with specific PP&E
Expense
Capitalize certain costs
Capitalize replacements and additions; expense repairs and maintenance; expense net book value of replaced PP&E
Accounting for general and administrative, overhead, and support function costs

13. PP&E Cost Capitalization
Component Accounting
Component is a part or portion of PP&E that (1) can be separately identified as an asset and depreciated over its own expected useful life and (2) is expected to provide benefit for more than one year
If component has an expected useful life that differs from the PP&E asset, cost should be separately accounted for and depreciated over its expected useful life
If a component is replaced, the new component is capitalized and the old component is written off

14. PP&E Cost Capitalization
Status of Project
FASB cleared prospectus in February 1999
AcSEC began deliberations in January 2000
Revised prospectus cleared in May 2000
Exposure draft issued June 29, 2001 – comment period ends November 15, 2001

15. Questions