Revenue:

Real estate

Handbook

US GAAP

August 2026

______

kpmg.com/us/en/frv

KPMG Real Estate Revenue Handbook — page 2

Contents

Foreword ............................................................................................................... 1

Acknowledgments ................................................................................................ 2

About this publication ........................................................................................... 3

Executive summary .............................................................................................. 4

A. Scope ............................................................................................................. 7

B. Step 1: Identify the contract ......................................................................... 25

C. Step 2: Identify the performance obligations ............................................... 29

D. Step 3: Determine the transaction price ...................................................... 39

E. Step 4: Allocate the transaction price .......................................................... 50

F. Step 5: Recognize revenue .......................................................................... 56

G. Other matters ............................................................................................... 89

Index of changes .............................................................................................. 102

KPMG Financial Reporting View ....................................................................... 103

KPMG Real Estate Revenue Handbook — page 3

Revenue: Real estate

Foreword

Keeping pace with change

The ongoing application of the revenue and other income standards continues

to present challenges as real estate companies react to the business practices

and economic environment in recent years.

Although the challenges to real estate companies have varied widely depending

on the nature of their businesses and how they interact with their customers

and buyers, most have experienced changes in a number of their estimates and

their processes and considerations for evaluating their buyers’ credit and

nonperformance risk.

KPMG Handbook,

Revenue recognition

, illustrates how the revenue standard

applies to common transactions, provides examples about common scenarios

and explains our thinking on the questions that continue to arise.

This publication provides supplemental technical guidance on key issues for real

estate companies, including their interaction with the leases standard. We

address some of the common questions about the effects of the standards on

sales of real estate and other non-lease revenue, and we hope it will advance

the dialogue on these and other issues.

We will continue to provide the latest thinking that affects real estate

companies.

Mike Breen

and

Valarie Mosier

Department of Professional Practice, KPMG LLP

KPMG Real Estate Revenue Handbook — page 4

Revenue: Real estate

Acknowledgments

This Handbook has been produced by the Department of Professional Practice

(DPP) of KPMG LLP in the United States.

We would like to acknowledge the efforts of the main contributors to this

edition:

Mike Breen

Clare McIntyre

Valarie Mosier

We would also like to acknowledge the current and former members of DPP

who contributed significantly to this Handbook: Kimber Bascom, Richard

Binderup, Nick Burgmeier, Ryan Campbell, Sam Hall, Brandon Kano, Lori Kozen,

Kevin Manson, Bob Mosier, Scott Muir, Angie Storm and Kirby Vilker.

KPMG Real Estate Revenue Handbook — page 5

Revenue: Real estate

About this publication

Purpose

The purpose of this publication is to assist you in understanding the

requirements of Topic 606, Revenue from Contracts with Customers, and

Subtopic 610-20, Other Income

—

Gains and Losses from the Derecognition of

Nonfinancial Assets, as they apply to real estate transactions.

This publication is intended for use by preparers and other interested parties

with a working knowledge of real estate sales guidance, and an understanding

of the revenue recognition and other income models.

Organization of the text

The publication is in Q&A format and is organized into chapters that largely

reflect the steps in the revenue recognition model. Our commentary refers to

the

FASB Accounting Standards Codification

, when excerpts are not included,

where applicable. For example, 606-10-25-1 is paragraph 25-1 of Subtopic

606-10. We include examples to explain key concepts, and we explain the

changes from legacy US GAAP.

Terminology

Unless otherwise indicated explicitly or by comparison, we use the terms

‘customer’ and ‘buyer’ interchangeably to refer to the purchaser in a transaction

involving the sale of real estate. This is because the guidance in this publication

addresses both the requirements of Topic 606 on revenue recognition from

sales to customers, and the requirements of Subtopic 610-20 on recognition of

gains and losses from the derecognition of nonfinancial assets in transactions

with parties other than customers.

We use the terms ‘gain’ and ‘gain or loss’ interchangeably to refer to the

income statement effect from derecognition of nonfinancial assets in the scope

of Subtopic 610-20 as the transaction may result in either and is reported in

other income.

August 2026 edition

This edition of our publication removes legacy guidance to reflect the adoption

of Topic 606, Subtopic 610-20 and Topic 842. Items that have been significantly

updated or revised are identified throughout the publication with #.

The

Index of changes

lists all of the significant changes made in this edition to

assist you in locating updated content.

KPMG Real Estate Revenue Handbook — page 6

Revenue: Real estate

Executive summary

Scope

The guidance applies to all

contracts with customers

unless the customer contract

is specifically in the scope of

other guidance – e.g. Topic

460 (guarantees).

Topic 606 applies to contracts to deliver goods or

services to a customer. A ‘customer’ is a party that

has contracted with an entity to obtain goods or

services that are an output of the entity’s ordinary

activities in exchange for consideration.

Topic 606 is applied to part of a contract when only

some elements are in the scope of other guidance.

chapter A

Step 1: Identify the contract

Contracts can be written,

oral or implied by an entity’s

customary business

practices, but must be

enforceable by law.

This may require legal

analysis on a jurisdictional

level to determine when a

contract exists and the terms

of that contract’s

enforceability.

A contract with a customer is accounted for under

the revenue model when the contract is legally

enforceable, and all of the following criteria are met:

•

the contract has commercial substance;

•

rights to goods or services can be identified;

•

payment terms can be identified;

•

the consideration the entity expects to be

entitled to is probable of collection; and

•

the contract is approved and the parties are

committed to their obligations.

If the criteria are not met, any consideration

received from the customer is generally recognized

as a deposit (liability).

chapter B

Step 2: Identify the performance obligations

Performance obligations do

not have to be legally

enforceable; they exist if the

customer has a reasonable

expectation that the good or

service will be provided.

Performance obligations are the unit of account

under Topic 606 and generally represent the distinct

goods or services that are promised to the

customer.

Promises to the customer are separated into

performance obligations and are accounted for

separately if they are both (1) capable of being

distinct and (2) distinct in the context of the

contract.

A promise can be implied by

customary business

practices, policies or

statements.

If the distinct goods or services are substantially the

same and have the same pattern of transfer to the

customer over time, they are combined into a

single performance obligation (a ‘series’).

chapter C

KPMG Real Estate Revenue Handbook — page 7

Revenue: Real estate

Executive summary

Step 3: Determine the transaction price

Estimating variable

consideration is a significant

judgment for many entities.

When determining the

transaction price, an entity

uses the legally enforceable

contract term. It does not

take into consideration the

possibility of a contract

being cancelled, renewed or

modified.

The transaction price is the amount of consideration

to which an entity expects to be entitled in

exchange for transferring goods or services to a

customer, excluding amounts collected on behalf of

third parties – e.g. some sales taxes. This

consideration can include fixed and variable

amounts.

The transaction price determination also considers:

•

Variable consideration

, which is estimated at

contract inception and is updated at each

reporting date for any changes in

circumstances. The amount of estimated

variable consideration included in the

transaction price is the amount for which it is

probable that a significant reversal in the

amount of cumulative revenue recognized will

not occur when the uncertainty is resolved.

•

Noncash consideration

received from a

customer, which is measured at fair value at

contract inception.

•

Consideration payable to a customer

, which

represents a reduction of the transaction price

unless it is a payment for distinct goods or

services the entity receives from the customer.

•

Significant financing component

, which may

exist in a contract when payment is received

significantly before or after the transfer of

goods or services. This could result in an

adjustment to the transaction price to impute

interest income/expense.

chapter D

Step 4: Allocate the transaction price

A contractually stated price

or list price is not presumed

to be the stand-alone selling

price of that good or service.

The transaction price is allocated at contract

inception to each performance obligation to depict

the amount of consideration to which an entity

expects to be entitled in exchange for transferring

the promised goods or services to the customer.

An entity generally allocates the transaction price to

each performance obligation in proportion to its

stand-alone selling price. However, when specified

criteria are met, a discount or variable consideration

is allocated to one or more, but not all, performance

obligations.

The stand-alone selling price is the price at which

an entity would sell a promised good or service

separately to a customer. Observable stand-alone

prices are used when they are available. If not

available, an entity is required to estimate the price

KPMG Real Estate Revenue Handbook — page 8

Revenue: Real estate

Executive summary

using other techniques that maximize the use of

observable inputs – even if the entity never sells

the promised good or service separately.

chapter E

Step 5: Recognize revenue

An entity first determines

whether a performance

obligation meets the criteria

to recognize revenue over

time.

If none of the over-time

criteria are met, revenue for

the performance obligation

is recognized at the point in

time that the customer

obtains control of the goods

or services.

An entity recognizes revenue when it satisfies its

obligation by transferring control of the good or

service to the customer.

A performance obligation is satisfied over time if

one of the following criteria are met:

•

the customer simultaneously receives and

consumes the benefits as the entity performs;

•

the entity’s performance creates or enhances

an asset that the customer controls as the

asset is created or enhanced; or

•

the entity’s performance does not create an

asset with an alternative use to the entity, and

the entity has an enforceable right to payment

for performance completed to date.

If control transfers

over time

, an entity selects a

method to measure progress that is consistent with

the objective of depicting its performance.

Control is the ability to direct

the use of, and obtain

substantially all of the

remaining benefits from, the

goods or services – or

prevent others from doing

so.

If control transfers at a

point in time

, the following

are some indicators that an entity considers to

determine when the customer obtained control.

The customer has:

•

a present obligation to pay;

•

physical possession;

•

legal title;

•

the risks and rewards of ownership; and

•

accepted the asset.

chapter F

KPMG Real Estate Revenue Handbook — page 9

Revenue: Real estate

A. Scope

Detailed contents

Item significantly updated in this edition: #

Question A10

How do you determine whether real estate sales are in the

scope of Topic 606 or Subtopic 610-20?

Question A20

What else is in the scope of Subtopic 610-20?#

Question A21

Does Subtopic 610-20 apply to the transfer of an option to

purchase real estate?

Question A25

What guidance should a seller apply when it sells a

noncontrolling interest in an entity that is not a subsidiary (e.g. equity

method investee)?

Question A26

Are sales of undivided interests to noncustomers in the scope of

Subtopic 610-20? What if the buyer is a customer?

Question A30

How does an entity apply the revenue (or other income)

recognition guidance when it sells property improvements (or integral

equipment) and leases the underlying land to a customer?#

Question A40

How do guarantees affect the accounting for an accompanying

sale of real estate?

Question A50

How do support obligations affect the accounting for an

accompanying sale of real estate?

Example A50.1

Property sale with support obligation

Question A60

Under Topic 606, what is the unit of account for sales of

condominium units within a condominium project (or similar structure)?

Question A70

Is a property or asset manager’s carried interest (or promote) in

the scope of Topic 606?#

KPMG Real Estate Revenue Handbook — page 10

Revenue: Real estate

A. Scope

Question A10

How do you determine whether real

estate sales are in the scope of Topic 606 or Subtopic

610-20?

Interpretive response:

Determining which guidance applies depends on

whether the buyer is a customer. If the buyer is a customer, the seller accounts

for the sale under Topic 606 and recognizes revenue and cost of sales. The

Master Glossary to the Codification defines a customer as “a party that has

contracted with an entity to obtain goods or services that are an output of the

entity’s ordinary activities in exchange for consideration.”

[Master Glossary,

360-10-40-3A]

A real estate developer predominantly in the business of selling retail land or

residential units would be an example of an entity that likely is selling real

estate as an output of its ordinary activities.

In contrast, a real estate investment trust (REIT) that primarily leases real estate

generally would not sell real estate as an output of its ordinary activities. While

some REITs often sell properties as part of their overall investment strategy,

they identify the output of their normal activities as the service they provide to

their tenants. This conclusion is consistent with how a REIT’s operations are

characterized for US federal income tax purposes.

While a REIT’s income generally is tax-free (assuming it meets qualification

criteria), gains on dispositions of property held primarily for sale to customers in

the ordinary course of business are considered “prohibited transactions” and

are subject to 100% tax. To preserve the maximum tax advantage to the REIT

and its investors, a REIT generally does not sell property to customers in its

ordinary course of business.

Accounting for sales to customers – Topic 606

A seller accounts for customer sales under Topic 606 and recognizes revenue

and cost of sales in its income statement. The seller follows this accounting

regardless of whether it sells its direct interest in the real estate or its

controlling ownership interest in an entity that holds the real estate.

When a contract exists and the seller transfers control of the property, the

seller derecognizes the real estate and recognizes the transaction price as

revenue.

If a contract does not exist, the seller recognizes the cash received as a deposit

liability, continues to report the real estate in its financial statements,

depreciates it (if not held for sale), and evaluates it for impairment as necessary.

[360-10-35, 360-10-40-3C, 45-9 – 45-10]

This reporting continues until a contract does exist and control of the property

transfers, or until the seller meets one of these conditions:

•

the seller has no remaining obligations to transfer goods or services to the

customer and all, or substantially all, of the promised consideration has

been received and is nonrefundable;

•

the contract has been terminated and the consideration received is

nonrefundable; or

KPMG Real Estate Revenue Handbook — page 11

Revenue: Real estate

A. Scope

•

the seller has transferred control of the goods or services to which the

consideration that has been received relates, has stopped transferring

goods and services to the customer (if applicable) and has no obligation

under the contract to transfer additional goods or services, and the

consideration received from the buyer is nonrefundable.

[606-10-25-7 – 25-8]

Accounting for sales to noncustomers – Subtopic 610-20

If the seller determines that the buyer is not a customer, it generally accounts

for the sale under Subtopic 610-20 because a real estate asset is a nonfinancial

asset and typically is not a business.

The seller recognizes a gain or loss in the

income statement for noncustomer sales.

If the seller is transferring a group of assets or a controlling financial interest in a

subsidiary, other considerations apply. If substantially all of the fair value of the

assets of the group or subsidiary is concentrated in nonfinancial assets (e.g. real

estate and intangibles) and the group or subsidiary is not a business, the seller

applies Subtopic 610-20 to the sale of each distinct asset within the group or

subsidiary. This includes assets in the group or subsidiary that would be

financial assets if they were sold separately. These financial assets within the

group or subsidiary are referred to as ‘in-substance nonfinancial assets’. See

Question A20

[610-20-15-4, 360-10-40-3A]

To address real estate sales to noncustomers, Subtopic 610-20 incorporates

Topic 606’s principles that address sales to customers. Specifically, a seller of a

nonfinancial (or an in-substance nonfinancial) asset to a noncustomer applies

Topic 606’s guidance to determine:

•

whether a contract exists;

[610-20-25-5, 606-10-25-1 – 25-8]

•

how to separate and measure one or more parts of a contract that are

within the scope of other Topics;

[610-20-15-9, 606-10-15-4]

•

the number of distinct assets in the disposal group;

[610-20-25-6, 606-10-25-19 –

25-22]

•

the transaction price, including estimating variable consideration,

constraining that consideration, and evaluating whether there is a significant

financing component, noncash consideration and consideration payable to

the customer;

[610-20-32-3, 606-10-32-2 – 32-27, 32-42 – 32-45]

•

how to allocate the consideration in the contract to distinct assets in the

disposal group; and

[610-20-32-6, 606-10-32-28 – 32-41]

•

when an entity satisfies a performance obligation by transferring control of

an asset.

[610-20-25-6, 606-10-25-30]

Under Subtopic 610-20, when a contract exists and the seller has transferred

control of the property (which includes concluding that it no longer has a

controlling financial interest under Topic 810 (consolidation) if the asset is

owned by a separate legal entity – see

Question F90

), the seller derecognizes

the real estate and recognizes a gain or loss equal to the difference between

the amount of consideration transferred and the carrying amount of the asset.

The amount of consideration that is included in the calculation of the gain or

For more information on the definition of a business, see KPMG Handbook,

Business

combinations

KPMG Real Estate Revenue Handbook — page 12

Revenue: Real estate

A. Scope

loss includes both the transaction price determined under Topic 606 and the

carrying amount of liabilities assumed or relieved by the buyer.

[610-20-32-2]

If the seller is transferring a group of assets or a controlling financial interest in a

subsidiary, the sale of each distinct asset within the group or subsidiary is

accounted for as a separate unit of account under Subtopic 610-20 as previously

discussed. The seller may need to allocate the consideration to each distinct

asset – e.g. if the seller does not transfer control of all of the distinct assets at

the same time.

[610-20-25-6, 32-2]

Similar to Topic 606, if a contract does not exist, the seller recognizes the cash

received as a deposit liability, continues to report the real estate in its financial

statements, depreciates it (if not held for sale), and evaluates it for impairment

as necessary.

[360-10-35, 360-10-40-3C, 45-9 – 45-10]

This reporting continues until a contract does exist and control of the property

transfers, or until the seller meets one of the conditions in paragraph

606-10-25-7. At that time, the property and related deposit liability are

derecognized and the gain or loss is recognized.

[606-10-25-1 – 25-8]

Question A20

What else is in the scope of Subtopic

610-20?#

Interpretive response:

As discussed in

Question A10

, the guidance on

derecognition of nonfinancial assets to noncustomers in Subtopic 610-20

applies to sales to noncustomers of nonfinancial assets and in-substance

nonfinancial assets. It also applies to other transfers of these assets including

sales of ownership interests in certain subsidiaries that are not businesses (see

discussion on

partial sales

below) and other changes in circumstances that

result in loss of control over the nonfinancial (or in-substance nonfinancial)

assets – e.g. because of the expiration or termination of a contractual

agreement, a dilution event, a government action or default of a subsidiary’s

nonrecourse debt (see

Question F50

). An entity also could lose control over

nonfinancial assets and in-substance nonfinancial assets by contributing those

assets to a joint venture or another noncontrolled investee (see discussion on

partial sales below).

[610-20-05-2]

What is a ‘nonfinancial asset’?

Nonfinancial assets include land, buildings, intangible assets and materials and

supplies. A nonfinancial asset does not meet the definition of either a business

or a financial asset (e.g. cash, receivables, equity method investment).

Nonfinancial assets may be either recognized or unrecognized (e.g. a zero

carrying amount).

[610-20-15-2]

Nonfinancial assets may also include properties with real estate components,

like land plus property improvements and integral equipment – i.e. those

properties that have been identified as in-substance real estate historically.

However, just because a property was in-substance real estate under legacy

US GAAP does not mean that a sale of that property is in the scope of

Subtopic 610-20. The current guidance requires an entity to apply Topic 810 to

sales of all businesses, regardless of whether they were in-substance real

KPMG Real Estate Revenue Handbook — page 13

Revenue: Real estate

A. Scope

estate under legacy US GAAP. The FASB retained the legacy guidance on

identifying in-substance real estate only to identify the scope of

(a) sale-leaseback transactions that remained subject to the guidance in

Subtopic 360-20 until the new leases standard was adopted

and (b) the non-

revenue-related guidance specific to timeshare transactions within the scope of

Topic 978 (time-sharing activities). The definition is no longer relevant for

identifying what guidance to apply to derecognition transactions other than sale-

leasebacks.

[610-20-15-4, 360-20-15-2, 978-10-15-7 – 15-12]

What is an ‘in-substance nonfinancial asset’?

As previously mentioned, in-substance nonfinancial assets are financial assets

that are being sold either as part of a group or within a subsidiary that is not a

business and for which substantially all of the fair value of the assets of that

group or subsidiary is concentrated in nonfinancial assets – e.g. real estate and

intangibles. When determining the fair value of the assets of the group or

subsidiary, a seller should include recognized and unrecognized assets, but

exclude cash and cash equivalents. The seller should also exclude liabilities that

are assumed or relieved by the buyer.

[610-20-15-7]

The FASB decided to use the term

substantially all

because it is commonly

used throughout US GAAP. However, it did not specify a quantitative threshold

for what substantially all means when applying the scope of Subtopic 610-20. In

other US GAAP, substantially all generally is interpreted to mean approximately

90% or greater; however, for evaluating the scope of Subtopic 610-20, we

believe that substantially all is not necessarily meant to be a bright-line

quantitative threshold. When there is uncertainty about whether the

‘substantially all’ threshold is met (e.g. because the ratio is close to the

quantitative threshold or the valuation of assets is based on unobservable (Level

3) fair value measurement inputs subject to significant measurement

uncertainty), we believe qualitative factors may also be considered. The

purpose of a qualitative assessment is to evaluate whether the substance of

the transaction is a transfer of nonfinancial assets. We believe relevant factors

to consider include but are not limited to whether the financial assets in the

transaction:

•

are simply a product of the property’s operations – e.g. rent receivables. If

so, it may be appropriate to conclude that substantially all of the fair value

of the assets is concentrated in nonfinancial assets even if their fair value is

at or slightly below 90% of the fair value of the set.

•

lack commercial substance. If so, a quantitative assessment that includes

those assets would not be appropriate. For example, if the seller arbitrarily

included financial assets in the transaction that otherwise would not have

been part of the set to avoid applying Subtopic 610-20, those financial

assets would be excluded from the quantitative analysis. These situations

can be highly judgmental and based on facts and circumstances.

When substantially all of the fair value of the group’s or subsidiary’s assets is

concentrated in nonfinancial assets and the group or subsidiary is not a

Sale-leaseback transactions remain subject to Subtopic 360-20 only until a company

adopts ASU 2016-02, Leases (Topic 842). Topic 842 supersedes Subtopic 360-20 and

provides a single accounting model for sale-leaseback transactions that applies

regardless of the nature of the asset transferred.

KPMG Real Estate Revenue Handbook — page 14

Revenue: Real estate

A. Scope

business, a seller applies Subtopic 610-20 to the sale of each distinct asset

within the group or subsidiary. This includes assets in the group or subsidiary

that would be financial assets if they were sold separately.

[610-20-15-5]

In some cases, substantially all of the fair value of a group’s assets is not

concentrated in nonfinancial assets, but the group includes a subsidiary in

which substantially all of the fair value of the subsidiary’s assets is concentrated

in nonfinancial assets. For example, Entity A has two consolidated subsidiaries

(Sub A and Sub B) and has entered into a contract with Entity D to transfer

100% of the ownership in these two subsidiaries that are not businesses. Sub

A’s only asset is a parcel of land (i.e. a nonfinancial asset). Sub B’s only asset is

an equity method investment (i.e. a financial asset). The fair values of Sub A and

Sub B are equal and therefore half of the total value of the assets being sold

relates to a nonfinancial asset and the other half relates to a financial asset (and

therefore, the equity method investment held by Sub B is not an in-substance

nonfinancial asset). In that case, the seller applies Subtopic 610-20 to the sale

of the distinct asset within Sub A and applies the relevant US GAAP to the sale

of Sub B. See Case C of Example 1 in paragraphs 610-20-55-9 – 55-10. Also,

see the flowchart below that describes the scope of Subtopic 610-20.

[610-20-15-6]

Section 17.2.40 of KPMG Handbook,

Revenue recognition,

provides additional

discussion, questions, and examples about how to identify in-substance

nonfinancial assets.

What about partial sales?

Partial sales of real estate can occur in several ways.

Transaction 1.

A seller and a third-party investor form a venture. The seller

contributes real estate to the newly formed venture and the third-party investor

contributes cash, property or services. The seller retains a controlling financial

interest in the venture post

‑

sale and no interest in the third party.

Transaction 2.

Assume the same facts as Transaction 1 except the seller

retains only a noncontrolling interest in the venture post

‑

sale. The venture may

be a joint venture.

Transaction 3.

A seller contributes real estate to a newly formed, wholly

owned venture. Sometime later, it sells a partial ownership interest in the

venture to a third-party investor for cash, property or services. The

consideration may come directly from the investor to the seller or may be

contributed by the investor to the venture. The seller retains a controlling

financial interest in the venture post

‑

sale and no interest in the third party.

Transaction 4.

Assume the same facts as Transaction 3 except the seller

retains only a noncontrolling interest in the venture post

‑

sale. The venture may

be a joint venture.

Transaction 5.

A seller transfers real estate to an existing equity method

investee in exchange for cash or noncash consideration.

All of these transactions are in the scope of Subtopic 610-20 but the seller has

different considerations relative to derecognition and measurement depending

on whether it retains a controlling or noncontrolling interest. See

Question F90

[610-20-15-3, 323-10-35-7(c), 970-323-30-3]

KPMG Real Estate Revenue Handbook — page 15

Revenue: Real estate

A. Scope

What isn’t in scope?

As previously mentioned, if an asset or a group of assets meets the definition

of a business, the seller applies Topic 810 to the derecognition transaction.

Subtopic 610

‑

20 also does not apply to:

•

sales to customers;

•

services provided to noncustomers (see Question 17.2.60 of KPMG

Handbook,

Revenue recognition

);

•

sales of nonprofit activities;

•

transfers of financial assets, including transfers of investments – e.g. those

accounted for under the equity method, see

Question A25

;

•

transfers of subsidiaries in which substantially all of the fair value of the

assets is

not

concentrated in nonfinancial assets;

•

exchanges of nonfinancial assets for a controlling financial interest in a

business (business combinations);

•

exchanges between entities in the same line of business to facilitate sales

to customers;

•

nonreciprocal transfers;

•

sale-leaseback transactions (see discussion that follows);

•

lease contracts;

•

contributions made that are within the scope of Subtopic 720-25 (other

expenses – contributions made) or Subtopic 958-605 (not-for-profit entities

– revenue recognition);

•

transfers of investments in ventures accounted for using proportionate

consolidation as described in paragraph 810-10-45-14;

•

transfers between entities under common control;

•

conveyances of oil and gas mineral rights; and

•

exchanges of airline take-off and landing slots.

[610-20-15-4]

How does a seller determine what guidance applies when transferring a

nonfinancial asset?

The following decision tree summarizes the sequence of analysis required to

evaluate which guidance applies for a transaction that entirely, or partially,

involves a nonfinancial asset.

This decision tree may be more useful in more complicated transactions (mix of

financial and nonfinancial assets).

KPMG Real Estate Revenue Handbook — page 16

Revenue: Real estate

A. Scope

Apply Topic 860

Is the transaction a

transfer of financial

assets in scope of

Topic 860?

Yes

Apply Topic 606

Is the buyer a

customer?

Yes

Apply

Subtopic 810-10

Is the set a business

or nonprofit activity?

Yes

Apply other guidance

Do any other scope

exceptions apply?

Yes

Apply

Subtopic 610-20

Is the asset being

transferred a single

nonfinancial asset

(NFA) or group/

subsidiary?

Separate assets

from subsidiary

Apply

Subtopic 610-20 to

each distinct asset

Is substantially all of

the fair value

nonfinancial assets?

Yes

Separate parts and

apply appropriate

guidance to distinct

assets/liabilities

Apply

Subtopic 810-10 or

other applicable

guidance

Subsidiary or

group?

Does the group

include a subsidiary?

NFA

Group

Sub

Assets

Group/Sub

Notes:

If the transfer includes other contractual arrangements that are not the assets of the

seller that will be derecognized (e.g. guarantees), those contracts are separated and

accounted for under the applicable guidance. See Section 17.2.60 of KPMG

Handbook,

Revenue recognition

, for additional guidance.

See Section 17.2.40 of KPMG Handbook,

Revenue recognition

, for additional

guidance.

KPMG Real Estate Revenue Handbook — page 17

Revenue: Real estate

A. Scope

What guidance applies to a real estate sale-leaseback if Subtopic 610-20

does not?

Subtopic 610-20 does not apply to real estate sale-leaseback transactions; those

transactions are in the scope of Topic 842, which provides a single accounting

model for sale-leaseback transactions that applies regardless of the type of

asset transferred.

The seller-lessee

and the buyer-lessor

in a sale-leaseback transaction consider

the guidance in Topic 606 (and the other specific sale/purchase requirements in

Subtopic 842-40) to assess whether a sale/purchase of the asset has occurred.

The company then applies the lease guidance in Topic 842 when accounting for

the leaseback (or the failed sale-leaseback guidance in Subtopic 842-40 if a

sale/purchase has not occurred).

For more information on Topic 842 and sale-leaseback accounting, see chapter

9 of KPMG Handbook,

Leases

Question A21

Does Subtopic 610-20 apply to the

transfer of an option to purchase real estate?

Background:

A transferor applies Subtopic 610-20 when it derecognizes

nonfinancial assets. Nonfinancial assets include intangible assets, land,

buildings, or materials and supplies.

[610-20-15-2]

A transferor applies Topic 860 (transfers and servicing) when it derecognizes

financial assets and analogizes to Topic 860 when it derecognizes derivative

assets that are not financial assets – e.g. derivatives that require physical

delivery of a nonfinancial asset that is readily convertible to cash (and therefore

meets the net settlement criterion).

[860-10-15-3 – 15-5, 815-10-40-1 – 40-3, 15-119 – 15-

139]

The Master Glossary to the Codification defines a financial asset as cash,

evidence of an ownership interest in an entity, or a contract that conveys to one

entity a right to do either of the following:

[Master Glossary]

•

receive cash or another financial instrument from a second entity; or

•

exchange other financial instruments on potentially favorable terms with

the second entity.

Topic 815 (derivatives and hedging) defines a derivative instrument as a

financial instrument or other contract with all three of the following

characteristics.

[815-10-15-83]

•

It has (1) one or more underlyings and (2) one or more notional amounts or

payment provisions or both.

•

It requires no initial net investment or an initial net investment that is

smaller than would be required for other types of contracts that would be

expected to have a similar response to changes in market factors.

•

Its terms require or permit net settlement, it can readily be settled net by a

means outside the contract, or it provides for delivery of an asset that puts

the recipient in a position not substantially different from net settlement.

KPMG Real Estate Revenue Handbook — page 18

Revenue: Real estate

A. Scope

However, Topic 815 excludes from its scope a contract that meets the

definition of a derivative if it is:

[815-10-15-59]

•

not exchange-traded;

•

the underlying on which the settlement is based is the price or value of a

nonfinancial asset of one of the parties to the contract; and

•

the nonfinancial asset is not readily convertible to cash.

Interpretive response:

Generally, yes. A transferor applies Subtopic 610-20

when derecognizing an option to purchase real estate unless the option is a

financial asset or a derivative within the scope of Topic 815.

We believe a real estate option is rarely a financial asset, because it generally

does not give the holder the right to receive cash or a financial instrument.

We also believe a real estate option is rarely a derivative within the scope of

Topic 815, because generally:

•

it does not meet the definition of a derivative because it requires physical

delivery of real estate; or

•

it meets the exclusion from derivative accounting for contracts that meet

the definition of a derivative but are not traded on an exchange.

If a transferor transfers (sells or assigns) an option to purchase real estate or

other asset to a buyer and then leases that asset back from the buyer, the

transfer and leaseback may be considered to be a sale-leaseback transaction

that should be accounted for based on the guidance in Subtopic 842-40. Refer

to the sale-leaseback discussion in Question A20 and Chapter 9 of KPMG

Handbook,

Leases

, including Question 9.1.15 on determining when the transfer

of an option and leaseback of the asset subject to the option is within the scope

of 842-40.

Question A25

What guidance should a seller apply

when it sells a noncontrolling interest in an entity that is

not a subsidiary (e.g. equity method investee)?

Interpretive response:

As discussed in

Question A20

, Subtopic 610-20 does

not apply to transfers of financial assets, including transfers of investments –

e.g. those accounted for under the equity method. The scope of Topic 860

applies to the sale of those investments regardless of whether (a) the buyer is a

customer or a noncustomer, and (b) the underlying assets are predominantly

real estate or other nonfinancial assets.

[610-20-15-4(e)]

However, if an entity sells its 100% ownership in a subsidiary that is not a

business to a noncustomer and the fair value of the assets within that

subsidiary is concentrated in nonfinancial assets, then the seller applies

Subtopic 610-20 to the sale of each of the assets within the subsidiary. This

includes any financial assets (like equity method investments) because those

financial assets are in-substance nonfinancial assets. See

Question A20

[610-20-15-7]

KPMG Real Estate Revenue Handbook — page 19

Revenue: Real estate

A. Scope

Question A26

Are sales of undivided interests to

noncustomers in the scope of Subtopic 610-20? What if

the buyer is a customer?

Interpretive response:

It depends. While Subtopic 610-20 does not address

whether transfers of undivided interests are within its scope, we believe sellers

should apply it to transfers when the undivided interest being sold is accounted

for as a nonfinancial asset. Likewise, we believe sellers should apply Subtopic

610-20 to transfers of undivided interests in nonfinancial assets that were

wholly owned before the sale.

Some entities account for undivided interests in legal entities under the equity

method, but use gross financial statement presentation, often referred to as

proportionate consolidation. Subtopic 610-20 excludes sales of both equity

method investments and undivided interests in ventures when proportionate

consolidation is used. These investors should apply Topic 860 to derecognition

events. See

Question A25

[610-20-15-4]

Undivided interests in unincorporated legal entities

Subtopic 323-30 generally requires an investor with an interest in a partnership

or unincorporated joint venture (also referred to as

undivided interests in

ventures

) to account for it under the equity method if the investor has

significant influence over the investee. The SEC staff’s position is that these

investors should apply the equity method unless their interests are so minor

that they have virtually no influence. General partners are presumed to have

interests that are more than minor. In practice, limited partners generally are

presumed to have interests that are more than minor when their equity

interests are more than 3 to 5%.

[323-30-15-2 – 15-3, 25-1, 323-30-S99-1, 970-323-25-2, 25-

There are narrow exceptions to the guidance in Subtopic 323-30. Subtopics

910-810, 930-810 and 932-810 each provide an exception for interests in

investees in the construction or extractive industries when the investor also is

in those industries. For those investments, the investor applies the recognition

and measurement guidance for equity method investments as described in

Topic 323 (equity method and joint ventures). However, the investor is

permitted to apply gross, or proportionate, presentation in the financial

statements versus the one-line presentation required by Topic 323.

[910-810-45-1,

930-810-45-1, 932-810-45-1, 810-10-45-14]

As discussed above, Subtopic 610-20 excludes sales of equity method

investments and investments in ventures accounted for using proportionate

consolidation. We believe that investors with undivided interests in ventures,

including those investors that present the assets and liabilities underlying the

venture on a gross basis, should apply Topic 860 for derecognition. While some

investors have the option for gross presentation versus one-line

presentation

all must apply the recognition and measurement guidance for equity method

investments.

KPMG Real Estate Revenue Handbook — page 20

Revenue: Real estate

A. Scope

Undivided interests in nonfinancial assets – non-real property

Undivided interests

in specific assets or liabilities generally are outside the

scope of Topic 323 because they represent direct proportional ownership of

individual assets or liabilities versus ownership in an entity holding the assets or

liabilities. Investors with undivided interests in specific assets that are not real

property generally separately account for their share of those assets. Investors

with undivided interests in real property must meet certain criteria to separately

account for their share of the assets (see below).

We believe that investors with undivided interests in nonfinancial assets that

separately account for their proportionate ownership should apply Subtopic 610-

20 for derecognition. We do not believe these proportionate ownership

interests are outside the scope of Subtopic 610-20 because they are not

accounted for under paragraph 810-10-45-14. See

Question A20

Likewise, we believe sellers should apply Subtopic 610-20 to transfers of

undivided interests in nonfinancial assets that were wholly owned before the

sale. When a seller transfers an undivided interest and retains an undivided

interest that is accounted for as a nonfinancial asset, we believe the asset being

sold – i.e. the unit of account to which Subtopic 610-20 is applied – is the

proportionate ownership interest in the asset. We do not believe the retained

proportionate ownership interest in the asset (which continues to be accounted

for as a nonfinancial asset) represents consideration received for the sale. Thus,

the retained proportionate ownership interest in the asset would not be

remeasured to fair value.

Undivided interests in real property

Subtopic 970-323 requires an investor with an undivided interest in real property

to account for its interest under the equity method if the real property is subject

to joint control. Investors have joint control when decisions about the financing,

development, sale and operations of the real estate require the approval of two

or more of the investors.

[970-323-25-12]

If the investors do not have joint control, they may separately account for their

share of the assets, liabilities, revenue and expenses if the following additional

conditions are met:

•

each investor is entitled to only its pro rata share of income;

•

each investor is responsible to pay only its pro rata share of expenses; and

•

each investor is severally liable only for indebtedness it incurs in connection

with its interest in the property.

[970-810-45-1]

We believe that investors with undivided interests in real property that

separately account for their proportionate ownership of those assets should

apply Subtopic 610-20 for derecognition of those undivided interests. We do not

believe these proportionate ownership interests are outside the scope of

Subtopic 610-20 because they are not accounted for under paragraph 810-10-

45-14.

An undivided interest is defined in Subtopic 970-810 as an ownership arrangement in

which two or more parties jointly own property, and title is held individually to the extent

of each party’s interest.

KPMG Real Estate Revenue Handbook — page 21

Revenue: Real estate

A. Scope

Likewise, we believe sellers should apply Subtopic 610-20 to transfers of

undivided interests in real property that was wholly owned before the sale;

however, we believe the application of Subtopic 610-20 depends on the seller’s

characterization of the retained interest in the asset after the sale.

When a seller transfers an undivided interest and retains an undivided interest

that is accounted for as a nonfinancial asset, we believe the asset being sold –

i.e. the unit of account to which Subtopic 610-20 is applied – is the

proportionate ownership interest in the asset. We do not believe the retained

proportionate ownership interest in the asset (which continues to be accounted

for as real property) represents consideration received for the sale. Thus, the

retained proportionate ownership interest in the real property would not be

remeasured to fair value. This is consistent with the FASB’s statement that it is

not appropriate to remeasure a retained interest when the asset does not

change its character from a nonfinancial asset to a financial asset.

[ASU 2017-05.BC64]

When a seller transfers an undivided interest and retains an undivided interest

that is accounted for as an equity method investment, we believe the asset

being sold – i.e. the unit of account to which Subtopic 610-20 is applied – is the

entire asset. We believe the equity method investment represents noncash

consideration received for the sale. Thus, the equity method investment would

be initially measured at fair value just as retained equity method investments

are in partial sale transactions. See additional discussion in

Question F90

While proportionate accounting for the undivided interest in real property may

be applied when the above conditions are met, the investor may alternatively

elect to apply the equity method. If the investor elects to account for its interest

under the equity method, we believe it should apply Topic 860 for

derecognition. See

Question A25

Sales to customers

Sales of undivided interests to customers are in the scope of Topic 606 unless

the undivided interest is in-substance a financial asset. Sales of financial assets

are accounted for under Topic 860 regardless of whether the buyer is a

customer. In the real estate industry, we believe many sales of undivided

interests to customers (e.g. time-sharing interests) should be accounted for

under Topic 606. See

Question C10

Question A30

How does an entity apply the revenue (or

other income) recognition guidance when it sells

property improvements (or integral equipment) and

leases the underlying land to a customer?#

Interpretive response:

When a contract contains elements covered by

different accounting Topics, the entity applies the guidance in those other

Topics about how to separate and/or initially measure those elements.

However, if the other guidance does not specify how to separate and/or initially

measure one or more parts of the contract, then the entity applies Topic 606’s

separation and/or measurement guidance.

[606-10-15-4, 610-20-15-9]

KPMG Real Estate Revenue Handbook — page 22

Revenue: Real estate

A. Scope

Separation and allocation of contract components

Topic 842 (leases) includes guidance on separating lease and non-lease

components. A lessor must separate a single contract into each separate lease

and non-lease component and allocate the consideration in the contract using

the transaction price allocation guidance in Topic 606, which is based on relative

stand-alone selling prices. Although Topic 842 provides lessors a practical

expedient not to separate lease and non-lease components if specific criteria

are met (see

Question G20

for additional information), we believe a sale of

property improvements with an accompanying lease of the underlying land

generally would not qualify for that expedient. Therefore, the contract

consideration usually is allocated to the components on a relative stand-alone

selling price basis.

[606-10-32-28 – 32-41, 842-10-15-28 – 15-32, 15-38 – 15-42]

Recognition of the sale component

Revenue or gain is recognized on the sale of the property improvements (or

integral equipment) when control transfers to the customer (based on the

requirements in Topic 606 or Subtopic 610-20). Subtopic 610 20 requires

gain/loss presentation for noncustomer transactions while Topic 606 requires

revenue and cost of sales presentation for customer transactions.

[606-10-25-23 –

25-30, 610-20-25-6]

Accounting for the land lease

The lease of the underlying land is accounted for under Topic 842. A land lease

is generally classified by the lessor as an operating lease unless the lessee

effectively obtains control of the underlying asset or, even without control, the

lease payments and any third-party residual value guarantee represent

substantially all of the asset’s fair value and are probable of collection. For more

information on Topic 842 and lessor accounting, see KPMG Handbook,

Leases

Question A40

How do guarantees affect the accounting

for an accompanying sale of real estate?

Interpretive response:

When a contract with a customer or noncustomer

contains elements addressed by different Topics, if the other Topics specify

how to separate and/or initially measure one or more parts of the contract, then

an entity first applies those separation and/or initial measurement requirements.

[606-10-15-2, 15-4, 610-20-15-9, 55-2 – 55-5]

The seller first determines whether Topic 460 (guarantees), Topic 815

(derivatives and hedging) or another Topic applies to the guarantee. If the

guarantee is within the scope of Topic 460 or Topic 815 (see KPMG Handbook,

Derivatives and hedging

), the seller/guarantor initially recognizes and measures

it at fair value using the initial measurement guidance in the applicable Topic.

The seller then allocates the remainder of the consideration to the sale of the

property.

[606-10-15-2, 610-20-15-9]

KPMG Real Estate Revenue Handbook — page 23

Revenue: Real estate

A. Scope

The following guarantee contracts are within the scope of Topic 460.

Contracts that contingently require a guarantor to make payments to a

guaranteed party based on changes in an underlying that is related to an

asset, a liability, or an equity security of the guaranteed party.

Contracts that contingently require a guarantor to make payments to a

guaranteed party based on another entity’s failure to perform under an

obligating agreement (performance guarantees).

Indemnification agreements (contracts) that contingently require a

guarantor to make payments to an indemnified party (guaranteed party)

based on changes in an underlying that is related to an asset, a liability, or

an equity security of the indemnified party.

Indirect guarantees of the indebtedness of others, even though the

payment to the guaranteed party may not be based on changes in an

underlying that is related to an asset, a liability, or an equity security of the

guaranteed party.

[460-10-15-4]

Topic 460’s implementation guidance states that a market value guarantee on a

nonfinancial asset owned by the guaranteed party is an example of the type of

contract described in (a) above. We believe a seller’s guarantee of a buyer’s

investment (or a return on its investment), similar to a market value guarantees,

generally falls within the scope of Topic 460 and is separated from the sale

transaction and initially measured at fair value. The seller allocates the

remainder of the contract consideration to the sale of the real estate, which is

subject to Topic 606’s guidance on determining the transaction price.

[460-10-15-

4(a), 55-2(b)]

Because the seller accounts for it separately, the guarantee does not affect the

seller’s ability to recognize revenue or gain when it transfers control of the real

estate to the buyer. Guarantee-like arrangements not within the scope of

Topic 460 or other accounting guidance are combined with the sale transaction

that is accounted for under Topic 606 or Subtopic 610-20. These guarantee-like

provisions may affect the:

•

amount of revenue, gain or loss recognized on the sale (because the

provision may result in the transaction price being variable); or

•

timing of derecognition if the provision is significant enough to conclude

that control of the property has not transferred.

See

Question F10

for discussion about control transfer.

For example, an entity may guarantee its own performance. Consider a

seller/developer that sells land with an accompanying construction contract and

concludes it is a single performance obligation (see

Question C20

). The

seller/developer may provide a service-related guarantee that requires it to pay a

penalty if not fulfilled. Because the seller/developer is guaranteeing its own

performance, that provision is not in the scope of Topic 460. Instead, it gives

rise to variable consideration.

Refer to Question 2.3.10 of KPMG Handbook,

Revenue recognition

, for

additional guidance on guarantees of an entity’s own future performance. See

also

Question F60

in this publication for discussion of put options, which, like

KPMG Real Estate Revenue Handbook — page 24

Revenue: Real estate

A. Scope

some guarantee provisions, may result in a seller retaining control despite

relinquishing physical possession of the property.

Question A50

How do support obligations affect the

accounting for an accompanying sale of real estate?

Interpretive response:

If the seller’s obligation to support the operations of the

property (e.g. the seller agrees to support the operations up to a break-even

level of cash flows for a period of time) is within the scope of Topic 460, the

seller separates the support obligation and initially recognizes and measures it

at fair value under Topic 460’s initial measurement guidance. The seller

allocates the remainder of the contract consideration to the sale of the real

estate.

[460-10-30-2]

In our experience, support obligations generally have the characteristics of

guarantees that are within the scope of Topic 460, because they are analogous

to guarantees of the collection of scheduled contractual cash flows from

financial assets or business revenue.

[460-10-15-4(a), 55-2(d) – 55-2(e)]

Therefore, we believe most support obligations should be separated from the

sale transaction and initially measured at the fair value of the guarantee. When

the seller accounts for a support obligation separately, the obligation does not

affect the seller’s ability to recognize revenue or gain when the seller transfers

control of the real estate to the buyer.

Guarantee

‑

like arrangements not within the scope of Topic 460 or other Topics

remain combined with the sale transaction and may affect the:

•

amount of revenue, gain or loss recognized on the sale (because the

provision may result in the transaction price being variable); or

•

timing of derecognition if the provision is significant enough to conclude

that control of the property has not transferred.

See

Question F10

for discussion about control transfer and

Question F60

for

discussion about put options, which is another situation in which a seller may

retain control despite relinquishing physical possession of the property.

Example A50.1

Property sale with support obligation

Description of the arrangement

ABC Corp. sells a newly constructed property with a cost of $1,200,000 to DEF

Corp. for $2,000,000 in cash. ABC guarantees the cash flows of the property

will be sufficient to meet all the property’s operating needs for the first three

years after the sale date. The fair value of the guarantee at the sale date is

$30,000 and there is no other variable consideration.

Evaluation

Because the support obligation is a guarantee within the scope of Topic 460, it

is initially separated from the real estate sale and measured at fair value.

KPMG Real Estate Revenue Handbook — page 25

Revenue: Real estate

A. Scope

ABC allocates $30,000 of the $2,000,000 contract consideration to the

guarantee, and allocates $1,970,000 to the sale of the property, which is the

transaction price.

ABC recognizes a profit of $770,000 ($1,970,000 less $1,200,000 cost) when it

transfers control of the property. The guarantee continues to be accounted for

separately under Topic 460 and does not affect the profit recognized on the

sale. ABC recognizes subsequent changes in the guarantee’s carrying amount

outside of revenue (or gain on sale if the buyer is not a customer).

Question A60

Under Topic 606, what is the unit of

account for sales of condominium units within a

condominium project (or similar structure)?

Interpretive response:

Topic 606 generally specifies the unit of account is an

individual contract with a customer and includes implementation guidance that

illustrates individual contracts with customers to construct individual units in a

multi

‑

unit residential complex are accounted for separately.

[606-10-55-180]

However, there is a practical expedient that allows an entity to apply the

guidance to a portfolio of contracts (or performance obligations) with similar

characteristics, but only if the entity reasonably expects the effect on the

financial statements to not differ materially from applying the guidance to the

individual contracts.

[606-10-10-4]

We believe it may be difficult for an entity to demonstrate a reasonable

expectation that the effect of using a project or portfolio approach is materially

the same as using an individual contract approach because the:

•

control of the individual units likely will transfer at different points in time

(see

Question F40

about the pattern of control transfer in unit sales); and

•

transaction prices and fulfillment costs of individual units within a project

likely will be different.

Question A70

Is a property or asset manager’s carried

interest (or promote) in the scope of Topic 606?#

Interpretive response:

It depends.

Managers are compensated in different ways for providing asset management

services including a base management fee, an incentive-based fee or an

incentive-based capital allocation in the form of a carried interest in a

partnership or similar structure. Incentives are earned based on the

performance of the assets under management.

Because carried interest arrangements are generally in-form equity, the IASB

and FASB’s Joint Transition Resource Group for Revenue Recognition

discussed whether such arrangements are either in the scope of Topic 606 or

accounted for as an ownership interest in the investee entity at its April 2016

meeting. FASB members present at the meeting indicated that the FASB

discussed performance fees in asset management contracts when developing

KPMG Real Estate Revenue Handbook — page 26

Revenue: Real estate

A. Scope

Topic 606. All FASB members present at the meeting expressed the view that

performance fees in the form of carried interest arrangements were intended to

be in the scope of Topic 606.

[TRG 04-16.50]

The SEC Observer at the meeting indicated that the SEC staff would accept an

application of Topic 606 for these arrangements. However, he also noted that

applying an ownership model to these arrangements, rather than Topic 606,

may be acceptable based on the specific facts and circumstances. If an entity

were to apply an ownership model, the SEC staff would expect the full

application of the ownership model, including an analysis of the consolidation

guidance in Topic 810, the equity method of accounting under Topic 323 or

other relevant guidance. We understand that the SEC staff would not object to

the view that the carried interest would be evaluated as a

performance fee

rather than an interest in the fund itself when making an assessment of

whether it is a variable interest under Topic 810.

The SEC Observer did not elaborate on the nature of the facts and

circumstances that in the SEC staff’s view would require application of Topic

606 to these arrangements. We are not aware of any examples in which the

SEC staff believe applying an ownership model would be unacceptable when

the performance fee is in the form of equity (i.e. carried interest).

Based on our understanding of the SEC staff’s views, we believe both private

and public companies may account for performance-based fees in the form of a

capital allocation under one of the following models (as an accounting policy

election to be consistently applied):

•

the revenue recognition guidance in Topic 606; or

•

an equity ownership model using the guidance in Topic 323, Topic 810 or

other relevant guidance.

Based on our current understanding of the views of the FASB and SEC staffs, if

an entity applies Topic 606 to these arrangements, we believe it will generally

be difficult to support a conclusion that it is preferable to change to an

ownership model. Future standard-setting or regulatory developments may

cause our view to change.

If an entity applies an ownership model (e.g. Topic 323), the presentation and

disclosure of the equity income from these arrangements would also be

separate from revenue from arrangements accounted for under Topic 606. See

KPMG Handbook,

Equity method of accounting

, for further information on the

application of Topic 323 to these arrangements.

KPMG Real Estate Revenue Handbook — page 27

Revenue: Real estate

B. Step 1: Identify the contract

Step 1: Identify the

contract

Detailed contents

Question B10

What consideration should a seller give to the buyer’s initial and

continuing investments when evaluating if a contract exists?

KPMG Real Estate Revenue Handbook — page 28

Revenue: Real estate

B. Step 1: Identify the contract

Question B10

What consideration should a seller give to

the buyer’s initial and continuing investments when

evaluating if a contract exists?

Interpretive response:

Subtopic 610-20 requires an entity to apply the

guidance in Topic 606 to determine if the agreement meets the contract

existence criteria. These criteria establish the enforceable rights and obligations

of a contract and include the following (all must be met):

parties have approved the contract and are committed to performing their

respective obligations;

entity can identify each party’s rights regarding the goods or services to be

transferred;

entity can identify the payment terms for the goods or services to be

transferred;

contract has commercial substance; and

it is probable that the entity will collect substantially all of the consideration

to which it will be entitled.

Refer to sections 3.2 and 3.3 of KPMG Handbook,

Revenue recognition

, for

further guidance on determining whether a contract exists and applying the

collectibility criterion, respectively.

[610-20-25-5, 606-10-25-1 – 25-8]

Unlike legacy guidance for real estate sales, neither Topic 606 nor Subtopic 610-

20 require that the buyer provide specific levels of initial or continuing

investment to demonstrate that the contract existence criteria are met.

The objective of evaluating the buyer’s ability and intention to pay is to assess

whether there is a substantive transaction between the seller and the buyer.

This assessment is partially forward looking, which requires the seller to use

judgment and consider all facts and circumstances, including the seller’s

customary business practices and its knowledge of the buyer.

Seller’s considerations when evaluating whether collectibility is probable

Payment terms that

suggest a significant

uncertainty about the

buyer’s intention and

ability to fulfill its

obligations

Do the payment terms reflect inherent uncertainty about

the buyer’s intention to fulfill its obligations?

•

Small down payment relative to the overall contracted

price.

•

Nonrecourse, seller-provided financing.

•

Customer-provided collateral or guarantees that are

illiquid or have highly variable or unobservable fair

value.

•

Continuing periodic payments that extend beyond:

—

a customary financing period for similar

transactions; and

—

the property’s estimated useful life.

•

No periodic payments required.

•

Guarantees provided by lower-rated counterparties.

Importance of the

property to the

buyer’s operations

•

Does the buyer’s business model and reasons for

entering into the transaction raise doubt about its

intention to follow through with its obligations?

KPMG Real Estate Revenue Handbook — page 29

Revenue: Real estate

B. Step 1: Identify the contract

Seller’s considerations when evaluating whether collectibility is probable

•

Does the buyer need the property to operate its

business, which likely indicates that it would have a

greater commitment to perform than if the purchase

was made for speculative investment purposes?

Prior experience

•

Does the seller have prior experience with the buyer

(or a similar class of buyer) for the same or similar

transaction that raises questions about the buyer’s

intent and ability to perform?

•

Has the seller previously chosen not to enforce its

contractual rights in similar contracts with the buyer (or

buyer class) under similar circumstances?

•

Is the seller’s receivable subject to future

subordination?

An entity should not view these factors in isolation. Instead, the entity should

evaluate the factors collectively and evaluate all relevant facts and

circumstances. No single factor determines whether the buyer is committed to

perform or collectibility is probable. An entity that refers to the legacy guidance

in Subtopic 360-20 on initial and continuing investments as an indicator of

whether collectibility is probable should not consider these thresholds as safe

harbors or bright lines. The seller’s ability to later repossess the property after it

transfers control to the buyer at a point in time should not be considered when

assessing its ability to mitigate its credit risk exposure.

[606-10-55-3C]

If a contract does not exist, the seller:

•

continues to report the nonfinancial asset on its statement of financial

position;

•

depreciates it if it is not held for sale; and

•

evaluates it for impairment as necessary under Section 360-10-35.

[606-10-25-1, 610-20-25-5, 360-10-40-3C, 45-9 – 45-10]

The seller then accounts for cash collected as a deposit liability until a contract

exists and the seller transfers control of the property or until the seller meets

one of these conditions:

•

the seller has no remaining obligations to transfer goods or services to the

customer and all, or substantially all, of the promised consideration has

been received and is nonrefundable;

•

the contract has been terminated, and the consideration received is

nonrefundable; or

•

the seller has transferred control of the goods or services for which it has

received consideration; the seller has stopped transferring goods and

services to the buyer (if applicable) and has no obligation under the contract

to transfer additional goods or services; and the consideration received

from the buyer is nonrefundable.

[610-20-25-5, 606-10-25-6 – 25-8]

If facts and circumstances change and the seller can subsequently demonstrate

that a contract exists or one of the conditions above are met, it will recognize

revenue under Topic 606 (customer transactions) or gain under Subtopic 610-20

(noncustomer transactions).

KPMG Real Estate Revenue Handbook — page 30

Revenue: Real estate

B. Step 1: Identify the contract

Topic 606 illustrates the collectibility analysis in the context of a real estate sale

when a real estate developer sells a building and provides long

‑

term,

nonrecourse financing for 95% of the sales price. The buyer expects to repay

the loan primarily from income derived from its restaurant business and lacks

other income or assets to repay the loan. Additionally, the restaurant business

faces significant competitive risks and the buyer has limited industry

experience. Because of the uncertainty associated with the buyer’s ability and

intention to pay, the seller concludes that the criteria necessary to conclude a

contract exists are not met.

[606-10-55-95 – 55-98, 25-1]

At the sale date (and each reporting period), the seller must evaluate the

conditions necessary to conclude a contract exists (or one of the conditions in

paragraph 606-10-35-7 is met) to determine how to account for the

nonrefundable deposit.

[606-10-25-1 – 25-8, 610-20-25-5]

We believe at the sale date the seller in the above fact pattern likely would not

recognize revenue or gain because:

•

it is not probable the seller will collect the consideration to which it is

entitled;

•

the seller has not received substantially all of the consideration;

•

the seller provided nonrecourse financing for a substantial portion of the

consideration;

•

the contract has not been terminated; and

•

the seller may not have transferred control of the building (see

Question F10

Until the seller can conclude a contract exists or one of the conditions in

paragraph 606-10-25-7 is met, it does not derecognize the asset or recognize a

receivable. The seller instead will recognize the nonrefundable deposit received

as a deposit liability.

[606-10-25-30, 610-20-25-5, 360-10-40-3C]

The seller must continue to assess the contract to determine if and when it is

appropriate to recognize revenue or gain. We believe the following situations

will most commonly occur in real estate sales when a contract does not exist at

the sale date.

•

A contract subsequently does exist because the buyer has established a

consistent payment history, obtained other capital or financing sources, or

accumulated sufficient funds to reduce the risk of nonpayment. The seller

derecognizes the building and recognizes revenue or gain on the sale at the

point in time control transfers.

[606-10-25-1]

•

A contract does not exist, but the parties terminate the arrangement and

the seller repossesses the property. The seller recognizes the

nonrefundable deposit in income.

[606-10-25-1 – 25-8, 610-20-25-5]

The guidance on evaluating the existence of a contract (and the accounting if a

contract does not exist) applies to both customer and noncustomer

transactions.

KPMG Real Estate Revenue Handbook — page 31

Revenue: Real estate

C. Step 2: Identify the performance obligations

Step 2: Identify the

performance obligations

Detailed contents

Question C10

Is the sale of an undivided interest in the common areas where

the seller/developer may build future amenities considered a separate

performance obligation from the sale of a condominium unit or

residential lot when the undivided interest is transferred to the

customer in the sales transaction? Does the answer change if the

seller/developer does not transfer the undivided interest but will

transfer future amenities to a third party?

Question C15

What is the unit of account for noncustomer real estate sales

when the disposal group includes more than one asset?

Question C20

Does the sale of land and the agreement to construct property

improvements comprise multiple performance obligations? Is the

analysis different if the buyer is not a customer?

Question C30

How should an entity analyze the number of performance

obligations in a typical property management services contract?

KPMG Real Estate Revenue Handbook — page 32

Revenue: Real estate

C. Step 2: Identify the performance obligations

Question C10

Is the sale of an undivided interest in the

common areas where the seller/developer may build

future amenities considered a separate performance

obligation from the sale of a condominium unit or

residential lot when the undivided interest is transferred

to the customer in the sales transaction? Does the

answer change if the seller/developer does not transfer

the undivided interest but will transfer future amenities

to a third party?

Interpretive response:

Transferring future amenities to the customer

A seller accounts for a good or service as a performance obligation if the good

or service promised to the customer is distinct from other goods or services

promised in the contract. A good or service is distinct if:

the customer can benefit from the good or service either on its own or with

other resources that are readily available to the customer (i.e. the good or

service is capable of being distinct); and

the entity’s promise to transfer the good or service to the customer is

separately identifiable from other promises in the contract (i.e. distinct in

the context of the contract).

[606-10-25-19]

Capable of being distinct

A good or service meets criterion (a), capable of being distinct, if it could be

“used, consumed, sold for an amount that is greater than scrap value, or

otherwise held in a way that generates economic benefits.” The fact that the

entity regularly sells a good or service separately indicates that a customer

could benefit from the good or service on its own or with other readily available

resources.

[606-10-25-20]

Distinct in the context of the contract

The seller’s objective when assessing whether a promise is distinct in the

context of the contract (criterion (b)) is to determine whether the nature of its

overall promise is to transfer each of the goods or services, or whether the

promise is to transfer a combined item to which each of the promised goods or

services are inputs.

[606-10-25-21]

These factors indicate a good or service is not distinct in the context of the

contract:

•

the entity provides a significant service of integrating the goods or services

with other goods or services promised in the contract;

•

one or more of the goods or services significantly modifies or customizes,

or is significantly modified or customized by, one or more of the other

goods or services promised in the contract; or

KPMG Real Estate Revenue Handbook — page 33

Revenue: Real estate

C. Step 2: Identify the performance obligations

•

the goods or services are highly interdependent or highly interrelated – i.e.

each one is significantly affected by the other goods or services.

The undivided interest in the common areas, regardless of whether the

amenities have been completed, generally:

•

cannot generate independent economic benefits to the buyer (the

undivided interest is not practically separable from the fee interest in the

unit or lot); and

•

is integral to the buyer’s purchase of the unit or lot – i.e. the buyer is unable

to purchase (or not purchase) the undivided interest in the common areas

without the condominium unit or lot.

Therefore, we believe the sale of the unit or lot and the accompanying transfer

to the customer of the undivided interest in the common areas would be a

single performance obligation.

We believe this conclusion is consistent with the FASB’s guidance stating that

a developer may need to include construction of common areas in its measure

of progress toward completely satisfying its performance obligation to construct

an individual unit within a multi

‑

unit residential complex.

[606-10-55-180]

We also believe this conclusion is consistent with the cost guidance in

Subtopic 970-340 that requires developers to allocate to the benefitted land

parcels the common costs of the amenity. This guidance was not amended by

Topic 606 or Topic 340 (other assets).

Accounting for amenity costs – amenity transferred to the customer

The FASB’s industry guidance in Subtopic 970-340 on accounting for amenity

costs applies because the future amenity is being sold or transferred in

connection with the sale of individual units by transferring the undivided interest

to the customer. In this situation, the developer should allocate the costs that

exceed the anticipated proceeds as common costs to the land parcels that

benefitted from the development, or probably will benefit, because the amenity

is clearly associated with the sale of the project. The common costs include the

developer’s expected future operating costs until the amenity is assumed by

the buyers of the units. Before the amenity is substantially complete and

available for use, operating income (loss) is included as a reduction of (or

addition to) common costs. See additional discussion in

Question F40

about the

timing of revenue recognition for sales of condominium units (and other similar

structures).

[970-340-25-9 – 25-11]

Transferring future amenities to a third party

When the seller/developer transfers future amenities to a third party (e.g. a

homeowner’s association (HOA), municipality or community development

district) instead of transferring them to the customer through an undivided

interest, it analyzes the transfers differently. Based on discussions with the

FASB staff, we believe those third parties generally are not extensions of the

customer because they are unrelated to the customer and the customer does

not control the amenities before or after the transfer.

While an individual homeowner often has an obligation to pay fees to third-party

transferees such as HOA dues or municipal taxes and may have some rights to

KPMG Real Estate Revenue Handbook — page 34

Revenue: Real estate

C. Step 2: Identify the performance obligations

participate in their operation, such as becoming a board member, appealing fee

or tax assessments, or obtaining and reviewing governing documents or

financial data, the individual generally does not have an equity interest or the

ability to control the third party or the amenity either before or after the transfer.

In this situation, the promise associated with the future amenity would not be

considered part of the customer’s contract to purchase the property because

the amenities will be transferred to an unrelated party. Therefore, delivery of

the amenity would not be considered a performance obligation in the contract

with the customer.

Accounting for amenity costs – amenity transferred to a third party

We believe the guidance on accounting for amenity costs that will be sold

separately from the unit applies to these situations because the developer is

selling or transferring the future amenity separately to the third party. The

amount of capitalizable costs (incurred before the amenity is substantially

complete and available for use) that exceeds the estimated fair value at the date

of substantial physical completion should be allocated as common costs to the

land parcels that benefitted and to those for which development is probable.

Capitalizable costs are reduced by operating income (or are increased by

operating losses) generated by the amenity before it is substantially complete

and available for use. Operating income (or loss) generated by the amenity after

it is substantially complete and available for use is included in operating results.

A later sale of the amenity at an amount different from the estimated fair value

at substantial completion, less any accumulated depreciation, results in a gain

or loss in net income in the period in which the sale occurs.

[970-340-25-9(b) – 25-11]

In the scenario described, the third party typically pays little or no consideration

on transfer of the amenity. Therefore, we believe that the developer would treat

as common costs all the costs associated with the amenity that are not

expected to be recovered on transfer to the HOA or municipality.

Question C15

What is the unit of account for

noncustomer real estate sales when the disposal group

includes more than one asset?

Interpretive response:

As discussed in

Questions A10

and

A20

, when a seller

transacts with a noncustomer, and substantially all of the fair value of a group’s

or subsidiary’s assets is concentrated in nonfinancial assets and the group or

subsidiary is not a business, the seller applies Subtopic 610-20 to the sale of

each distinct asset within the group or subsidiary. This includes assets in the

entity or group that would be financial assets if they were sold separately but

are in-substance nonfinancial assets (as a result of being included in a group or

subsidiary in which substantially all the fair value is concentrated in nonfinancial

assets).

[610-20-15-5 – 15-6]

Each distinct nonfinancial asset (or in-substance nonfinancial asset) is a

separate unit of account that needs to be analyzed to determine whether

derecognition is appropriate and, if so, the amount of the related gain or loss.

Subtopic 610-20 requires the seller to identify each distinct nonfinancial asset

KPMG Real Estate Revenue Handbook — page 35

Revenue: Real estate

C. Step 2: Identify the performance obligations

using the criteria in Step 2 of the revenue recognition model in Topic 606.

[610-

20-25-6 – 32-2]

A seller identifies each distinct nonfinancial asset (or in-substance nonfinancial

asset) as a separate unit of account even when multiple nonfinancial assets are

transferred together in a legal entity. However, the FASB observed that in many

cases, control of nonfinancial assets in a subsidiary will transfer at the same

time and practically a seller may not need to separately identify the distinct

assets when a group or subsidiary has multiple nonfinancial assets and in-

substance nonfinancial assets (if any). Nevertheless, a seller should carefully

evaluate the arrangement to ensure there are no provisions indicating that

assets in a single group or subsidiary will transfer at different times.

[ASU 2017-

05.BC42]

Also, there may be situations in which the seller retains control of specific

assets within the group – e.g. by having a repurchase option on a single asset in

the group. In those situations, the seller will need to allocate consideration to

each distinct nonfinancial and in-substance nonfinancial asset to compute the

gain on those assets for which control has transferred. See

Question F60

[610-

20-25-6]

Refer to Question 17.3.40 of KPMG Handbook,

Revenue recognition,

for

additional discussion about the unit of account under Subtopic 610-20 and

Question F91

for discussion about how the transaction price is allocated when

the transaction contains multiple distinct nonfinancial assets.

Question C20

Does the sale of land and the agreement

to construct property improvements comprise multiple

performance obligations? Is the analysis different if the

buyer is not a customer?

Interpretive response:

Contracts with customers

It depends. As discussed in

Question C10

, a seller accounts for a good or

service as a performance obligation only if the good or service promised to the

customer is distinct (i.e. capable of being distinct and distinct in the context of

the contract) from other goods or services in the contract.

[606-10-25-19]

Capable of being distinct

When evaluating whether the transfer of the land and the construction contract

are capable of being distinct, the seller/developer considers whether the land

alone could be used, consumed, sold for an amount that is greater than scrap

value or otherwise held in a way that generates economic benefit. For example,

could the land alone be sold, developed by another party or leased to others?

The seller/developer also considers whether the property improvements that

are the output of the construction contract could independently generate

economic benefits. For example, could the property improvements be sold

independently (perhaps if a buyer leased the underlying land) or leased?

KPMG Real Estate Revenue Handbook — page 36

Revenue: Real estate

C. Step 2: Identify the performance obligations

The seller/developer also considers whether it (or a similar party) regularly sells

land or construction services separately.

[606-10-25-20]

We believe a seller/developer often may conclude that the sale of the land and

construction service contract are capable of being distinct, but it needs to

consider all the facts and circumstances. See

Question C10

about how a

seller/developer may evaluate this criterion in a property sale with an

accompanying undivided interest in common areas where future amenities may

be built.

Distinct in the context of the contract

When the seller/developer evaluates whether the sale of the land and the

construction contract are distinct in the context of the contract, its objective is

to determine whether the nature of its overall promise is to transfer each of the

goods or services, or whether the promise is to transfer a combined item to

which the promised goods or services are inputs.

Factors that indicate a good or service is

not

distinct in the context of the

contract, include, but are not limited to:

•

Indicator a –

the entity provides a significant service of integrating the

goods or services with other goods or services promised in the contract;

•

Indicator b –

one or more of the goods or services significantly modifies or

customizes, or is significantly modified or customized by, one or more of

the other goods or services promised in the contract; or

•

Indicator c –

the goods or services are highly interdependent or highly

interrelated (i.e. each one is significantly affected by the other goods or

services).

Indicator a

While land appears to be an input to delivering a property improvement, the

land with the property improvements may not be the combined output

specified in the contract. The land transfer and property improvement

construction may be separate promises in the contract.

For example, these contract terms may suggest the promises are separate:

•

the stated contract consideration (not necessarily the transaction price) for

the land sale may be independent of the construction service consideration;

•

the timing for delivery of each promise may be different because the title to

the land transfers to the buyer before construction begins; or

•

the dispute resolution or default provisions associated with the land sale,

the construction contract, or both, do not affect the terms of the other

promise.

Indicator b

Whether property improvements significantly modify or customize the land may

depend, in part, on the nature of the improvement and the characteristics of the

land. For example, certain land parcels may be expected to have largely the

same value with or without the property improvements – e.g. one in a unique

KPMG Real Estate Revenue Handbook — page 37

Revenue: Real estate

C. Step 2: Identify the performance obligations

location and/or zoned for a particular use. Other land parcels may not require

significant site preparation (demolition, clearing, grading or excavation) so the

construction of the improvements may not significantly modify or customize the

land.

Indicator c

This indicator focuses on whether the promises affect each other to such an

extent that delivery/satisfaction of one without the other, and vice versa, would

significantly affect the value or utility of the delivered/satisfied promise.

The FASB’s guidance provides one example of highly interrelated promises

when an entity grants a customer an antivirus software license along with

when-and-if-available updates. The updates occur frequently and are critical to

the continued utility of the software because without them the customer’s

ability to benefit from the software would decline significantly. These promises

are not distinct in the context of the contract because the license and its

updates are inputs to a combined output of antivirus protection.

The updates significantly modify the functionality of the software to ensure that

it protects the customer from new viruses and are integral to maintaining the

software’s utility. The license and the updates fulfill a single promise to the

customer, which is to provide protection from computer viruses. We believe

that the FASB intended this example to illustrate a very narrow fact pattern that

is specific to certain software

license arrangements.

[606-10-55-140D – 55-140F]

The FASB provided another example of an entity contracting with a customer to

sell a piece of equipment with installation services that are not complex and are

capable of being performed by alternative service providers. In this scenario, the

promises are distinct in the context of the contract for the following reasons.

•

The entity is not providing a significant integration service. Instead, the

entity has promised to deliver the equipment and install it. The entity would

be able to fulfill its promise to transfer the equipment separately from its

promise to install it. The entity has not promised to combine the equipment

and the installation services in a way that would transform them into a

combined output.

•

The installation services will not significantly customize or modify the

equipment.

•

Although the customer can benefit from the installation services only after

it has obtained control of the equipment, the installation services do not

significantly affect the equipment because the entity would be able to fulfill

its promise to transfer the equipment independently from its promise to

provide installation services. Because the equipment and the installation

services do not significantly affect each other, they are not highly

interdependent or highly interrelated.

[606-10-55-150A – 55-150D]

Even if the customer is contractually required to use the entity’s installation

services, the promises are still distinct because the contractual requirement

does not change the characteristics of the goods or services, nor does it change

the entity’s promises to the customer.

[606-10-55-150E – 55-150F]

When applying this guidance to land sales with accompanying development

contracts, we believe sellers/developers often will conclude that the land and

KPMG Real Estate Revenue Handbook — page 38

Revenue: Real estate

C. Step 2: Identify the performance obligations

construction services are not highly interdependent or highly interrelated

because generally a customer could benefit independently from the land and

construction services.

For example, a customer could purchase the land and hire another party to

perform the construction services and conversely could purchase, lease or

redeploy other land on which the developer could construct the improvements.

While the contract allows the customer to benefit from the construction

services only after it has obtained control of the land, generally the

seller/developer can fulfill its promise to transfer the land independently of its

promise to perform the construction services.

However, there may be situations in which the land sale and the development

contract are highly interdependent or interrelated. This could occur when the

entire project is so complex or specialized that the value of the combined

output (i.e. the completed property) relies primarily on the seller/developer’s

proprietary knowledge, skill or position in the market. In these unusual

situations, the parties to the contract also likely would conclude that indicator (a)

is met because the seller/developer performs a significant service of integrating

the land sale and the construction services to deliver a transformed combined

output for which the buyer has contracted.

A contractual requirement to use the same seller/developer for the land sale

and construction services does not affect the conclusion about whether the

promises are distinct.

[606-10-55-150E – 55-150F]

Careful consideration of the total contract and all relevant facts and

circumstances about the delivery of goods or services to the customer are

critical when evaluating whether promises are distinct in the context of the

contract.

Contracts with noncustomers

Subtopic 610-20 refers to Topic 606’s guidance on separating performance

obligations only in the context of the seller identifying the distinct nonfinancial

and in-substance nonfinancial assets to which it will allocate the contract

consideration. However, it also says that if a contract to sell a nonfinancial (or in-

substance nonfinancial) asset includes other promises (e.g. services or

guarantees in the scope of Topic 460) that do not relate to assets of the seller

to be derecognized, those arrangements are separated and accounted for under

other Topics.

[610-20-15-9 – 15-10, 25-6]

We believe that if a seller/developer routinely sells land as an output of its

ordinary activities, the land sale and construction services likely are both within

the scope of Topic 606 on customer transactions. Those sellers would assess

the number of performance obligations as discussed above.

If the seller/developer routinely provides construction services as an output of

its normal activities but does not routinely sell land as part of those activities, it

would apply Subtopic 610-20 to the land sale and Topic 606 to the construction

services if those two promises are distinct. We believe the seller generally

would allocate the total transaction price between these two units of account

using relative stand-alone selling prices. See additional discussion in

Question E10

[610-20-15-9 – 15-10, 25-6, 32-2 – 32-6, 606-10-15-4, 32-29]

KPMG Real Estate Revenue Handbook — page 39

Revenue: Real estate

C. Step 2: Identify the performance obligations

If the land and construction services are not distinct, the evaluation would be

based on whether their combined output (the land sale and services) is an

output of the seller/developer’s normal activities.

See additional discussion in

Question F30

about the timing of revenue

recognition for land sales with accompanying construction contracts.

Question C30

How should an entity analyze the number

of performance obligations in a typical property

management services contract?

Interpretive response:

The manager first must identify the promises to the

customer and evaluate whether each promise is distinct (see the response to

Question C20

for the distinct criteria). When evaluating whether the multiple

promises are distinct the manager will generally focus on determining whether

the nature of the property management services is to provide a single,

integrated service offering, and therefore the individual activities that comprise

property management are not distinct in the context of the contract.

While each activity conducted by a manager may be capable of being distinct,

the activities may not be separately identifiable when the manager provides a

significant service of integrating the activities such that they become essentially

fulfillment activities or inputs to provide the management service.

A key consideration in this determination is whether the activities the manager

will perform to fulfill the performance obligation are indeterminate (e.g. even if

the type of activities are generally understood, the quantity and mix of activities

that will need to be performed to fulfill the obligation are unknown), or are

known upfront – e.g. the manager will do X, Y and Z activity once weekly for

three years. A manager with a promise to provide indeterminate activities is

likely to conclude that it is providing a single, integrated service offering to the

customer – i.e. it is conducting all of the activities to perform a single promise

of an outsourced service for the customer.

If the property management services are not a single integrated service

offering, the manager should analyze each specified activity to determine if it is

distinct from the other activities to conclude on the number of performance

obligations.

If the property management services are a single integrated service offering,

the manager may still need to determine whether the integrated service is a

‘series’. For example, could a three

‑

year property management services

contract be subdivided into distinct time periods like three annual periods or

36 monthly periods? This may be important for purposes of allocating variable

consideration (see

Question E10

) or subsequent modifications.

A performance obligation is a series when it comprises distinct goods or

services that are substantially the same and have the same pattern of transfer.

When the integrated service can be subdivided into smaller time increments

during which the manager’s promises are substantially the same in each time

increment, the performance obligation may be a series if each time increment is

distinct.

KPMG Real Estate Revenue Handbook — page 40

Revenue: Real estate

C. Step 2: Identify the performance obligations

After subdividing the service period into time increments, the manager must

evaluate whether those identified increments are distinct from each other. If so,

the manager considers the services a series of distinct services that are

accounted for as a single performance obligation (i.e. series guidance in

Topic 606). If the time increments are not distinct, the property management

services are still a single performance obligation but not a series. See

Question E10

for additional discussion.

[606-10-25-14 – 25-15, 25-19 – 25-21]

The FASB illustrates this guidance in an example where property management

services are accounted for as a single performance obligation under the series

guidance.

[606-10-55-157B – 55-157E, Ex 12A]

The example reaches this conclusion because:

•

each day’s property management services are substantially the same

because the manager provides the same overall service each day, even if

the underlying tasks or activities vary – e.g. cleaning services, leasing or

reservation services, property maintenance;

•

each day of property management services is satisfied over time because

the customer simultaneously receives and consumes the benefits provided

by the manager as it performs (see the discussion of the over-time criteria

Question F20

); and

•

the same method is used to measure progress toward complete

satisfaction of the performance obligation because each day’s obligation to

provide property management services typically is measured using a time-

based approach.

[606-10-25-15, 25-27]

For more information see the following Questions:

•

D30

– determining the transaction price when the property management

services contract accompanies a property sale;

•

E10

– allocating the transaction price when the property management

services contract accompanies a property sale; and

•

F130

– recognizing revenue for variable consideration in a property

management services contract.

KPMG Real Estate Revenue Handbook — page 41

Revenue: Real estate

D. Step 3: Determine the transaction price

D. Step 3: Determine the

transaction price

Detailed contents

Question D10

How does a seller’s right to participate in a property’s future

profits affect the determination of the transaction price for the sale of

that property?

Example D10.1

Sale of property with future profits interest

Question D15

Are incentive fees (e.g. in property or asset management

agreements) that are subject to variability due to market prices or

volatility always constrained to zero?

Example D15.1

Applying the constraint to an asset management

contract when there is market volatility

Question D20

Is a change in estimate relative to the measure of progress

toward satisfaction of the performance obligation on a construction

contract subject to the revenue recognition constraint?

Question D30

What discount rate does an entity use when determining the

time value of money to include in the transaction price for a property

management service contract that is prepaid as part of an all cash

operating property sale?

Example D30.1

Sale of property with prepaid property management

services

Question D40

When a seller receives nonmonetary consideration in a property

sale, does it apply the guidance for nonmonetary transactions or the

guidance on noncash consideration?

Question D45

Does a seller in a real estate sale recognize as noncash

consideration the receipt of a real estate option that is outside the

scope of Topic 815?

Question D50

How does a seller consider liabilities assumed by the buyer in a

sale of real estate to a noncustomer?

KPMG Real Estate Revenue Handbook — page 42

Revenue: Real estate

D. Step 3: Determine the transaction price

Question D10

How does a seller’s right to participate in

a property’s future profits affect the determination of the

transaction price for the sale of that property?

Interpretive response:

The seller generally treats its right to future profits as

variable consideration and estimates it upfront to determine the transaction

price (the amount of consideration to which it expects to be entitled). The seller

would not estimate its right to future profits upfront as part of the transaction

price for the property sale if:

[606-10-32-40, 55-18]

•

it must allocate the future profits entirely to another performance obligation,

or to distinct goods or services within a series of distinct goods or services

that are accounted for as a single performance obligation; or

•

the contract also contains another performance obligation satisfied over

time and the entity recognizes the future profits as revenue for that

performance obligation in the amount to which the entity has a right to

invoice as a practical expedient.

Variable consideration included in the transaction price is subject to a constraint

and is regularly reassessed until the uncertainty is resolved. A seller may only

include its estimate of its share of future profits in the transaction price to the

extent that it is probable that a significant reversal in the amount of cumulative

revenue recognized will not occur when the uncertainty is subsequently

resolved.

[606-10-32-11 – 32-14]

The guidance on the constraint requires a seller to consider both the likelihood

and the magnitude of a potential revenue reversal and includes the following

factors that could increase the likelihood or the magnitude of a revenue

reversal.

[606-10-32-12]

•

The amount of consideration is highly susceptible to factors outside the

seller’s influence. Those factors may include market volatility, the judgment

or actions of third parties, weather conditions, and a high risk of

obsolescence of the promised good or service.

•

The seller does not expect resolution to the uncertainty about the amount

of consideration for a long period of time.

•

The seller’s experience or other evidence with similar contracts is limited,

or that experience or other evidence has limited predictive value.

•

The entity has a practice of either offering a broad range of price

concessions or changing the payment terms and conditions of similar

contracts in similar circumstances.

•

The contract has a large number and broad range of possible consideration

amounts.

The seller must estimate the transaction price in light of the specific facts and

circumstances of the arrangement and cannot default to a conclusion that the

variable consideration is fully constrained until the uncertainty is resolved. The

seller will update the estimated transaction price each reporting period to reflect

the current circumstances at each reporting date.

KPMG Real Estate Revenue Handbook — page 43

Revenue: Real estate

D. Step 3: Determine the transaction price

The guidance on determining the transaction price applies to both customer and

noncustomer transactions.

Example D10.1

Sale of property with future profits

interest

Description of the arrangement

ABC Corp. sells a newly constructed retail property with a cost of $1,200,000 to

DEF Corp. for $2,000,000 in cash and a right to receive 5% of future operating

profits from the property over a 10-year earn-out period. ABC has no ongoing

performance obligations related to the operations of the property.

Because the in-place leases have fixed payments for the first two years of the

earn-out period, ABC concludes it is probable that it will receive a payout of

$50,000 in total variable consideration for years one and two. It bases its belief

on the contractual, fixed lease payments in those years and its experience with

similar properties and tenants.

However, ABC is less certain about its expected payouts in years 3 through 10

because the lease payments that the property buyer will receive shift from fixed

payments to contingent payments based on the lessees’ underlying third-party

sales. While ABC is not guaranteed a minimum payout in years 3-10 and there

is more uncertainty than the payouts expected in years one and two, it

nevertheless can estimate its expected payout based on its experience with

similar properties and tenants.

ABC estimates it will be entitled to at least $250,000 in earn-out payments in

years 3-10 and concludes it is probable that a significant reversal of the variable

consideration when compared to cumulative revenue of $2,300,000 will not

occur. The transaction price amount is the contractual selling price of

$2,000,000 plus $300,000 of the variable consideration for the 10-year earn-out

period. ABC does not believe it has a basis to reasonably estimate any

additional earn-out amounts because of its level of uncertainty about receipts in

excess of $300,000.

Evaluation

Gain of $1,100,000 ($2,000,000 contractual selling price + $300,000

in variable

consideration – $1,200,000 cost) is recognized when control of the property

transfers. The $300,000 of variable consideration is included in the transaction

price because it is probable a significant reversal compared to the cumulative

revenue recognized of $2,300,000 will not occur.

ABC continually assesses the variable consideration, considering the constraint,

and revises its estimates accordingly.

The effect of the time value of money is not analyzed when consideration is variable and

its timing varies based on the occurrence or nonoccurrence of a future event that is not

substantially within the control of the customer or entity.

[606-10-32-17(b)]

KPMG Real Estate Revenue Handbook — page 44

Revenue: Real estate

D. Step 3: Determine the transaction price

Question D15

Are incentive fees (e.g. in property or

asset management agreements) that are subject to

variability due to market prices or volatility always

constrained to zero?

Interpretive response:

No. As discussed in

Question D10

, a contract with

variable consideration based on market prices or subject to volatility does not

necessarily mean the transaction price should be fully constrained. In certain

circumstances, it may be appropriate to include variable amounts in the

transaction price even if the realization of the variable consideration continues

to be subject to market prices or volatility.

Although consideration being highly susceptible to factors outside an entity’s

influence is a factor that suggests an increased likelihood or magnitude of a

revenue reversal, that factor is not determinative in concluding whether variable

consideration could be recognized.

[606-10-32-12]

Therefore, depending on an entity’s evaluation of these factors, circumstances

may exist in which an entity concludes that it is able to recognize some amount

of revenue even when fees vary due to factors outside its control. An entity

would need appropriate evidence to support that its estimate of the transaction

price reflects the application of the constraint.

Example D15.1

Applying the constraint to an asset

management contract when there is market volatility

Asset Manager enters into a two-year contract to provide asset management

services to Fund, a non-registered investment partnership. Fund’s objective is

to invest in real estate properties. In addition to a fixed management fee, Asset

Manager earns a performance-based incentive fee equal to 20% of Fund’s

return in excess of an established hurdle rate over the contract period.

Asset Manager determines that the contract includes a single performance

obligation (series of distinct services) that is satisfied over time and identifies

that the performance fee is variable consideration. Before including the

estimates of the performance fee in the transaction price, Asset Manager

considers whether the constraint applies to the performance fee.

Contract inception

At contract inception, Asset Manager determines that the cumulative amount of

consideration is constrained because the promised consideration for the

performance fee is highly susceptible to factors outside its own influence.

Subsequent reassessment

At each subsequent reporting date, Asset Manager concludes the full amount

of the performance fee is constrained, and therefore excluded from the

transaction price. This is because:

This example is adapted from Example 25 in Topic 606.

KPMG Real Estate Revenue Handbook — page 45

Revenue: Real estate

D. Step 3: Determine the transaction price

•

the performance fee has a high variability of possible consideration

amounts, and the magnitude of any downward adjustment could be

significant;

•

although Asset Manager has experience with similar contracts, that

experience is not predictive of the outcome of the current contract; this is

because the amount of consideration is highly susceptible to volatility in the

market (based on the nature of the assets under management); and

•

there are a large number of possible outcomes.

This determination is made each reporting date and could change toward the

end of the contract period.

Assume that with three months left, Fund has achieved an annualized rate of

return significantly in excess of the hurdle rate and, as such, Asset Manager

liquidates the remainder of the investments and invests the cash into a money

market fund for the remainder of the contract term. Based on the annualized

rate of return achieved to date compared to the hurdle rate, Asset Manager

concludes that a subsequent significant reversal in relation to cumulative

revenue recognized is not probable for the entire incentive fee given the risk of

not achieving the rate of return has been mitigated by investing the Fund’s

assets in low-risk money market funds.

At that point, Asset Manager would include at least some of the estimated

variable consideration in the transaction price.

Question D20

Is a change in estimate relative to the

measure of progress toward satisfaction of the

performance obligation on a construction contract

subject to the revenue recognition constraint?

Interpretive response:

The objective of the constraint on variable consideration

is to recognize revenue only to the extent it is probable the cumulative amount

of revenue recognized is not subject to a risk of significant revenue reversal

due

to variability in the transaction price

. While a construction contractor may

experience revenue reversals when it changes its estimate of progress toward

complete satisfaction of a performance obligation, these reversals do not

represent changes in the ultimate consideration to which the developer is

entitled.

[606-10-32-11 – 32-14]

The risk associated with a change in timing of total revenue is not evaluated

under the constraint. However, significant changes in timing may:

•

call into question the contractor’s ability to reasonably estimate its

progress;

•

result in a reassessment of whether performance bonuses or penalties in

the contract may occur, which would affect the transaction price; and

•

suggest that the contractor should evaluate the need to recognize a

provision for anticipated losses on the contract.

[606-10-25-36 – 25-37, 605-35-25-

45 – 25-49]

KPMG Real Estate Revenue Handbook — page 46

Revenue: Real estate

D. Step 3: Determine the transaction price

Question D30

What discount rate does an entity use

when determining the time value of money to include in

the transaction price for a property management service

contract that is prepaid as part of an all cash operating

property sale?

Interpretive response:

This question assumes that the property sale and the

property management service contract

are two performance obligations or

units of account.

The objective when adjusting the promised amount of consideration for a

significant financing component is for an entity to recognize revenue at an

amount that reflects the price the customer would have paid if it had paid cash

for the promised goods or services when or as control transfers. Therefore, a

seller determines the discount rate by identifying the rate that would discount

the stand-alone selling price (and related timing) of the property management

services to the allocated transaction price.

[606-10-32-15, 32-20]

The discount rate should be the rate that would exist in a separate financing

transaction between the buyer and the seller at contract inception that reflects

the credit characteristics of the party receiving financing in the contract, and

collateral or security provided by the buyer or the seller, if any, including assets

transferred in the contract.

The seller adjusts the transaction price to reflect the time value of money only if

the financing component is significant to the

contract

, not necessarily

significant to one or more of the separate performance obligations. In this case,

the seller would evaluate the significance of the financing component

associated with the prepayment of the property management services relative

to the transaction price of the contract (i.e. the transaction price for the sale of

the property and property management services combined).

A contract does not have a significant financing component even if the timing of

payments and the transfer of control of the goods or services differs

significantly if one of these factors exist:

•

the customer makes an advance payment, and the timing of the transfer of

goods or services is at the customer’s discretion;

•

a substantial amount of the consideration is contingent on a future event

outside the parties’ control; or

•

the difference between the promised consideration and the cash

‑

selling

price arises for reasons other than financing.

[606-10-32-17]

The property management services are determined to be a single performance obligation

because the entity is providing a series of distinct services that are substantially the

same with the same pattern of transfer. See additional discussion in

Question C30

[606-10-25-14(b)]

If selling land and providing property management services are both an output of the

entity’s ordinary activities, the entity evaluates whether it has one or more performance

obligations under Topic 606. If not, the seller may have two units of account – e.g. it

applies Subtopic 610-20 to the sale of the land to a noncustomer and Topic 606 to the

property management services provided to a customer. See

Question C20

KPMG Real Estate Revenue Handbook — page 47

Revenue: Real estate

D. Step 3: Determine the transaction price

As a practical expedient, a seller does not need to account for a financing

component when the period is expected to be one year or less between when

the seller transfers a good or service and when the customer pays for the good

or service.

[606-10-32-18]

The guidance on determining the transaction price applies to both customer and

noncustomer transactions.

Example D30.1

Sale of property with prepaid property

management services

Description of the arrangement

ABC Corp. sells an office building with a carrying amount of $1,500,000 and

agrees to manage the office building for three years. ABC routinely provides

property management services as an output of its normal activities but does not

typically sell property.

The buyer pays $2,000,000 in cash at the date of sale for the office building and

the management services. ABC identifies two units of account ((1) sale of office

building to a noncustomer and (2) property management services provided to a

customer) and allocates $1,714,286 of the transaction price to the sale of the

office building and $285,714 to the future property management services (see

Example E10.1

for illustration).

ABC makes these allocations based on the stand-alone selling prices of

$1,800,000 for the office building and $300,000, or $100,000 per year, for the

property management services. ABC determines that the financing component

is significant to the contract, and that the property management services will be

delivered evenly over the three-year service period.

Evaluation

Because ABC has determined that the financing component is significant to the

contract, it establishes an initial contract liability of $285,714 and accrues

interest expense each period on that liability. ABC calculates the interest rate by

determining what rate discounts the cash selling price of the property

management services ($300,000 or $100,000 per year for 3 years of monthly

payments) to the promised consideration (i.e. $285,714).

The interest rate implicit in the contract is 3.19%, which ABC concludes is

reasonable relative to what its borrowing rate would be in a separate financing

transaction. This rate (and the resulting interest expense amounts below)

assume monthly payments on the contract liability equal to $8,333.33

($300,000 over 36 months) to reflect the property management services being

delivered evenly over time.

One way to account for this would be as follows.

KPMG Real Estate Revenue Handbook — page 48

Revenue: Real estate

D. Step 3: Determine the transaction price

At inception

Debit

Credit

Cash

285,714

Contract liability

285,714

To reflect cash received that is allocated to

property management services.

Cash

1,714,286

Property and equipment

1,500,000

Gain

214,286

To record gain on sale of office building.

Note:

$285,714 + $1,714,286 = $2,000,000 cash consideration received from buyer.

Year 1

Debit

Credit

Interest expense

7,783

Contract liability

7,783

To accrue aggregate annual interest expense

(based on hypothetical monthly payments) on

contract liability.

Contract liability

100,000

Revenue

100,000

To recognize Year 1 property management

service revenue.

Year 2

Debit

Credit

Interest expense

4,794

Contract liability

4,794

To accrue aggregate annual interest expense

(based on hypothetical monthly payments) on

contract liability.

Contract liability

100,000

Revenue

100,000

To recognize Year 2 property management

service revenue.

KPMG Real Estate Revenue Handbook — page 49

Revenue: Real estate

D. Step 3: Determine the transaction price

Year 3

Debit

Credit

Interest expense

1,709

Contract liability

1,709

To accrue aggregate annual interest expense

(based on hypothetical monthly payments) on

contract liability.

Contract liability

100,000

Revenue

100,000

To recognize Year 3 property management

service revenue.

Question D40

When a seller receives nonmonetary

consideration in a property sale, does it apply the

guidance for nonmonetary transactions or the guidance

on noncash consideration?

Interpretive response:

Topic 606 and Subtopic 610-20 superseded most of the

real estate

‑

specific exchange guidance in Topic 845 (nonmonetary

transactions). However, Topic 845 still applies to nonmonetary exchanges

between entities in the same line of business to facilitate sales to customers or

potential customers (e.g. exchanges of similar land lots between real estate

developers) because Topic 606 excludes those transactions.

[606-10-15-2(e)]

When Topic 845 is applicable

A nonmonetary exchange shall be measured based on the recorded amount

(including any impairment) of the nonmonetary asset(s) relinquished, and not

the fair value of the exchanged assets. No gain or loss is recognized.

[845-10-30-3]

When Topic 606 is applicable

When the consideration received in a sale of real estate includes noncash

consideration, the seller/transferor measures the noncash consideration at fair

value. If the seller cannot make a reasonable estimate of the fair value of the

noncash consideration, it uses the stand-alone selling price of the promised

goods or services.

[606-10-32-21 – 32-22, 610-20-32-4]

The seller measures the noncash consideration at contract inception – i.e. the

date at which the conditions are met to conclude a contract exists.

[606-10-32-21,

606-10-25-1 – 25-8]

Changes in the fair value of the consideration after contract inception are:

[606-

10-32-23]

•

not included in the transaction price if they are due to the form of the

consideration – e.g. changes in the share price of securities or changes in

KPMG Real Estate Revenue Handbook — page 50

Revenue: Real estate

D. Step 3: Determine the transaction price

the fair value of nonfinancial assets which the entity is entitled to receive

from a customer; or

•

variable consideration if they are caused by something other than the form

of the consideration – e.g. the exercise price of a share option changes

because of the entity’s performance.

If the changes in the fair value of the consideration are due to both the form of

the consideration and some reason other than the form of the consideration,

then the seller applies the variable consideration guidance only to the variability

resulting from reasons other than the form of the consideration.

This guidance applies to all transactions in the scope of Subtopic 610-20, which

includes traditional partial sale transactions, contributions to form real estate

joint ventures (assuming the seller retains only a noncontrolling interest), and

transfers of nonfinancial assets to an existing equity method investee. Noncash

consideration also includes receipt of a new or incremental noncontrolling

interest in the entity that owns the asset post-sale. Because the seller

measures the noncash consideration received in the form of a retained

noncontrolling interest at fair value in these transactions, it will recognize 100%

gain when control of the nonfinancial (or in-substance nonfinancial) asset

transfers to the noncontrolled buyer.

[610-20-05-2, 32-2 – 32-4]

For information about control transfer when a noncontrolling interest is retained

or received, see

Question F90

. Refer to Question 17.2.40 of KPMG Handbook,

Revenue recognition,

for additional discussion about transfers of nonfinancial

assets for nonmonetary consideration and Question 17.3.80 of the Handbook

for discussion about the receipt of a noncontrolling interest in a counterparty as

noncash consideration.

Question D45

Does a seller in a real estate sale

recognize as noncash consideration the receipt of a real

estate option that is outside the scope of Topic 815?

Interpretive response:

Yes. As discussed in

Question D40

, when the

consideration received in a sale of real estate includes noncash consideration,

the seller/transferor generally measures the noncash consideration at fair value.

We believe this guidance applies when a seller receives an option to purchase

real estate that is not subject to the sale, regardless of whether the option is a

derivative within the scope of Topic 815. The seller will then apply the

subsequent measurement guidance in Topic 815 only if the option is within its

scope.

[606-10-32-21 – 32-22, 610-20-32-4]

A seller applies the guidance on noncash consideration when it concludes that it

has a contract with the buyer. However, if the seller receives an option to

repurchase the property subject to the sale, the option generally prevents

control transfer to the buyer. For information about the effects of repurchase

rights on sale accounting, see

Question F70

KPMG Real Estate Revenue Handbook — page 51

Revenue: Real estate

D. Step 3: Determine the transaction price

Question D50

How does a seller consider liabilities

assumed by the buyer in a sale of real estate to a

noncustomer?

Interpretive response:

Under Subtopic 610-20, when a contract exists and the

seller transfers control of the property, the seller derecognizes the real estate

and recognizes a gain or loss equal to the difference between the amount of

consideration received and the carrying amount of the real estate. The amount

of consideration that is included in the calculation of the gain or loss includes

both the

transaction price

and the carrying amount of liabilities assumed or

relieved by the buyer.

[606-10-32-3, 610-20-32-2 – 32-5]

If control of the real estate transfers before the liability is extinguished under

Topic 405 (liabilities) and therefore the liability cannot be derecognized at the

same time as the real estate, the seller applies the guidance on constraining

estimates of variable consideration to determine the carrying amount of the

liability to include in the gain or loss calculation. For example, if the debt was

issued at a premium and that premium is expected to decline through

amortization between the time control of the asset transfers and the time the

debt is extinguished, the seller should estimate the carrying amount of the debt

as of the date it is expected to be extinguished for purposes of determining the

gain or loss on the sale of the real estate. The seller then recognizes this

amount as a contract asset, which represents the consideration it has not yet

received in exchange for transferring the assets.

[610-20-32-5, 45-3, 405-20-40-1, 606-

10-32-11]

If control of the real estate transfers after the liability is extinguished (and

therefore the real estate cannot be derecognized at the same time as the

liability), the seller derecognizes the liability and recognizes the amount as a

contract liability, which represents the consideration received before

transferring control of the asset.

[610-20-45-3]

Refer to Question 17.3.60 of KPMG Handbook,

Revenue recognition

, for

discussion on what to consider when determining the transaction price

(including when changes in the transaction price occur after contract inception)

and how the amount of consideration is used to calculate the gain or loss. Refer

to Question 17.3.70 of the Handbook for discussion about how the amount of

liability assumed or relieved by the counterparty is included in the consideration

received.

KPMG Real Estate Revenue Handbook — page 52

Revenue: Real estate

E. Step 4: Allocate the transaction price

Step 4: Allocate the

transaction price

Detailed contents

Question E10

How does the seller allocate the transaction price in a contract

that transfers control of a property and also requires the seller to

provide ongoing property management services to a customer? What if

the buyer is not a customer?

Example E10.1

Sale of property with ongoing property management

services

KPMG Real Estate Revenue Handbook — page 53

Revenue: Real estate

E. Step 4: Allocate the transaction price

Question E10

How does the seller allocate the

transaction price in a contract that transfers control of a

property and also requires the seller to provide ongoing

property management services to a customer? What if

the buyer is not a customer?

Interpretive response:

Sale of property to a customer

When the sale of the property and the property management services

are

separate performance obligations, the seller generally allocates the transaction

price based on relative stand

‑

alone selling prices – i.e. the price at which an

entity would sell a promised good or service separately to a customer.

However, in some cases the seller attributes variable consideration and

discounts to some, but not all, performance obligations or distinct goods and

services within a series of distinct goods or services that comprise a single

performance obligation under paragraph 606-10-25-14(b).

[606-10-25-15, 32-36 –

32-40]

The seller should first consider the guidance on allocating variable

consideration. If the contract includes consideration that is variable, the seller

will need to determine if the variable consideration should be allocated to one or

both performance obligations. The seller must allocate variable consideration

(and subsequent changes to that amount) entirely to a single performance

obligation (or to distinct goods or services within a series of distinct goods or

services that are accounted for as a single performance obligation) if the:

•

terms of the variable payment relate specifically to the entity’s efforts to

satisfy the performance obligation or the distinct good or service within the

series, and

•

allocation of the variable amount entirely to the performance obligation or

the distinct good or service within the series is consistent with the

objective to allocate the transaction price in an amount that depicts the

consideration that the entity expects to be entitled to in exchange for the

promised goods or services after considering the contract’s performance

obligations and payment terms.

[606-10-32-28, 32-40]

It is common for stand-alone property management service contracts to include

a base fee and a variable fee that may depend on the property’s operations, the

manager’s cost to provide certain services, or both. A real estate sale with an

accompanying property management services contract also may include

variable consideration. The seller/property manager needs to consider the

guidance on allocating variable consideration when concluding whether it

should allocate the variable component entirely to the property management

services or to both the property management services and the property sale.

[606-10-32-40]

See

Question C30

on accounting for a series of distinct, daily property management

services as a single performance obligation.

KPMG Real Estate Revenue Handbook — page 54

Revenue: Real estate

E. Step 4: Allocate the transaction price

If the seller allocates the variable consideration entirely to the property

management services, it will need to determine if those services constitute a

series of distinct time increments of property management services. If the

seller concludes the property management services are a series of distinct time

increments of services (i.e. a series of daily, weekly, monthly management

services), it must further allocate the variable consideration to the distinct

service periods within the single series performance obligation if the:

•

variable consideration earned for a given distinct service period relates

specifically to the seller’s services for that period (or an outcome from

those services), and

•

allocation of that amount specifically to the distinct service period is

consistent with the allocation objective.

[606-10-32-28, 32-40]

The seller follows these steps to determine whether to allocate variable

consideration to distinct service periods within the single performance

obligation.

•

First, the seller must determine whether the nature of the property

management services is to provide a single, integrated service offering for a

defined period of time, or to perform a specified set of activities during the

period. Important to this determination is whether the activities the seller

will perform to fulfill the performance obligation are indeterminate (e.g.

even if the type of activities is generally understood, the quantity and mix of

activities that will need to be performed to fulfill the obligation are

unknown), or are known upfront (e.g. the seller will do X, Y and Z once each

week for three years). If the activities are indeterminate then the

performance obligation generally consists of distinct service periods.

•

Second, the seller must determine whether the nature of the promise is

substantially the same in each time increment. For example, could a

three

‑

year property management services contract be subdivided into time

periods like three annual periods or 36 monthly periods?

•

Third, the seller must determine whether the time increments of service

are distinct from each other. If they are not distinct, then the series

guidance cannot apply to the property management services performance

obligation.

•

Finally, if there is a series of distinct service periods within the single

property management services performance obligation, the seller must

determine whether the fees relate specifically to the seller’s efforts to

transfer the distinct services (or an outcome from those services) and

allocating the variable fees earned during each distinct service period only

to that service period is consistent with the allocation objective.

[606-10-25-19

– 25-21, 32-40]

If the seller must allocate the variable consideration entirely to the property

management services performance obligation,

and

that performance obligation

is a series of distinct service periods to which the variable consideration earned

each period can be allocated, the seller may not need to estimate the total

variable fees that will be earned during the contract to account for the

performance obligation. The variable fees earned each period will be allocated

to, and recognized in, each period.

KPMG Real Estate Revenue Handbook — page 55

Revenue: Real estate

E. Step 4: Allocate the transaction price

If the seller (a) cannot allocate the variable consideration entirely to the property

management services performance obligation, (b) the obligation is not a series

of distinct service periods or (c) the variable consideration earned each distinct

service period within a series cannot be allocated to that distinct service period,

the seller generally will need to estimate the total transaction price associated

with that performance obligation (including the variable consideration) to which

the seller expects to be entitled for performing the property management

services over the full performance obligation service period subject to the

constraint. The constraint limits the seller to only including estimates of variable

consideration in the transaction price to the extent that it is probable that a

significant reversal in the cumulative revenue recognized will not occur when

the uncertainty associated with the variable consideration is subsequently

resolved. See additional discussion about the constraint in

Questions D10

and

D15

[606-10-32-11 – 32-14]

The seller will recognize the transaction price (which may include fixed and

variable consideration) allocated to the property management services over

time based on an appropriate measure of progress as the performance

obligation is satisfied. For additional discussion about recognizing property

management service revenue, see

Questions D15

and

F130

If the sale and accompanying property management services contract also

include a future profits interest (see

Question D10

), the seller would perform a

similar analysis because of the variable consideration and existence of more

than one performance obligation.

After the seller allocates variable consideration, it will need to determine if any

discount should be allocated entirely to one of the performance obligations or

allocated proportionately. The discount is the difference between the

transaction price and the sum of the stand-alone selling prices. The guidance on

the allocation of variable consideration discussed above differs from the

guidance on the allocation of a discount to some, but not all, performance

obligations or to distinct goods or services within a series of distinct goods or

services that are accounted for as a single performance obligation. An entity

should allocate a discount entirely to one or more, but not all, of the

performance obligations if all of the following conditions exist:

•

the entity regularly sells each distinct good or service (or each bundle of

distinct goods or services) in the contract on a stand-alone basis;

•

the entity also regularly sells on a stand-alone basis a bundle (or bundles) of

some of those distinct goods or services at a discount to the stand-alone

selling prices of the goods or services in each bundle; and

•

the discount attributable to each bundle of goods or services described is

substantially the same as the discount in the contract, and an analysis of

the goods or services in each bundle provides observable evidence of the

performance obligation to which the discount in the contract belongs.

[606-10-32-37]

In our experience, most real estate companies do not offer a wide range of

bundled goods or services. Therefore, in most cases, these conditions will not

exist, and the seller will allocate the discount to all performance obligations in

the contract on a relative stand-alone selling price basis. See

Example E10.1

KPMG Real Estate Revenue Handbook — page 56

Revenue: Real estate

E. Step 4: Allocate the transaction price

Sale of property to a noncustomer

As discussed in

Questions D30

and

C20

, if selling property and providing

property management services are both an output of the seller’s ordinary

activities, the seller evaluates whether it has one or more performance

obligations under Topic 606. If it has more than one performance obligation, the

seller allocates the transaction price as discussed above.

If the seller routinely provides property management services as an output of its

normal activities, but does not routinely sell property as part of those activities,

it would apply the guidance in Subtopic 610-20 to the property sale and Topic

606 to the property management services. We believe the seller generally

would allocate the total transaction price between the two units of account

using the same guidance described above for sales of property to customers.

After the seller allocates the total transaction price to the Subtopic 610-20

promise and the Topic 606 promise, it may need to further allocate those

individual transaction prices to multiple performance obligations (within the

Topic 606 promise) and multiple distinct assets (within the Subtopic 610-20

promise).

[610-20-15-9 – 15-10, 25-6, 32-2 – 32-6]

Example E10.1

Sale of property with ongoing property

management services

Description of the arrangement

ABC Corp. sells an office building with a carrying amount of $1,500,000 and

agrees to manage the office building for three years for total consideration of

$2,000,000 payable in cash upon closing of the sale.

ABC routinely provides property management services as an output of its

normal activities but does not typically sell property.

The estimated stand-alone selling price of the office building and the series of

management services are $1,800,000 and $300,000, or $100,000 per year,

respectively. Assume that the:

•

customer makes no ongoing payments for the services;

•

financing component is not significant to the contract;

and

•

criteria for allocating the overall discount entirely to one of the performance

obligations are not met.

[606-10-32-37]

Evaluation

The seller allocates the total transaction price of $2,000,000 to the two separate

units of account based on relative stand-alone selling prices.

Combined stand-alone selling price: $2,100,000

$1,800,000 (property stand-alone selling price) + $300,000 (property management

services stand-alone selling price at $100,000 each year for 3 years)

See

Example D30.1

for an illustration of the accounting if the financing component is

significant to the contract.

KPMG Real Estate Revenue Handbook — page 57

Revenue: Real estate

E. Step 4: Allocate the transaction price

Transaction price allocated to property sale: $1,714,286

($1,800,000 ÷ $2,100,000) × $2,000,000

Transaction price allocated to property management services

: $285,714

($300,000 ÷ $2,100,000) × $2,000,000

Gain – recognized when control of the property is transferred: $214,286

$1,714,286 – $1,500,000

Property management service fee revenue – recognized over the three-year

service period as the performance obligation is satisfied: $285,714

If the arrangement also included ongoing payments of $10,000 per year for the

property management services, the process for allocating the total transaction

price of $2,030,000 ($2,000,000 payable at closing + $30,000 in ongoing

payments of $10,000 per year for three years) would follow the same approach

as illustrated above. This approach also assumes that the financing component

is not significant to the contract and the discount is not allocated entirely to one

unit of account.

The seller would allocate the total transaction price of $2,030,000 to the two

units of account based on relative stand-alone selling prices:

Combined stand-alone selling price: $2,100,000

$1,800,000 (property stand-alone selling price) + $300,000 (property management

services stand-alone selling price of $100,000 each year for 3 years)

Transaction price allocated to property sale: $1,740,000

($1,800,000 ÷ $2,100,000) × $2,030,000

Transaction price allocated to property management services: $290,000

($300,000 ÷ $2,100,000) × $2,030,000

Gain – recognized when control of the property is transferred: $240,000

$1,740,000 – $1,500,000

Property management service fee revenue – recognized over the three-year

service period as the performance obligation is satisfied: $290,000

The property management services are a single performance obligation because the

entity is providing a series of distinct services that is substantially the same with the

same pattern of transfer. See further discussion in

Question C30

[606-10-25-14(b)]

KPMG Real Estate Revenue Handbook — page 58

Revenue: Real estate

F. Step 5: Recognize revenue

Step 5: Recognize revenue

Detailed contents

Question F10

At what point does control typically transfer in a real estate sale

when the performance obligation is only delivery of the property?

Question F20

When does control typically transfer in a real estate construction

contract (e.g. for the development of property improvements such as a

building) when the contract represents a single performance obligation

for the construction services?

Question F25

Does an entity have an enforceable right to payment if the

contract does not explicitly state the right to payment on contract

termination?

Question F30

When does control typically transfer in a contract that includes a

property sale and an accompanying construction contract (e.g. for the

development of property improvements for the customer, such as a

building on the land)?

Example F30.1

Sale of land with construction contract

Question F40

Can the seller/developer of a condominium unit (or similar

structure) recognize revenue over time as construction of the unit

progresses if title to the completed unit does not transfer until

construction is completed?

Example F40.1

Sale of a condominium unit

Question F50

When does control transfer in a standstill arrangement in which a

real estate subsidiary defaults on nonrecourse debt but the lender

chooses to maintain the legal relationship until the lender can find a

buyer?

Question F60

Has control transferred if in connection with the sale of real

estate, the seller provides the buyer with an option to put the property

back to the seller?

Question F70

Has control transferred if in connection with the sale of real

estate, the seller obtains the right (or has an obligation) to repurchase

the property?

Question F80

Is a right of first refusal (or a right of first offer) considered an

obligation or right to repurchase the property?

Question F90

How should a seller evaluate transfer of control under Subtopic

610-20 when it transfers ownership interests in a legal entity (e.g. in a

partial sale) or otherwise retains an interest in the asset (e.g. in a sale to

an equity method investee)?

Example F90.1

Partial sale with a retained controlling financial interest

Example F90.2

Partial sale with a retained noncontrolling interest

Example F90.3

Sale to an existing equity method investee

KPMG Real Estate Revenue Handbook — page 59

Revenue: Real estate

F. Step 5: Recognize revenue

Question F91

How is the transaction price allocated when the transaction

contains multiple distinct nonfinancial assets?

Question F95

How is the gain or loss on the sale presented in the income

statement?

Question F100

Does the guidance in Question F90 apply when the venture

owns operating real estate that meets the definition of a business?

Question F110

Is a buy-sell clause allowing either investor to make an offer to

acquire the other’s interest in an entity that holds real estate considered

an obligation or a right to repurchase the property from the perspective

of the investor that sold the real estate to the entity?

Question F120

What is the accounting consequence when a general partner in

a limited partnership sells a property to the partnership for cash

(contributed by the limited partners) and a significant receivable?

Question F130

How should a manager recognize revenue associated with

variable consideration in a property management services contract

when the contract bases the variable consideration on a percentage of

the property’s operating results?

Example F130.1

Multiple variable payments in one contract allocated to

the period they were earned

Question F140

When should a real estate broker that is acting as an agent

recognize revenue?

Example F140.1

Real estate broker commissions

KPMG Real Estate Revenue Handbook — page 60

Revenue: Real estate

F. Step 5: Recognize revenue

Question F10

At what point does control typically

transfer in a real estate sale when the performance

obligation is only delivery of the property?

Interpretive response:

An entity recognizes revenue or gain when it transfers

control of the property to the buyer. The buyer obtains control of the asset

when it has the ability to direct the use of, and obtain substantially all of the

remaining benefits from, the asset. A seller must determine at contract

inception whether it satisfies the performance obligation over time or at a point

in time. If the seller does not satisfy a performance obligation over time, the

performance obligation is satisfied at a point in time. A performance obligation

to deliver a single asset (or group of assets) on a single settlement date is

typically satisfied at a point in time because it does not meet any of the

over

‑

time control transfer criteria and there is no progress to measure.

[606-10-25-23 – 25-24, 25-27, 610-20-25-1, 25-5 – 25-7]

For performance obligations satisfied at a point in time, these indicators

suggest that control has transferred the:

•

seller has a present right to payment for the asset;

•

buyer has legal title to the asset;

•

seller has transferred physical possession of the asset;

•

buyer has the significant risks and rewards of ownership of the asset; and

•

buyer has accepted the asset.

[606-10-25-30]

We believe in the context of US property sales that the guidance generally

suggests that control transfers at closing because the closing date is the point

in time when most of the indicators typically are met. The Board reached a view

consistent with this when it addressed the issue of control transfer in real

estate transactions within the scope of ASU 2011-10 (derecognition of in-

substance real estate).

Excerpt from ASU 2011-10

BC10.

Therefore, an entity would look to the definition and indicators of control

in the proposed revenue recognition guidance to determine when the

counterparty to the transaction obtains control of the asset (that is, real estate)

and when to derecognize the real estate. Under the proposed revenue

recognition guidance, indicators that the customer has obtained control of a

good or service include, among others, the fact that the customer has legal

title and physical possession.

While transfer of control for sales of existing property often occurs at closing,

the seller needs to consider the facts and circumstances of the particular

transaction. For example,

Question B10

illustrates a situation in which the seller

transferred legal title and physical possession of the building to the buyer at

closing but may have retained control of the building based on its analysis of the

control indicators (in addition to failing the requirements to establish contract

existence).

Questions F50

and

F70

address other situations where control may

not reside with the party with legal title and physical possession.

KPMG Real Estate Revenue Handbook — page 61

Revenue: Real estate

F. Step 5: Recognize revenue

The guidance on control transfer applies to both customer and noncustomer

transactions; however, additional considerations apply when nonfinancial and in-

substance nonfinancial assets are transferred within a legal entity. See

Question F90

Question F20

When does control typically transfer in a

real estate construction contract (e.g. for the

development of property improvements such as a

building) when the contract represents a single

performance obligation for the construction services?

Interpretive response:

An entity recognizes revenue when it satisfies a

performance obligation by transferring control of the good or service to the

customer. An entity considers an asset or service transferred when, or as, the

customer obtains control of the asset. An entity determines at contract

inception whether it satisfies the performance obligation over time or at a point

in time. If an entity does not satisfy a performance obligation over time, the

performance obligation is satisfied at a point in time.

[606-10-25-23 – 25-24]

An entity transfers control of a good or service over time if the transaction

meets at least one of the following criteria:

[606-10-25-27]

a. The customer simultaneously receives and consumes the benefits

provided by the entity’s performance as the entity performs;

This criterion primarily applies to traditional service contracts (e.g. property

management services) when the customer is benefitting on a periodic basis as

the entity performs (e.g. as the property is being managed) as opposed to

service contracts when an asset is being constructed or enhanced on the

customer’s behalf. When a customer’s asset is being constructed or enhanced,

further analysis is necessary under criterion (b) and criterion (c) if criterion (b) is

not met.

b. The entity’s performance creates or enhances an asset (e.g. work in

process) that the customer controls as the asset is created or

enhanced; or

We believe this criterion generally will be met in a real estate construction

contract when the customer owns the underlying land and takes control of the

property improvements as construction progresses. In that case, the customer

generally is able to direct the use of, and obtain substantially all of the remaining

benefits from, the improvements during construction.

The customer generally is able to use the property improvements to enhance

the value of other assets during the construction period. The ability to use the

property improvements includes selling the land the customer owns on which

the improvements are built; selling or exchanging the property, including the

partially completed improvements; and pledging the property with the partially

completed improvements to secure a loan.

KPMG Real Estate Revenue Handbook — page 62

Revenue: Real estate

F. Step 5: Recognize revenue

This analysis applies when the customer controls and holds legal title to the

land on which improvements are constructed. A similar analysis also may apply

if the customer leases the underlying land on a long-term basis and will own the

property improvements. A developer will not meet criterion (b) however, if it (as

opposed to the customer) controls the property and/or the improvements until

construction is complete. This may occur in constructing condominium units (or

similar structures). See

Question F40

for additional discussion.

c. The entity’s performance does not create an asset with an alternative

use to the entity, and the entity has an enforceable right to payment

for performance completed to date.

An entity only needs to meet one of the three criteria to conclude that a

performance obligation is satisfied over time. We believe this criterion may also

be met in a real estate construction contract if the customer owns the

underlying land and takes control of the property improvements as construction

progresses because the developer’s performance generally does not create an

asset with alternative use to the developer. Usually the customer controls the

property improvements being constructed and those improvements are affixed

to land controlled by the customer. Therefore, the developer likely is legally and

practically prohibited from directing the improvements for any other use.

[606-10-25-27 – 25-28]

However, to meet this criterion, the developer also must have an enforceable

right to payment for performance completed to date, which often is the case

when a contract includes payment provisions that protect the developer in the

event of a termination for convenience by the customer.

When a contract does not specify whether the entity has a right to payment on

contract termination, we believe an enforceable right to payment is presumed

not to exist. See

Question F25

for additional discussion.

If the entity meets at least one of the above criteria, revenue on the

construction services performance obligation is recognized over time as

satisfaction of the performance obligation progresses.

[606-10-25-27]

The guidance on control transfer applies to both customer and noncustomer

transactions.

Question F25

Does an entity have an enforceable right

to payment if the contract does not explicitly state the

right to payment on contract termination?

Interpretive response:

Generally, no. We believe that when a contract's

written terms do not specify the entity's right to payment upon contract

termination, an enforceable right to payment is presumed not to exist. This is

consistent with the FASB staff views discussed at the June 26, 2018 Private

Company Council meeting

[PCC Memo June 26, 2018]

We believe this presumption (that an enforceable right to payment does not

exist) also applies to non-cancellable contracts when there are no written terms

to specify the entity’s right to payment if the customer breaches the contract.

KPMG Real Estate Revenue Handbook — page 63

Revenue: Real estate

F. Step 5: Recognize revenue

However, if the entity asserts that it has an enforceable right to payment for

performance completed to date in these circumstances, to overcome this

presumption, we would expect it to take the following steps.

•

Support its assertion (that it has an enforceable right to payment) based on

legislation, administrative practice or legal precedent that confers upon the

entity a right to payment for performance completed to date

This analysis

should demonstrate that an enforceable right to payment exists in the

relevant jurisdiction.

[606-10-55-14(a)]

•

Assess whether relevant legal precedent indicates that similar rights to

payment for performance completed to date in similar contracts have no

binding legal effect.

[606-10-55-14(b)]

The fact that the entity may have a basis for making a claim against the

counterparty in a court of law would not on its own be sufficient to support that

an enforceable right to payment exists as discussed in Question 7.3.80 in

KPMG Handbook

Revenue recognition

Question F30

When does control typically transfer in a

contract that includes a property sale and an

accompanying construction contract (e.g. for the

development of property improvements for the

customer, such as a building on the land)?

Interpretive response:

As discussed in

Question C20

, a seller/developer first

needs to determine whether the contract contains one or more performance

obligations or units of account.

In the more common scenario when the property sale and the construction

services are two performance obligations or units of account, the

seller/developer usually allocates the transaction price to those two

performance obligations or units of account based on relative stand-alone

selling prices (see

Question E10

). The seller/developer evaluates each

performance obligation or unit of account to determine whether it recognizes

revenue or gain over time or at a point in time. As discussed in

Question F10

control of property often transfers at a point in time, and as discussed in

Question F20

, construction services (as a stand-alone performance obligation or

unit of account) are often, but not always, satisfied over time.

In the less common scenario when the property sale and the construction

contract comprise a single performance obligation or unit of account, the entity

will need to analyze whether the single performance obligation or unit of

account is satisfied:

•

at a point in time – upon delivery of the completed property, including

improvements; or

•

over time – as title to the land transfers and construction progresses on the

improvements affixed to the buyer-owned land.

If title to the land transfers to the buyer before construction begins, and the

buyer owns the improvements during construction, we believe the analysis of

KPMG Real Estate Revenue Handbook — page 64

Revenue: Real estate

F. Step 5: Recognize revenue

the over-time criteria relative to the single combined performance obligation

may be similar to the analysis in

Question F20

. This analysis shows that the

seller/developer will often recognize revenue over time because the

seller/developer

’

s performance creates or enhances an asset that the buyer

controls as the asset is created or enhanced.

[606-10-25-27(b)]

When there is just one performance obligation or unit of account for both the

land sale and the construction services, however, the total revenue recognized

over time represents the total transaction price (including the contract

consideration for both elements). Progress toward satisfaction of that single

performance obligation is measured relative to both elements (see

Example F30.1

When there is a single performance obligation or unit of account and the buyer

does not hold title to the land or have legal ownership of the improvements

affixed to the land as construction progresses (e.g. in some contracts to

construct condominium units or similar structures), it may be difficult to

conclude the performance obligation is satisfied over time. See additional

discussion in

Question F40

Example F30.1

Sale of land with construction contract

Description of the arrangement

ABC Corp. sells land with a carrying amount of $400,000 to DEF Corp. for

$1,000,000. Additionally, ABC agrees to build a fitness center for an additional

$500,000 (estimated cost of $400,000).

ABC routinely provides construction services as an output of its normal

activities but does not typically sell land.

Assume the sale of the land and the construction of the fitness center comprise

two separate units of account (see additional discussion in

Question C20

) and

DEF obtains the title to the land at closing before construction of the fitness

center begins. ABC allocates $950,000 (of the total $1,500,000 transaction

price) to the sale of the land and $550,000 to the construction contract, based

on their relative stand-alone selling prices.

Evaluation

Because the sale of the land and construction of the fitness center comprise

two separate units of account, ABC will need to determine when, or over what

period, it satisfies each unit of account. ABC concludes that control of the land

transfers when DEF takes legal and physical possession of the land. The

construction services are satisfied over time because ABC is creating and

enhancing an asset (the fitness center) that DEF controls as it is created.

For the land sale, ABC recognizes a $550,000 gain (allocated transaction price of

$950,000 less the $400,000 carrying amount) at closing.

For the construction services, ABC uses an input method (cost-to-cost) to

recognize revenue based on its periodic efforts relative to the total expected

effort to completely satisfy the performance obligation.

KPMG Real Estate Revenue Handbook — page 65

Revenue: Real estate

F. Step 5: Recognize revenue

Assume at the end of period one that the accumulated costs for constructing

the fitness center are $200,000. Using costs incurred to measure its progress,

ABC recognizes $275,000 of revenue ($550,000 × ($200,000 ÷ $400,000)) in

period one. ABC recognizes the remaining revenue of $275,000 over time as it

constructs the fitness center.

Question F40

Can the seller/developer of a

condominium unit (or similar structure) recognize

revenue over time as construction of the unit progresses

if title to the completed unit does not transfer until

construction is completed?

Interpretive response:

To recognize revenue over time, the transaction must

meet at least

one

of the following criteria.

[606-10-25-27]

a. The customer simultaneously receives and consumes the benefits

provided by the entity’s performance as the entity performs;

As discussed in

Question F20

, this criterion primarily applies to traditional

service contracts (e.g. property management services) when the customer

benefits on a periodic basis as the entity performs (e.g. as the property is being

managed). This contrasts with service contracts when an asset is being

constructed or enhanced on a customer’s behalf that require further analysis

under criterion (b) or under criterion (c) if criterion (b) is not met.

b. The entity’s performance creates or enhances an asset (e.g. work in

process) that the customer controls as the asset is created or

enhanced; or

In many cases, we believe the buyer of a condominium unit is unable to direct

the use of, and obtain substantially all of the remaining benefits from, the unit

during construction because title to the real estate typically does not transfer

until construction of the unit is complete and the sale closes. We also believe

that the customer likely does not obtain substantially all the benefits of the unit

because the buyer generally is unable to use the unit to:

•

produce goods or provide services;

•

enhance the value of other assets, settle liabilities or reduce expenses;

•

sell or exchange the unit; or

•

pledge the unit to secure a loan.

[606-10-25-25]

The buyer also generally does not direct the use of the unit during construction

because it does not hold legal title or have physical possession.

c. The entity’s performance does not create an asset with an alternative

use to the entity, and the entity has an enforceable right to payment

for performance completed to date.

Topic 606 illustrates various scenarios when a seller/developer is constructing a

unit in a multi-unit residential complex with differing customer payment

structures.

KPMG Real Estate Revenue Handbook — page 66

Revenue: Real estate

F. Step 5: Recognize revenue

Example 1

presumes the customer pays a deposit on entering into the

contract, and the remainder of the contract price is payable on completion of

construction when the customer obtains physical possession of the unit. If the

customer defaults on the contract before completion, the seller/developer only

has a right to the deposit. The seller/developer does not have a right to payment

for work completed to date so it does not meet criterion (c).

[606-10-55-174 –

55-175]

Example 2

presumes the buyer makes progress payments during construction,

and the contract has substantive terms that preclude the seller/developer from

directing the unit to another customer. In addition, the contract precludes the

buyer from terminating the contract unless the seller/developer does not

perform, and if the buyer defaults on its payments, the seller/developer has the

right to all of the consideration promised in the contract if it completes the unit.

In this fact pattern, the seller/developer concludes that it meets criterion (c)

because the:

•

unit does not have an alternative use (i.e. the contract precludes the

seller/developer from transferring the unit to another customer – see

additional discussion below); and

•

seller/developer has an enforceable right to payment for performance

completed to

date because the customer must pay all of the consideration

promised in the contract if the seller/developer completes the unit.

The example points out that the legal practices in the particular jurisdiction are

relevant in arriving at this conclusion. This is the case because if the contract

terms provide for the right to payment for performance completed to date but

the legal practices in the particular jurisdiction do not allow for enforcement of

that right, criterion (c) would not be met.

[606-10-55-176 – 55-180]

Example 3

presumes the same facts as Example 2 except in the event of the

customer’s default, the seller/developer can require the customer to perform as

required under the contract, or it can cancel the contract and retain the unit

under construction and assess a penalty in proportion to the contract price. The

seller/developer has the right to payment for performance completed to date

because it could enforce that right, even if the seller/developer also could

choose to accept the unit under construction and assess a penalty instead. That

choice does not affect the assessment as long as the seller/developer’s right to

require the customer to continue to perform under the contract is enforceable.

[606-10-55-181 – 55-182]

While the examples primarily focus on the right to payment, even if a

seller/developer does have the right to payment for performance completed to

date (see Examples 2 and 3), it still needs to conclude the unit cannot be

directed to another customer either contractually during construction or

practically without incurring significant economic loss when it is completed.

[606-10-25-28, 55-10]

We believe in many cases, buyers of condominium units cannot specify major

structural changes to the design of the unit and the seller/developer often will

be able to practically direct the unit to another buyer after completion. In those

cases, a substantive contractual restriction

during

construction would need to

be in place to conclude the seller/developer’s performance does not create an

asset with an alternative use to the seller/developer. If so, over time revenue

recognition would be appropriate (and required) under criterion (c), assuming

KPMG Real Estate Revenue Handbook — page 67

Revenue: Real estate

F. Step 5: Recognize revenue

the seller/developer is entitled to payment for the work performed to date

throughout the contract. The seller/developer should consider all facts and

circumstances.

If the seller/developer does not meet the criteria to recognize revenue over

time, the performance obligation is satisfied at a point in time. The

seller/developer would recognize revenue on the sale of a unit when control

transfers to the customer, generally at closing as discussed in

Question F10

. In

our experience, US condominium sales contracts generally are structured

similar to the contract described in Example 1, which results in point-in-time

revenue recognition when control of the completed unit transfers to the

customer at closing. When a contract does not specify whether the entity has a

right to payment on contract termination, we believe it is presumed that an

enforceable right to payment does not exist. See

Question F25

for additional

discussion.

[606-10-25-27]

If the seller/developer has a further obligation to develop an amenity in

connection with the sale of the unit, the seller/developer would consider the

guidance in

Questions C10

and

C20

on determining the number of performance

obligations in the contract with the customer and

Question F30

on the timing of

revenue recognition.

See

Question A60

for discussion about the unit of account for these sales

under Topic 606.

Example F40.1

Sale of a condominium unit

Description of the arrangement

ABC Corp. is developing a condominium building and begins marketing

individual units during construction. On January 1, 20X3, ABC enters into sales

contracts with two customers to sell each one a unit with an estimated cost of

$180,000 at a sales price of $300,000. Each customer provides a 5% down

payment. Construction on the building is 50% complete.

ABC expects the customers to take possession of the units (and settle all

remaining consideration) on January 1, 20X4; however, during construction ABC

retains control of the building and the improvements. If the customers cancel

the contracts, ABC has a right to only the deposit amount.

Evaluation

Because the arrangement does not meet any of the criteria for satisfying a

performance obligation over time, ABC recognizes revenue at the point in time

control transfers to the customers, generally when the customers take

possession of the units on January 1, 20X4.

KPMG Real Estate Revenue Handbook — page 68

Revenue: Real estate

F. Step 5: Recognize revenue

Question F50

When does control transfer in a standstill

arrangement in which a real estate subsidiary defaults on

nonrecourse debt but the lender chooses to maintain the

legal relationship until the lender can find a buyer?

Interpretive response:

In these situations, the parent has to perform two

derecognition analyses – one for the assets of the subsidiary and one for the

liabilities.

Derecognition of the nonfinancial (and in-substance nonfinancial) assets

If substantially all of the fair value of the subsidiary is concentrated in

nonfinancial assets, the parent applies Subtopic 610-20 to evaluate

derecognition for each distinct asset within the subsidiary. See

Question A20

[610-20-05-2]

Subtopic 610-20 requires the parent to evaluate derecognition of the real estate

in two steps. As discussed in

Question F90

, in the first step, the parent

evaluates whether it has lost its controlling financial interest under Topic 810. If

the parent retains its controlling financial interest, it does not derecognize the

real estate. We believe that in most standstill situations the parent will conclude

that it no longer has a controlling financial interest in the entity. This is because

the default provisions of most debt arrangements shift the power to direct the

activities that most significantly affect the subsidiary’s economic performance

to the lender, even during the standstill period.

[610-20-25-1 – 25-3]

If the parent loses its controlling financial interest, it moves on to the second

step of evaluating derecognition under Subtopic 610-20. In the second step,

under the principles of Topic 606, the former parent evaluates whether it has a

contract with the lender and if so, whether it has transferred control of each

distinct asset within its former subsidiary.

[610-20-25-5 – 25-6]

As discussed in

Question F90

, Subtopic 610-20 has two models for evaluating

whether the former parent has transferred control of the former subsidiary’s

assets. When the former parent retains a noncontrolling interest, the parent

derecognizes each of the distinct assets when that former subsidiary controls

those assets. When the former parent does not retain a noncontrolling interest

in the former subsidiary, the parent derecognizes each of the distinct assets

when the counterparty (or counterparties) controls those assets.

[610-20-25-7]

While the application of these two models may yield different answers in a

more traditional partial sale, we believe in this situation, the former parent will

be evaluating whether it (as the legal owner of the former subsidiary) or the

lender (as the counterparty to the transfer and the new parent of the subsidiary)

controls the former subsidiary’s assets after the default.

In making this determination, the former parent considers Topic 606’s control

indicators to determine if and when the lender obtains control. The following

are indicators of the point in time that control has transferred:

•

the transferor has a present right to payment for the asset;

•

the counterparty has legal title to the asset;

•

the transferor has transferred physical possession of the asset;

KPMG Real Estate Revenue Handbook — page 69

Revenue: Real estate

F. Step 5: Recognize revenue

•

the counterparty has the significant risks and rewards of ownership of the

asset; and

•

the counterparty has accepted the asset.

[606-10-25-30, 610-20-25-6]

While the transfer of legal title and physical possession often are key indicators

of control in the context of real estate sale transactions (see

Question F10

), we

believe further analysis is necessary. In standstill arrangements, we believe the

fact that the counterparty has the significant risks and rewards of ownership of

the asset may be the most significant indicator of whether control has

transferred.

For example, the guidance states that physical possession may not coincide

with control of an asset in some repurchase or consignment arrangements

when the customer has physical possession but the seller has control, and in

some bill-and-hold transactions when the seller has physical possession but the

customer controls. For a counterparty to have obtained control of a product (or

asset) in a bill-and-hold arrangement, the transaction must meet all of the

following criteria:

the reason for the bill-and-hold arrangement must be substantive – e.g. the

counterparty has requested the arrangement;

the product must be identified separately as belonging to the counterparty;

the product currently must be ready for physical transfer to the

counterparty; and

the transferor cannot have the ability to use the product or to direct it to

another counterparty.

[606-10-55-83, 25-30(c)]

We believe that in many standstill arrangements, the transfer will meet all of

these criteria, which leads to the conclusion that the lender would have control

even though the former parent maintains physical possession through its

ownership interest in the subsidiary. In consideration of criterion (d), while the

former parent continues to operate the property through the subsidiary during

the standstill period (and therefore

uses

it), the lender may have the right to

receive as debt service payments substantially all of the cash flows arising from

the property’s operations.

In addition, the former parent generally does not have the ability to sell the

property (or its interest in the subsidiary) to another party, benefit from changes

in the fair value of the property, or otherwise have the power to direct the

activities that most significantly affect the property’s economic performance

(based on the guidance in Subtopic 810-10).

We believe the control analysis during the standstill period also is similar to the

analysis performed when there is a repurchase option in place. This guidance

indicates that the holder of an option to acquire the asset (the lender in this

case) may presently control the asset even though the other party has physical

possession.

[606-10-55-66 – 55-71]

When the parent concludes it no longer has a controlling financial interest in the

subsidiary and it no longer controls the assets within the former subsidiary, it

derecognizes the assets and recognizes as a gain or loss equal to the difference

between the amount of consideration it is entitled to receive and the carrying

amount of the real estate. In this case, the consideration likely is limited to the

carrying amount of the liabilities that the lender has promised to (or must)

KPMG Real Estate Revenue Handbook — page 70

Revenue: Real estate

F. Step 5: Recognize revenue

assume or relieve (after applying the constraint under Topic 606) when the

standstill arrangement terminates. See

Questions A20

and

D50

[610-20-32-2, 32-5]

Derecognition of the liabilities

Generally in standstill agreements, control of the real estate transfers before

the liabilities are extinguished under Topic 405. In these situations, the seller

recognizes the carrying amount of the liabilities (after applying the constraint as

discussed above and in

Question D50

) as a contract asset. The contract asset

represents the consideration that the former parent has not yet received in

exchange for transferring the assets.

[405-20-40-1, 606-10-32-11, 610-20-32-5, 45-3]

Question 17.4.20 of KPMG Handbook,

Revenue recognition

, provides additional

discussion about recognizing contract assets and liabilities in a Subtopic 610-20

transaction.

Question F60

Has control transferred if in connection

with the sale of real estate, the seller provides the buyer

with an option to put the property back to the seller?

Interpretive response:

Topic 606 provides guidance on accounting for a

seller’s obligation to repurchase a property at the buyer’s request (a put option).

The accounting for these transactions generally depends on the relationships

between the repurchase price, the original selling price and the market value of

the property. This guidance applies equally to transactions with noncustomers

in the scope of Subtopic 610-20.

[606-10-55-72 – 55-78, 610-20-25-6]

Put option

(a customer’s right to require the seller to repurchase the asset)

Repurchase price equal

to or greater than

original selling price?

Repurchase price

greater than expected

market value of asset?

Financing

arrangement

Customer has

significant economic

incentive to exercise the

put option?

Sale with a right

of return

Lease

Yes

KPMG Real Estate Revenue Handbook — page 71

Revenue: Real estate

F. Step 5: Recognize revenue

Note:

If the contract is part of a sale-leaseback transaction it is accounted for as a

financing arrangement.

To determine whether the buyer has a significant economic incentive to

exercise its put right, the seller considers the facts and circumstances including

the relationship of the repurchase price to the expected market value of the

property at the date of the repurchase (including consideration of the time value

of money) and the amount of time until the right expires. If the repurchase price

is expected to significantly exceed the market value of the property, this may

indicate the buyer has a significant economic incentive to exercise the put

option and require the seller to reacquire the property.

If the seller accounts for the contract as a financing arrangement, it continues to

recognize the property and also recognizes a financial liability initially equal to

the consideration received from the buyer. The seller recognizes amounts paid

to the buyer above that amount as interest expense. If the option lapses

unexercised, the seller derecognizes the property and the liability and

recognizes revenue or gain.

[606-10-55-70 – 55-71, 610-20-25-6]

Question F70

Has control transferred if in connection

with the sale of real estate, the seller obtains the right

(or has an obligation) to repurchase the property?

Interpretive response:

Topic 606 provides guidance on accounting for a

seller’s right to repurchase a property (a call option) and a seller’s obligation to

repurchase a property (a forward). A seller’s right under a call option (or

obligation under a forward agreement) to repurchase the property precludes

transfer of control to the buyer because the buyer is limited in its ability to direct

the use of, and obtain substantially all of the remaining benefits from, the

property even though it may have physical possession of the property. Whether

the contract is accounted for as a lease or a financing depends on the

relationship between the repurchase price and the original selling price. This

guidance applies equally to transactions with noncustomers in the scope of

Subtopic 610-20. See section 7.5.60 of KPMG Handbook,

Revenue recognition

which provides additional guidance on accounting for forward and call options

under Topic 606.

[606-10-55-68 – 55-71, 610-20-25-6]

KPMG Real Estate Revenue Handbook — page 72

Revenue: Real estate

F. Step 5: Recognize revenue

The customer does not obtain control of the asset

Forward

(a seller’s obligation to

repurchase the asset)

Call option

(a seller’s right to repurchase

the asset)

Asset repurchased for less than original

selling price?

Lease arrangement

Financing arrangement

Yes

Note:

If the contract is part of a sale-leaseback transaction, it is accounted for as a

financing arrangement.

While an option to repurchase the property at fair value arguably allows the

buyer to obtain substantially all of the remaining benefits from the property, it

limits the buyer’s ability to direct the use of the asset. We believe sales subject

to a seller’s call option that is exercisable at fair value are accounted for as a

leasing or financing arrangement depending on the expectation of the

property’s fair value over the option period relative to the original selling price.

We expect these transactions generally to be accounted for as financing

arrangements.

This guidance applies to both conditional and unconditional rights and does not

permit or require an assessment of the probability that a conditional right will

become unconditional. However, we believe if the condition that makes the

right exercisable is controlled by the buyer, then a seller generally considers

whether the buyer has the economic incentive to trigger the seller’s right to

repurchase (similar to the analysis on evaluating buyer put options). An example

of when the buyer controls whether the seller can exercise the repurchase right

is an anti-speculation clause in which the seller has the right to repurchase the

property only if the buyer fails to comply with certain provisions of the sales

contract.

[606-10-55-72 – 55-78]

As discussed in

Question F60

, if the buyer has an economic incentive not to

comply with the contract that triggers the seller’s right to repurchase the asset,

or there is greater than a remote likelihood the buyer will not comply for other

reasons (notwithstanding its ability to comply with the contract), the contract is

accounted for as a lease or a financing arrangement. That accounting depends

on the relationship between the repurchase price and the original selling price.

If the buyer does not have a significant economic incentive to trigger the

seller’s right to repurchase the asset, and it is remote that the buyer would

trigger the seller’s repurchase right for other reasons, the seller follows the

guidance on sales with a right of return that prevents recognition of revenue or

gain only if the seller expects the buyer to return the property.

[606-10-55-22 – 55-

29]

KPMG Real Estate Revenue Handbook — page 73

Revenue: Real estate

F. Step 5: Recognize revenue

In contrast, when the seller controls the right, we believe that generally the

contingency should be ignored and the entity should account for the contract as

a lease or financing arrangement because that right is no different than an

unconditional right. However, if the option is not substantive, the entity should

ignore the provision.

If neither the buyer nor the seller entirely controls the condition, the seller

would consider the effect of the condition on the buyer’s ability to control the

asset. Remote contingencies such as a natural disaster generally do not

preclude the buyer from obtaining control. However, a contingency that is more

than remote may restrict the buyer’s ability to direct the use of, and obtain

substantially all of the remaining benefits from, the asset for substantially all of

its estimated useful life.

The following examples illustrate this point.

•

When the buyer is obligated to stand ready to return the property for a

period of time and cannot use up or consume the entire property until after

the right lapses, the contract should be accounted for as a lease or a

financing. This would also be true if the right restricted the buyer’s ability to

benefit from reselling the property because the property could only be sold

subject to the repurchase right. If the right expires, the seller would

derecognize any liability and recognize revenue.

[ASU 2014-09.BC424]

•

When the condition is more than remote, but the right does not restrict the

buyer’s ability to direct the use or obtain substantially all the benefits of the

asset, the conditional right may more appropriately be accounted for as a

right of return.

Question F80

Is a right of first refusal (or a right of first

offer) considered an obligation or right to repurchase the

property?

Interpretive response:

We do not believe a right of first refusal based on a

bona fide offer by a third party constitutes an obligation or right to repurchase

the property. Even if a seller of real estate includes a right of first refusal on the

real estate as a condition of the sale, the buyer of that real estate still has the

ability to direct the use of, and obtain substantially all of the remaining benefits

from, the property because:

•

the buyer unilaterally controls the decision about whether and when to sell

the asset; and

•

if the buyer does decide to sell the asset, it will realize the asset’s

remaining benefits even if the original seller exercises its right because the

original seller must match the amount offered by the third party.

We believe a similar conclusion applies to a right of first offer that allows the

original seller to make an offer to the buyer before the buyer solicits or receives

offers from third parties to resell the property. However, the buyer must be able

to act in its best interest and must not be economically or contractually

KPMG Real Estate Revenue Handbook — page 74

Revenue: Real estate

F. Step 5: Recognize revenue

compelled to accept the offer, nor can the original seller be economically

compelled to make an offer.

The guidance applies to both customer and noncustomer transactions.

Question F90

How should a seller evaluate transfer of

control under Subtopic 610-20 when it transfers

ownership interests in a legal entity (e.g. in a partial sale)

or otherwise retains an interest in the asset (e.g. in a

sale to an equity method investee)?

Interpretive response:

Transfer of control

As discussed in

Question A20

, Subtopic 610-20 applies when a parent

derecognizes a subsidiary if substantially all of the fair value of that subsidiary is

concentrated in nonfinancial assets. As discussed in

Question F50

, that

guidance requires the parent to evaluate derecognition of the underlying assets

in two steps.

Step one

In the first step, the parent evaluates whether it has lost its controlling financial

interest under Topic 810. If the parent retains its controlling financial interest, it

does not derecognize the assets. Rather, it accounts for the sale of the

noncontrolling interests under Topic 810’s guidance covering decreases in

ownership. That guidance requires the parent to recognize the transaction in

equity.

[610-20-25-1 – 25-3, 810-10-45-21A – 45-24]

Step two

If the parent loses its controlling financial interest, it moves on to the second

step of evaluating derecognition under Subtopic 610-20. In the second step,

using the principles of Topic 606, the former parent evaluates whether it has a

contract with the buyer and, if so, whether it has transferred control of each

distinct asset within its former subsidiary.

[610-20-25-5 – 25-6]

Subtopic 610-20 has two models for evaluating whether the former parent has

transferred control of the former subsidiary’s assets.

[610-20-25-7]

Former parent retains a noncontrolling interest

When the former parent retains a noncontrolling interest in the former

subsidiary (i.e. the legal entity that holds the real estate), the parent

derecognizes each of the distinct assets when that former subsidiary controls

those assets. The former subsidiary controls those assets when it can direct

the use of, and obtain substantially all of the benefits from, each distinct asset.

Because in most cases the subsidiary owns and controls the assets before the

former parent sells the ownership interest in the subsidiary to a third party, we

believe most partial ownership sales will result in gain recognition when the

KPMG Real Estate Revenue Handbook — page 75

Revenue: Real estate

F. Step 5: Recognize revenue

seller relinquishes its controlling financial interest in the subsidiary. Question

17.3.110 and Example 17.3.10 of KPMG Handbook,

Revenue recognition

provide additional discussion about transfers of financial interests in legal

entities.

However, if the parent retains rights to individual assets held by the former

subsidiary that constrain the subsidiary’s ability to control the assets, control

may not transfer until those rights expire. For example, if the parent retained a

right (or had an obligation) to repurchase certain assets directly or purchase a

controlling financial interest in the former subsidiary, the repurchase feature

would prevent control of those assets from transferring to the former

subsidiary.

[610-20-55-15 – 55-16]

Former parent does not retain a noncontrolling interest

When the former parent does not retain a noncontrolling interest in the former

subsidiary, the parent derecognizes each of the distinct assets when the buyer

(or buyers) controls the assets. The buyer controls the assets when it can direct

the use of, and obtain substantially all of the benefits from, each distinct asset.

The following flowchart depicts the decision sequence for evaluating control

transfer.

Does the seller have a controlling

financial interest in the owner entity

post-sale?

Yes

Does a contract exist?

Has the seller transferred control?

Yes

Apply Topic 810 for decreases in

ownership interest.

Apply Topic 606 guidance;

consideration is recognized as a liability

and the asset is not derecognized.

Record gain/loss equal to the

consideration received less the carrying

amount of each distinct asset.

Consideration received is recognized as

a contract liability. The asset is not

derecognized until control transfers.

Reminders on measurement

When the former parent transfers control of the assets, it derecognizes them

and recognizes gains or losses equal to the differences between the allocated

amount of consideration received and the carrying amount of each asset. The

amount of consideration that is included in the calculation of the gain or loss

includes both the

transaction price

and the carrying amount of liabilities

assumed or relieved by the buyer (see

Question D50

KPMG Real Estate Revenue Handbook — page 76

Revenue: Real estate

F. Step 5: Recognize revenue

As discussed in

Question D40

, the transaction price includes the fair value of

noncash consideration the former parent receives in the form of a

noncontrolling interest. By including the fair value of the noncontrolling interest

in the transaction price, the former parent will recognize a 100% gain on these

transactions when control of the nonfinancial (or in-substance nonfinancial)

assets transfer to the counterparty.

Consider how the guidance is applied in the following transactions.

Transaction 1:

A seller and a third-party investor form a venture. The seller

contributes real estate to the newly formed venture and the third party investor

contributes cash, property or services. The seller retains a controlling financial

interest in the venture post-sale and no interest in the third party. Under

Subtopic 610-20, because the seller retains a controlling financial interest in the

venture, it applies the guidance in Topic 810 on decreases in ownership. The

seller will not recognize a gain in income.

Transaction 2:

Assume the same facts as Transaction 1 except the seller

retains only a noncontrolling interest in the venture post

‑

sale. The venture may

be a joint venture. Under Subtopic 610-20, because the seller relinquishes its

controlling financial interest in the venture and the former subsidiary controls

the underlying assets, the seller measures its noncontrolling interest at fair

value and recognizes a 100% gain in income from the derecognition of the

underlying assets.

Transaction 3:

A seller contributes real estate to a newly formed, wholly

owned venture. Sometime later, it sells a partial ownership interest in the

venture to a third-party investor for cash, property or services. The

consideration may come directly from the investor to the seller or may be

contributed by the investor to the venture. The seller retains a controlling

financial interest in the venture post

‑

sale and no interest in the third party.

Under Subtopic 610-20, because the seller retains a controlling financial interest

in the venture, it applies the guidance in Topic 810 on decreases in ownership.

The seller will not recognize a gain in income.

Transaction 4:

Assume the same facts as Transaction 3 except the seller has

only a noncontrolling interest in the venture post

‑

sale. The venture may be a

joint venture. Under Subtopic 610-20, because the seller relinquishes its

controlling financial interest in the venture and the former subsidiary controls

the underlying assets, the seller measures its noncontrolling interest at fair

value and recognizes a 100% gain in income from the derecognition of the

underlying assets (see Example 17.3.50 of KPMG Handbook,

Revenue

recognition

Transaction 5:

A seller transfers real estate to an existing equity method

investee for consideration. Under Subtopic 610-20, because the seller has only

a noncontrolling interest in the investee and the investee controls the

underlying assets, the seller measures a 100% gain in income from the

derecognition of the real estate. If the transaction results in an increase in the

seller’s share of the investee’s net assets, that amount is recognized at fair

value.

Under the current guidance, the accounting is not affected by the form of the

consideration received. The seller does not need to receive cash in the transfer

to derecognize the assets and recognize a gain or loss. The seller can receive

KPMG Real Estate Revenue Handbook — page 77

Revenue: Real estate

F. Step 5: Recognize revenue

partially or entirely noncash consideration, including a noncontrolling interest in

the investee, as long as it (a) no longer has a controlling financial interest in the

entity holding the asset post-sale, and (b) has transferred control of the asset.

[323-10-35-7(c), 610-20-15-4, 970-323-30-3]

Example F90.1

Partial sale with a retained controlling

financial interest

Description of the arrangement

ABC Corp. and DEF Corp. form a venture, XYZ LLC. ABC contributes real estate

with a carrying amount of $100 and receives $120 in cash from DEF and a 60%

interest in XYZ. ABC has a controlling financial interest in XYZ post-transaction.

Evaluation

Because ABC has a controlling financial interest in XYZ post-transaction, the real

estate is not derecognized and ABC accounts for the sale of the noncontrolling

interest to DEF as an equity transaction under Topic 810.

Debit

Credit

Cash

120

Noncontrolling interest ($100 carrying value ×

40% noncontrolling interest in XYZ LLC)

Additional paid-in capital

To reflect cash received from DEF in exchange for

40% interest in XYZ.

Example F90.2

Partial sale with a retained noncontrolling

interest

Description of the arrangement

ABC Corp. and DEF Corp. form a venture, XYZ LLC. ABC contributes real estate

with a carrying amount of $100 and a fair value of $300. ABC receives $180 in

cash from DEF and a 40% interest in XYZ. ABC accounts for its investment in

XYZ under the equity method post-transaction. XYZ controls the real estate

post-transaction.

Evaluation

Because post-transaction (a) ABC has only a noncontrolling interest in XYZ and

(b) XYZ controls the real estate, ABC derecognizes the real estate and

recognizes a gain for the difference between the total consideration received

and the carrying amount of the real estate. The total consideration received

includes $180 in cash plus $120, equal to the fair value of the 40%

noncontrolling interest in XYZ.

KPMG Real Estate Revenue Handbook — page 78

Revenue: Real estate

F. Step 5: Recognize revenue

Debit

Credit

Cash

180

Investment in XYZ

120

Real estate

100

Gain

200

To derecognize asset and recognize full gain on

sale.

Example F90.3

Sale to an existing equity method

investee

Description of the arrangement

ABC Corp. owns 40% of XYZ LLC and accounts for its investment under the

equity method. ABC sells to XYZ real estate with a carrying amount of $100 and

a fair value of $300. The other investors in XYZ contribute $180 in cash to the

venture to fund their portion of the purchase. ABC receives $180 in cash from

XYZ and maintains a 40% share in its underlying net assets. XYZ controls the

real estate post-transaction.

Evaluation

Because post-transaction (a) ABC has only a noncontrolling interest in XYZ, and

(b) XYZ controls the real estate, ABC derecognizes the real estate and

recognizes a gain for the difference between the total consideration received

and the carrying amount of the real estate. The total consideration received

includes $180 in cash plus $120, equal to the increase in the value of ABC’s

share of XYZ’s underlying net assets.

Debit

Credit

Cash

180

Investment in XYZ

120

Real estate

100

Gain

200

To derecognize asset and recognize full gain on

sale.

ABC would recognize the same amount of gain if it had received $300 in cash

rather than $180 in cash and $120 increase to its share of XYZ’s underlying net

assets.

Reminder on scope

The guidance discussed above applies only when the seller is transferring

ownership interests in a subsidiary in which substantially all of the fair value is

concentrated in nonfinancial assets.

KPMG Real Estate Revenue Handbook — page 79

Revenue: Real estate

F. Step 5: Recognize revenue

When substantially all of the fair value of a subsidiary is not concentrated in

nonfinancial assets, the seller would apply the guidance in Topic 810 on

derecognition and decreases in ownership of businesses. This guidance is

required for derecognition of subsidiaries when they are businesses and when

no other guidance applies. Topic 810 requires full gain or loss in earnings when

a controlling financial interest is sold, and no gain or loss in earnings when a

controlling financial interest is retained (i.e. the gain or loss is recognized in

equity). See

Question A20

Question F91

How is the transaction price allocated

when the transaction contains multiple distinct

nonfinancial assets?

Interpretive response:

The entity allocates the transaction price (including

amounts related to the liability assumed or relieved by the seller (see

Question

D50

) to each distinct nonfinancial asset following Step 4 of the revenue

recognition model.

[610-20-25-5]

Generally, that results in an allocation to each distinct nonfinancial asset on a

relative stand-alone selling price basis. Because of the nature of transactions

that are in the scope of Subtopic 610-20, it is not likely that an observable stand-

alone selling price has been established for the nonfinancial asset. Therefore,

the entity may have to estimate the stand-alone selling price.

Refer to

Question C15

for additional guidance on the unit of account when the

disposal group includes more than one asset and Question 17.3.130 of KPMG

Handbook,

Revenue recognition

, for additional guidance on the unit of account

in a partial sale.

Question F95

How is the gain or loss on the sale

presented in the income statement?

Interpretive response:

Subtopic 610-20 refers to the guidance in Topic 360 for

presenting the gain or loss on the sale of long-lived assets. Under that

guidance, the gain or loss that is not part of a discontinued operation is

presented in income (loss) from continuing operations. If the entity presents a

subtotal such as income (loss) from operations, the gain or loss is included in

that subtotal.

[610-20-45-1, 360-10-45-5]

Subtopic 610-20 does not provide guidance on presenting the gain or loss on

sales of assets that are in its scope but are not long-lived assets. However, we

believe entities generally should present the gain or loss consistent with the

Topic 360 guidance applicable to long-lived assets.

In our experience, some entities include gains on disposals of long-lived assets

in the same income statement line as impairment and disposal losses. Others

include gains in an other income/expense or similar income statement line.

The SEC staff has stated that a registrant should report gains or losses that

result from the disposition of long-lived assets as a component of other general

KPMG Real Estate Revenue Handbook — page 80

Revenue: Real estate

F. Step 5: Recognize revenue

expenses (i.e. in income from continuing operations) under Regulation S-X, with

any material items stated separately. Further, the SEC staff has distinguished

between other general expenses and selling, general, and administrative

expenses, although both line items are included in operating income.

[Reg S-X

Rule 5-03(b)(6)]

An entity is required to disclose where the gain or loss is reported in the notes

to the financial statements if it is not separately stated on the face of the

income statement as described in paragraphs 360-10-50-3 and 50-3A.

[610-20-50-

This guidance is reproduced from Question 17.4.10 in KPMG Handbook,

Revenue recognition

Question F100

Does the guidance in Question F90 apply

when the venture owns operating real estate that meets

the definition of a business?

Interpretive response:

No. As discussed in

Question A20

, Subtopic 610-20

applies only when the venture does not meet the definition of a business. If the

asset (or subsidiary or group of assets) transferred meets the definition of a

business, Subtopic 810-10 applies. However, in either case, the seller generally

will recognize a 100% gain in income when it loses its controlling financial

interest in the venture post-transaction, and $0 gain in income when it retains

its controlling financial interest in the venture post-transaction. However, the

amount of gain on the sale may differ depending on whether the asset (or

subsidiary or group of assets) is a business or a nonfinancial asset because a

seller would measure the consideration (a) at fair value in the derecognition of a

business and (b) at the transaction price (which may include an estimate of

variable consideration) plus the carrying amount of liabilities assumed by the

buyer in the derecognition of a nonfinancial asset.

If contingent consideration is present in the contract, a difference in the gain or

loss on derecognition between Subtopics 810-10 and 610-20 will likely occur

because contingent consideration is accounted for at fair value under

Subtopic 810-10, whereas it is accounted for as variable consideration subject

to the constraint under Subtopic 610-20.

Question F110

Is a buy-sell clause allowing either

investor to make an offer to acquire the other’s interest

in an entity that holds real estate considered an

obligation or a right to repurchase the property from the

perspective of the investor that sold the real estate to

the entity?

Interpretive response:

Frequently to facilitate a partial sale transaction, a seller

will contribute property to a newly formed entity and a third party will contribute

cash so that the seller can take a simultaneous cash distribution for the sale to

KPMG Real Estate Revenue Handbook — page 81

Revenue: Real estate

F. Step 5: Recognize revenue

that third party of an ownership interest in the entity. A contractual buy-sell

clause may be included in the terms of the sale that enables both investors in

the jointly owned entity to offer to buy the other investor’s interest. In some

cases, a buy-sell clause may be executed at any time; in other cases, only at a

specified future date or if specified circumstances arise.

When an offer is made under the buy-sell clause, the recipient of the offer can

elect to sell its interest for the offered amount or buy the offeror’s interest at

the offered amount. Generally, once an offer is made, the offeror is

contractually required to buy the other investor’s interest or sell its interest at

the offered amount, depending on the other investor’s election. A buy-sell

clause can specify that the offer be at fair value, at a contractually specified

amount, or at an amount determined by the offeror.

We do not believe a buy-sell clause, by itself, precludes the buyer from

obtaining control unless it gives the buyer an in-substance option to put its

interest back to the seller or gives the seller an in-substance right to reacquire

the buyer’s interest in the property. If the buy-sell clause is an in-substance put

or call option, the seller applies the guidance in

Question F60

Question F70

A buy-sell clause may be considered an in-substance option when the buyer

cannot act independently from the seller, or the seller is economically

compelled to reacquire the other investor’s interest in the jointly owned entity

(reacquiring the property). Those circumstances suggest that the buyer’s ability

to direct the use of, and obtain substantially all of the remaining benefits from,

the property is limited.

We believe the following indicators (not all-inclusive) may suggest the buyer has

not obtained control.

•

The price specified in the buy-sell agreement indicates that the parties have

already negotiated for the seller to acquire the buyer’s interest. This would

occur when the fixed price specified in the buy-sell clause economically

compels the seller to acquire the buyer’s interest or economically compels

the buyer to sell its interest to the seller.

•

The seller has a strategic necessity or an investment strategy that indicates

that it cannot relinquish its ownership rights to the buyer. Therefore, the

seller is compelled to reacquire full ownership of the real estate.

•

The seller has arrangements with the jointly owned entity, such as

management or third-party leasing arrangements, that may economically

compel the seller to reacquire the real estate to retain the economic

benefits (e.g. leasing commissions from lessees) or escape the negative

economic consequences (e.g. a below-market contract with the entity).

•

Tax implications economically compel the seller to acquire the buyer’s

interest in the entity (thereby reacquiring the real estate).

•

Tax implications economically compel the buyer to sell its interest in the

entity to the seller.

•

The buyer is financially unable to acquire the seller’s interest.

•

The buy-sell clause stipulates a specified rate of return to the buyer (or

seller), indicating that the buyer may not fully participate in the rewards of

ownership from the real estate.

KPMG Real Estate Revenue Handbook — page 82

Revenue: Real estate

F. Step 5: Recognize revenue

•

The buyer has a strategic necessity or an investment strategy that requires

it to sell its interest to the seller.

•

The buyer is legally restricted from acquiring the seller’s interest.

•

The real estate is integrated into the seller’s business, so the buyer does

not have alternative means available, such as selling to an independent third

party, to realize its economic interest.

We believe this guidance applies to both customer and noncustomer

transactions.

Question F120

What is the accounting consequence

when a general partner in a limited partnership sells a

property to the partnership for cash (contributed by the

limited partners) and a significant receivable?

Interpretive response:

Under Topic 606 and Subtopic 610-20, the seller first

determines if a contract exists given the significance of the receivable (see

Question B10

for discussion about evaluating whether a contract exists and the

resulting accounting if it does not). Next, it determines if and when control

transfers (see

Question F90

Question F130

How should a manager recognize

revenue associated with variable consideration in a

property management services contract when the

contract bases the variable consideration on a

percentage of the property’s operating results?

Interpretive response:

As discussed in

Question E10

, the manager will need

to determine if the services comprise a series of distinct time increments of

property management services.

Question C30

provides additional discussion

about identifying the performance obligations in a property management

services contract. If the manager concludes the services are a series of distinct

services (i.e. a series of daily, weekly or monthly management services), it must

allocate the variable consideration to the distinct service periods within the

single, series performance obligation if:

the variable consideration earned for a given distinct service period relates

specifically to the manager’s services for that period (or an outcome from

those services); and

allocation of that amount specifically to the distinct service period is

consistent with the allocation objective.

[606-10-32-40]

If the property management services comprise a series of distinct service

periods to which the variable consideration earned each period can be allocated,

the manager may not need to estimate the total variable fees that will be

KPMG Real Estate Revenue Handbook — page 83

Revenue: Real estate

F. Step 5: Recognize revenue

earned during the performance obligation period. The variable fees earned each

period will be allocated to, and recognized in, each period.

Topic 606 provides an example of a 20-year hotel management service contract

with a customer that pays the manager a monthly fee equal to 1% of the

hotel’s revenue. The manager concludes that it has a single performance

obligation to provide a series of daily property management services and that its

transaction price is entirely variable.

[606-10-55-157B – 55-157E]

The property manager then must determine if and how to allocate the variable

consideration to each of the distinct days of service in the series of daily

services. The property manager concludes that the terms of the variable

consideration relate specifically to the manager’s efforts to transfer each

distinct daily service and, therefore, concludes that allocating the variable

consideration based on the activities performed each day is consistent with

Topic 606’s overall allocation objective. See

Question E10

for additional

discussion about allocating the variable consideration.

[606-10-32-39(b), 32-40]

When the contract only includes variable consideration based on a percentage

of operating results, we believe in many cases a property manager will be able

to apply the ‘as-invoiced practical expedient’ and recognize revenue in the

amount to which it has a right to invoice. It will be able to apply the practical

expedient because the terms of the contract intend to provide the property

manager the right to consideration in an amount that corresponds directly with

the value to the customer of the performance completed each period.

[606-10-55-18]

Example F130.1

Multiple variable payments in one

contract allocated to the period they were earned

Property Manager enters into a two-year contract to provide property

management services to Customer. Property Manager charges Customer 2%

of monthly occupancy fees, reimbursement of labor costs incurred to perform

the service and an annual incentive payment based on 5% of gross operating

profit.

Property Manager concludes that the contract consists of a single performance

obligation satisfied over time to provide property management services.

Property Manager also concludes that the performance obligation is a series of

distinct days of service and that a time-based measure of progress is

appropriate for the performance obligation.

Property Manager concludes that the contract has three types of variable

consideration:

1. fee based on monthly occupancy fees;

2. reimbursement of variable labor costs; and

3. annual incentive payment based on gross operating profit.

Property Manager evaluates whether those amounts should be allocated

entirely to one or more distinct service periods.

Monthly fee.

Property Manager concludes that the entire fee should be

allocated each month. The variable amounts relate directly to Property

KPMG Real Estate Revenue Handbook — page 84

Revenue: Real estate

F. Step 5: Recognize revenue

Manager’s efforts and the outcome from providing the services each month

and are not dependent on prior or future months’ services and meet

criterion (a) in

Question F130

. Further, criterion (b) in

Question F130

is met

because the percentage of rental revenue is consistent each month and

would depict the amount the entity would charge to provide those services

on a monthly basis.

Reimbursement of variable labor costs.

Property Manager concludes that

the fee should be allocated entirely to each day. The variable amounts

relate directly to Property Manager’s efforts to transfer the service in that

time period and meet criterion (a) in

Question F130

because it is resolved

each day (i.e. not dependent on past or future performance). Further,

criterion (b) in

Question F130

is met because the reimbursement pricing

structure remains consistent among the distinct daily service periods and

depicts the varying amounts of consideration to which the entity expects to

be entitled each day.

Annual incentive payment.

Property Manager concludes the annual

incentive payment relates directly to the benefit provided to the customer

for the annual period and it is consistent with incentive fees that could be

earned in other years. As such, Property Manager concludes the incentive

payment should be allocated to each year.

Property Manager not only considers the allocation of the payments individually,

but also considers the allocation of all of the payment terms. As such, because

the monthly reimbursement of variable labor costs and annual incentive

payment relate to different service periods, Property Manager needs to

consider whether allocating the fees to different periods is consistent with the

allocation objective. Property Manager concludes that allocating the monthly

occupancy fee, reimbursement of variable labor costs and annual incentive

payment to different periods is consistent with the allocation objective because

each day during the contract period is in effect allocated its proportion of the

variable consideration.

Question F140

When should a real estate broker that is

acting as an agent recognize revenue?

Interpretive response:

A real estate broker often provides an agency service to

its customer when it is not the principal in the transaction but instead performs

a service of arranging for the provision of a good or service (e.g., the transfer of

control of the real estate) between the parties to a real estate transaction. A real

estate broker could either be the agent for a party selling or leasing property or

represent the buyer/lessee in the transaction.

The timing of revenue recognition first depends on whether the entity satisfies

the performance obligation at a point in time or over time. If the performance

obligation is satisfied over time, the real estate broker would apply an

appropriate measure of progress. If not satisfied over time the broker would

need to determine the point in time it satisfies that performance obligation.

KPMG Real Estate Revenue Handbook — page 85

Revenue: Real estate

F. Step 5: Recognize revenue

When a similar activity is bundled with other property management services,

the entity will first need to consider whether the service is distinct from the

other activities. See

Question C30

for additional discussion.

Over time vs point in time

A real estate broker acting as a sales agent for a customer that receives a

commission when the deal closes generally satisfies its performance obligation

at a point in time. This is because the activities performed by the broker before

sale typically do not transfer a good or service to a customer. If the customer

receives any benefit from the entity’s activities before the sale, that benefit

generally is limited unless the sale is completed. These services typically do not

meet the over-time criteria because:

•

the customer does not simultaneously receive and consume benefits as the

broker performs;

•

the broker is not creating or enhancing an asset the customer controls; and

•

the broker does not have an enforceable right to payment for performance

to date.

[606-10-25-27]

However, there may be arrangements that provide benefits to the customer

over time before a sale is completed. For example, this may arise when a

broker that enters into a written sale agent agreement receives a significant

nonrefundable upfront fee at the time of listing and a relatively small

commission fee when a sale is completed. The large nonrefundable upfront fee

generally indicates that the broker is providing the customer with a listing or

marketing service and the customer is benefiting from that service over time.

Moreover, that transaction likely meets the over-time criteria if the upfront fee

compensates the entity at cost plus a reasonable margin for its performance to

date and its performance does not create an asset with alternative use to the

entity (see

Question F40

for further discussion of the over-time criteria).

Satisfaction of a point-in-time performance obligation

When a broker satisfies its point-in-time agency performance obligation can vary

based on the facts and circumstances. For example, a broker may satisfy its

performance obligation when the principal and the end customer have each

committed to the contract or when the specified good is delivered or specified

service provided. In an agency relationship, the timing of when the principal

transfers control of the specified good or service to the end customer may

differ from the timing of when the agent satisfies its performance obligation.

There are multiple factors that can affect the point in time that an agent’s

performance obligation to arrange for the provision of a specified good or

service is satisfied. The following are important factors that we believe

influence this determination.

Who is the agent’s customer?

Agency relationships typically involve the agent

entering into contractual agreements with different counterparties. An agent’s

customer for its agency service may be the principal in the contract, the

customer purchasing the specified good or service, or both.

Determining its customer(s) is key to the agent establishing the nature of its

agency service – i.e. the nature of its promise to that (those) customer(s) and

when the related performance obligation is satisfied. For example, the nature of

KPMG Real Estate Revenue Handbook — page 86

Revenue: Real estate

F. Step 5: Recognize revenue

an agent’s promise may be different depending on which party in the real

estate transaction the agent is representing.

What is the nature of the agent’s promise to its customer(s)?

Topic 606

establishes that an agent ‘arranges for provision of the specified good or

service’ by the principal. However, it does not provide further guidance about

what that promise entails. The agent’s promise to its customer may involve

more than ‘connecting’ the two parties. For example, the agent may:

•

provide a value-add service, such as consulting, after the specified good is

delivered or specified service is provided; and/or

•

continue to perform a customer service function after the parties have

entered into their contract(s) – e.g. interfacing with the end customer about

coordinating closing documents and procedures or the move-in between

the end customer and the principal.

The first example likely represents a performance obligation (for which the

entity is a principal) separate from the agency service, and therefore would not

affect the timing of satisfaction of the agency service. However, judgment may

be involved in deciding whether a customer service function is a separate

performance obligation – i.e. separate from the agency service – or an integral

part of

the agent’s promise to provide the agency service and whether the

entity has completed its agency service.

If the entity is an agent for a specified good or service and also a principal for

another performance obligation in the contract, the entity will need to allocate

the consideration between the two performance obligations.

Determining the nature of the entity’s promise to provide the agency service is

critical to determining when that performance obligation is satisfied. How this

affects the timing of agency revenue recognition is illustrated in

Example F140.1

In some cases, the point at which the broker has a right to payment may be

informative, although not determinative, when evaluating the nature of the

broker’s promise. For example, when a broker has a right to payment without

further performance it may indicate that the nature of the promise corresponds

to the activity that triggers the payment. However, a broker will need to

distinguish between payment terms that represent variable commission and

payment terms that correspond to the entity’s performance. See trailing

commissions below for further discussion.

When does the principal transfer control of the specified goods or service

to the end customer?

The principal’s transfer of control of the specified good

or service to the end customer may indicate the agent’s performance obligation

is satisfied.

For example, an agent may continue to perform an important customer service

function, interfacing with the principal on the end customer’s behalf about

matters such as timing of close or coordination of the move-in, before control of

the specified good or service transfers to the end customer. However, after

control transfers (or begins to transfer in the case of a specified service

satisfied over time), that availability may no longer be an integral part of its

promise to arrange for the provision of the specified good or service – even if

the agent remains available to the end customer as a matter of customer

KPMG Real Estate Revenue Handbook — page 87

Revenue: Real estate

F. Step 5: Recognize revenue

relationship – because the end customer may have access to information or to

the service provider that it did not have previously. For example, the customer

may now have direct access to the landlord.

Trailing commissions

Trailing commissions often occur when a real estate broker satisfies its agency

performance obligation and receives subsequent payments from the principal

entity based on factors outside of the broker’s control – e.g. each time the

tenant renews a lease or in some cases when the lease term commences.

When the broker has no further obligations to the principal entity or the end

customer after the point in time the initial agency performance obligation is

satisfied, it determines the amount of trailing commissions to recognize as

revenue when the initial performance obligation is satisfied by applying the

guidance on variable consideration. If the entity performs other tasks that occur

after the initial sale, judgment will be required to determine whether those

activities represent performance obligations and therefore may affect the

allocation of the trailing commissions and the timing of revenue recognition.

[606-10-32-11]

A real estate broker estimates trailing commissions at contract inception and

includes them in the transaction price, subject to the variable consideration

constraint (see

Question D10

). A real estate broker with a significant amount of

history selling a particular product or service will likely recognize a portion of

revenue related to anticipated trailing commissions at the point in time the

performance obligation is satisfied. When there is a lack of history or the trailing

commissions are based on other significant uncertainties (e.g. market volatility),

the application of the variable consideration constraint guidance may be

challenging. However, in many circumstances we would expect a real estate

broker to be able to estimate at least some portion of the trailing commissions

at the time the performance obligation is satisfied.

A real estate broker reassesses its estimate of anticipated trailing commissions

at each reporting date, and records revenue for those anticipated trailing

commissions when it becomes probable that a significant reversal in cumulative

revenue recognized related to those trailing commissions (or a portion thereof)

will not occur.

Example F140.1

Real estate broker commissions

ABC real estate broker provides various brokerage services to assist customers

in leasing or selling real estate. ABC receives a commission for services based

on different commission structures.

Scenario 1: 100% commission upon lease execution

ABC enters into a contract to represent Landlord to lease space. ABC earns

100% of its commission on execution of the lease. The commission is due and

nonrefundable regardless of whether the tenant ultimately takes possession of

the space. ABC does not have any substantive performance requirements and

does not perform any substantive services for Landlord or a prospective tenant

KPMG Real Estate Revenue Handbook — page 88

Revenue: Real estate

F. Step 5: Recognize revenue

after lease execution. After lease execution, Landlord handles the relationship

with the tenant.

ABC determines that the contract includes a single agency performance

obligation related to brokering a lease between Landlord and a prospective

tenant.

Over time vs point in time

ABC evaluates whether the agency performance obligation is satisfied over

time or at a point in time and evaluates the over-time criteria as follows.

•

Landlord does not consume and receive benefit from the services as ABC

performs because those activities do not transfer a good or service to

Landlord and the benefit of the activities generally is limited unless the

lease is executed. Further, another entity would have to substantially re-

perform the activities to find a prospective tenant.

•

ABC does not create or enhance an asset that the building owner controls

while the asset is created or enhanced.

•

ABC does not have an enforceable right to payment for performance

completed to date. ABC will only earn the commission upon successfully

brokering an executed lease between the building owner and prospective

tenant.

Because none of the criteria for over-time revenue recognition are met, ABC

concludes the revenue from the leasing commission should be recognized at a

point in time.

Satisfaction of point-in-time agency performance obligation

ABC evaluates when it satisfies the point-in-time agency performance obligation

and considers the factors in

Question F140

•

Who is ABC’s customer?

Landlord is ABC’s customer as it is the party that

ABC entered into the contract with and agreed to represent.

•

What is the nature of the ABC’s promise to its customer?

The nature of

ABC’s promise to Landlord is to execute a lease agreement. This is

evidenced by the fact that ABC has a right to consideration upon lease

execution and does not perform any substantive services for Landlord or

tenant after the lease is executed.

•

When does the principal transfer control of the specified goods or

service to the end customer?

The specified lease service transfers to the

tenant when the lease term commences.

Based on the above, ABC concludes that the nature of its promise to Landlord

(its customer) is to provide an executed lease and that is the point in time at

which ABC’s services are complete. As a result, ABC recognizes revenue at

lease execution.

While the specified lease service does not transfer from Landlord to tenant (the

end customer) until lease commencement, ABC is not required to perform and

does not perform any substantive services between lease execution and lease

KPMG Real Estate Revenue Handbook — page 89

Revenue: Real estate

F. Step 5: Recognize revenue

commencement and therefore the performance obligation is satisfied at lease

execution.

Scenario 2: 50/50 lease commission structure

Assume the same facts as Scenario 1 except that ABC is entitled to only 50%

of the commission upon lease execution and is entitled to the remaining 50%

when the lease commences (i.e. when the tenant moves in). The initial 50%

payment is nonrefundable regardless of whether the tenant moves in.

While ABC only receives 50% of the commission upon lease execution, ABC

does not have substantive performance requirements after lease execution and

the second 50% payment is variable consideration. As a result, even though the

payment structure is different than Scenario 1, ABC still recognizes revenue at

the point in time the lease is executed.

ABC estimates the variable consideration (i.e. the second 50% payment) using

a most likely outcome approach (subject to the constraint) and recognizes that

amount of revenue at the time of lease execution.

Scenario 3: Real estate sale

ABC enters into a contract to represent Seller in the sale of real estate to a

prospective buyer. Seller will receive a fixed purchase price and contingent

consideration equal to 5% of future operating profits of the property over a

3-year earn-out period. ABC earns a sale commission equal to a percentage of

the fixed purchase price when the transaction closes. ABC will also earn a

percentage of the future contingent consideration paid by the prospective buyer

to Seller over the 3-year earn-out period. If the sale falls through, ABC is not

entitled to a payment.

ABC is required to perform activities necessary to obtain execution of a binding

purchase and sale agreement between Seller and prospective buyer, activities

performed during the due diligence period, and continuously represent the

buyer through actual legal close of the sale transaction. ABC is not required to

perform any activities during the 3-year earn-out period.

ABC determines that the contract includes a single performance obligation to

broker the sale transaction and that all of the activities prior to close are

activities that ABC performs to fulfill its promise to Seller.

Over time vs point in time

ABC considers whether the agency performance obligation is satisfied at a

point in time or over time as follows:

•

Seller does not consume and receive benefit as ABC performs the pre-sale

activities because those activities do not transfer a good or service to Seller

and the benefit of the activities generally is limited unless the transaction

closes. Further, another entity would have to substantially re-perform the

activities to find a prospective buyer. This would be the case even after

ABC identifies a prospective buyer because the new agent would need to

re-perform the work in the event the transaction with that prospective

buyer fell through.

KPMG Real Estate Revenue Handbook — page 90

Revenue: Real estate

F. Step 5: Recognize revenue

•

ABC does not create or enhance an asset that the current owner controls

as the asset is created or enhanced; and

•

ABC does not have an enforceable right to payment for performance

completed to date. The sale commission is only payable to ABC upon the

close of the sale.

As none of the criteria for over-time revenue recognition are met, ABC

concludes the revenue from the sale commission should be recognized at a

point in time.

Satisfaction of point-in-time agency performance obligation

Next, ABC evaluates when it satisfies the point-in-time agency performance

obligation and considers the factors in

Question F140

•

Who is ABC’s customer?

Seller is ABC’s customer because it is the party

that ABC entered into the contract with and agreed to represent.

•

What is the nature of the ABC’s promise to its customer?

The nature of

ABC’s promise to Seller is to arrange for a closed sale transaction. This is

evidenced by ABC’s requirement to perform until close and the fact that

ABC is not entitled to consideration until close.

•

When does the principal transfer control of the specified goods or

service to the end customer?

Control of the underlying real estate

transfers to the buyer at close.

ABC concludes that the nature of its promise to Seller (its customer) is to

arrange for a closed sale transaction, and closing is the point in time at which

ABC’s obligation is satisfied. While ABC only receives a commission equal to a

percentage of the fixed purchase price at sale closing, ABC does not have

substantive performance requirements after the sale closes. As a result, ABC

concludes that revenue is recognized at the point in time the sale closes.

ABC estimates the variable consideration (i.e. payments related to contingent

consideration during the 3-year earn-out period) using an expected value

approach and evaluates whether the amount is constrained. ABC recognizes

the amount included in the transaction as revenue at the time of sale closing.

At each future reporting period during the 3-year earn-out period, ABC

reassesses its estimates of future commission payments and recognizes

additional revenue from anticipated commissions to the extent that does not

make it probable that a significant reversal of cumulative revenue recognized

will occur.

KPMG Real Estate Revenue Handbook — page 91

Revenue: Real estate

G. Other matters

Detailed contents

Item significantly updated in this edition: #

Question G10

[Not used]

Example G10.1

[Not used]

Example G10.2

[Not used]

Question G15

[Not used]

Example G15.1

[Not used]

Question G20

How does Topic 606 interact with Topic 842 (when adopted)

when the lease is an operating lease and the lessee pays for certain

services and lessor costs – e.g. common area maintenance and

property taxes?

Question G22

If a lessor separates lease and non-lease components, how

should it estimate the stand-alone selling price of CAM to allocate total

consideration for an operating lease?

Question G23

If a lessor separates lease and non-lease components, should it

allocate variable CAM charges entirely to the CAM non-lease

component? Should a lessor allocate any of the fixed lease payment to

the CAM non-lease component?

Question G24

If a lessor separates a CAM non-lease component, how should it

determine the number of performance obligations?

Question G25

If a lessor separates a CAM non-lease component, how should it

allocate variable CAM payments (and recognize revenue) when CAM is

determined to be a series of distinct service periods?

Question G26

How should a lessor account for CAM provided in a lease after it

adopts Topic 606 but before it adopts Topic 842?

Question G27

After adopting Topic 842, how should a lessor present in its

income statement CAM revenue and lease income?

Question G28

Is a lessor permitted to recast comparative periods to conform

to its Topic 842 presentation of revenue from lease and qualifying non-

lease components?

Question G29

Is a lessor permitted to recast comparative periods to conform

to its Topic 842 gross vs net presentation?

Question G30

Can an entity capitalize costs incurred to sell real estate

projects?#

KPMG Real Estate Revenue Handbook — page 92

Revenue: Real estate

G. Other matters

Question G20

How does Topic 606 interact with Topic

842 (when adopted) when the lease is an operating lease

and the lessee pays for certain services and lessor costs

– e.g. common area maintenance and property taxes?

Interpretive response:

For more information on Topic 842’s effective date, see

Question A30

and KPMG Handbook,

Leases

Accounting for non-lease components – e.g. CAM

A contract might contain non-lease components in addition to lease

components. For example, in addition to leasing office space, the lessor may

promise to provide common area maintenance services (CAM), such as

cleaning of common areas, snow removal, parking lot maintenance and repairs.

In these situations, CAM is a non-lease component of the contract – i.e. service

being provided to the lessee.

[842-10-55-144 – 55-145]

The accounting for non-lease components depends on whether the lessor

elects the practical expedient allowing it not to separate components that

would be within the scope of Topic 606 if accounted for separately.

Topic 842 allows the lessor to elect not to separate non-lease components that

would be accounted for under Topic 606 – e.g. CAM, if two criteria are met:

[842-10-15-42A]

•

the timing and pattern of transfer to the lessee of the lease component and

the non-lease component(s) associated with that lease component are the

same; and

•

the lease component, if accounted for separately, would be classified as an

operating lease.

Lessor elects the practical expedient

If the lessor has elected the practical expedient and a contract includes multiple

non-lease components—one or more that meet the timing and pattern of

transfer criterion and one or more that do not—the lessor combines the non-

lease components that meet the criterion with the lease component and

separates any non-lease components that do not.

[842-10-15-42C]

If the non-lease components are the predominant components of the combined

component, the lessor should account for the combined component under

Topic 606, as a single Topic 606 performance obligation, rather than the leases

guidance in Topic 842. In those cases, the lessor:

[842-10-15-42B]

•

uses the same measure of progress for the combined Topic 606

component as it used when determining eligibility for the combination of

lease and non-lease component(s) (generally, time-elapsed); and

•

accounts for all variable payments related to any good or service, including

the lease, that is part of the combined Topic 606 performance obligation

using the guidance on variable consideration in Topic 606.

KPMG Real Estate Revenue Handbook — page 93

Revenue: Real estate

G. Other matters

Otherwise, the combined component is accounted for under Topic 842 as an

operating lease. This includes circumstances when the lease component and

non-lease component(s) are equally significant to the contract.

[842-10-15-42B]

In many cases, determining whether to account for the combined component

as a lease or as a single non-lease component in the scope of Topic 606 will be

simple. For example, in most real estate lease scenarios that include CAM, it

will be clear that the lease is the predominant element of the combined

component. This is because the lessee would clearly be expected to ascribe

more value to its right to use the real estate than to the CAM services.

A lessor elects the practical expedient by class of underlying asset.

[842-10-15-

42A]

Lessor does not elect the practical expedient or the lease and non-lease

component(s) do not qualify for combination

If the lessor does not elect the practical expedient or the lease and non-lease

component(s) do not meet the required criteria for combination, the lessor

should separate the lease and the non-lease components (e.g. the office space

lease and relevant non-lease component) and allocate the consideration in the

contract using the requirements in Topic 606 for allocating the transaction price

(i.e. generally on a relative stand-alone selling price basis).

[842-10-15-31, 606-10-32-

28 - 32-41, 842-10-15-28 – 32, 15-38 – 15-42]

The allocated revenue associated with the non-lease component(s) will be

recognized under Topic 606 and the allocated lease income associated with the

lease component(s) will be recognized under Topic 842. See

Question G22

for

additional discussion.

[606-10-32-28 – 32-29, 842-10-15-38 – 15-42]

Accounting for elements that are not ‘components’ – e.g. property taxes

or insurance paid to or on behalf of the lessor

Not every element of a contract that contains a lease is necessarily a

‘component’ (lease or non-lease). While it may be intuitive to assume that any

activity or cost that is not a lease component or payment that is not an explicit

‘lease payment’ must be a non-lease component, this is not how Topic 842

works. Instead, some elements of a contract – i.e. some activities and/or

payments – are not components because they do not transfer a good or service

to the lessee.

[842-10-15-30]

Examples of elements of a lease contract that do not transfer a good or service

to the lessee include a lessee’s reimbursement or payment of the lessor’s

property taxes and insurance. The lessee does not receive a good or service

from having to reimburse the lessor, or directly pay, the lessor’s property taxes

to the relevant taxing authority. Similarly, the lessee does not receive a good or

service from reimbursing the lessor’s insurance premium on the real estate

asset or paying for insurance in its own name on an asset that primarily benefits

the lessor (see section 4.2 of KPMG Handbook,

Leases

[842-10-15-30]

The accounting for property taxes and insurance paid for by the lessee will be

based on who (the lessee or the lessor) pays the relevant third party (e.g. the

taxing authority or the insurance provider) for the cost.

•

If the lessee pays the third party directly – e.g. remits payment of the tax

directly to the taxing authority or pays the insurance premium to the insurer

KPMG Real Estate Revenue Handbook — page 94

Revenue: Real estate

G. Other matters

– the lessor will recognize the cost and the lessee’s payment net in the

income statement. Neither the lessor’s costs nor the lessee’s payments

will be reflected on the lessor’s income statement. This reporting applies

regardless of whether the lessor was primarily obligated to, or primarily

benefitted from, the cost, and regardless of whether the lessor knows, can

readily determine or can reliably estimate the amount of the cost paid by

the lessee.

•

If the lessor pays the third party, and therefore recovers the cost through

payments it receives from the lessee (whether fixed or variable), the lessor

will recognize the cost and the lessee’s payments gross in the income

statement (see the discussion that follows).

Lessor applies the practical expedient

If the lessor applies the practical expedient and accounts for the lease and CAM

as one operating lease component, the lessee’s payments to reimburse the

lessor for property taxes or insurance are accounted for as:

•

fixed ‘lease payments’, if the reimbursement is structured as a fixed

adjustment to the base lease payment (i.e. a gross lease); or

•

variable lease payments, if the reimbursement varies based on the lessor’s

costs (i.e. a net lease).

Lessor does not elect the practical expedient or the lease and non-lease

component(s) do not qualify for combination

If the lessor does not (or cannot) apply the practical expedient and the contract

includes a lease component and non-lease component (e.g. CAM), the lessee’s

payments to reimburse the lessor for real estate taxes and insurance are

allocated to the lease and non-lease components based on the transaction price

allocation guidance in Topic 606.

[842-30-25-11(b), 842,10,15-40, 842-10-55-141 – 55-142]

If the lessor structures the reimbursement through a fixed adjustment to the

base lease payment (i.e. a gross lease), it would consider the adjustment part of

the total consideration in the contract, similar to any other fixed lease

payments. The lessor then allocates the total consideration in the contract to

the lease component(s) and the non-lease component(s) and generally

recognizes the amount allocated to the lease component(s) over the lease

term(s) on a straight-line basis, while recognizing the amount allocated to the

non-lease component(s) as those performance obligations are satisfied under

Topic 606. This would apply even if the lessor itemized that portion of the fixed

payment in the contract for reimbursement of taxes and insurance.

[842-10-15-40,

842-10-55-143, 842-30-25-11]

If the reimbursement to the lessor varies based on the lessor’s costs (i.e. a net

lease), those variable payments generally will be partially attributed to the

non-lease component(s) in a similar manner – i.e. based on the transaction price

allocation guidance in Topic 606.

However, we believe a lessor must consider whether allocating (or not

allocating) these amounts to a non-lease component (e.g. CAM) will result in

allocations to the lease and non-lease components that no longer meet the

Topic 606 allocation objective. For example, we believe it would be

inappropriate for a lessor to allocate a portion of the property tax and insurance

KPMG Real Estate Revenue Handbook — page 95

Revenue: Real estate

G. Other matters

charges to CAM services if that allocation would result in reporting CAM

income significantly greater than its stand-alone selling price.

[606-10-32-28]

It may instead be the case that the lessee’s reimbursements of lessor property

tax and/or insurance costs should be allocated entirely to the lease

component(s) based on the variable consideration allocation guidance in Topic

606.

[606-10-32-40]

Question G22

If a lessor separates lease and non-lease

components, how should it estimate the stand-alone

selling price of CAM to allocate total consideration for an

operating lease?

Interpretive response:

Often CAM is the only non-lease component in a lease

contract. While a lessor charges for CAM using a variety of mechanisms (e.g.

maintenance cost reimbursement, incremental fixed payment, incremental but

part of a single lease payment), the principle for determining the stand-alone

selling price when the lessor is separating lease and non-lease components is

the same. (See

Question G20

for additional discussion about the practical

expedient.) The lessor should apply the guidance in Topic 606 to estimate the

price at which it would provide CAM separately.

While no entity may provide exactly the same services separately, we believe a

lessor generally will be able to identify market data to support using an adjusted

market assessment approach or an expected cost plus a margin approach. We

generally do not believe it would be appropriate to use the residual approach to

estimate the stand-alone selling price for CAM.

Additionally, we do not believe it would be appropriate for a lessor to use only

the amount of actual costs billed to a lessee on a cost pass-through basis as the

stand-alone selling price for CAM. If a vendor were to provide those services

separately from a lease, the price it would charge a customer would include

some amount of profit margin because a profit-oriented business would not

perform services for no profit.

However, if the lessor bills to the lessee an administrative fee in addition to the

actual costs incurred to provide CAM, the total billings may approximate the

stand-alone selling price of CAM if the administrative fee added to the actual

costs approximates the profit margin that the lessor would have charged had

those services been provided separately. In that case, a lessor may be able to

allocate those cost plus administrative fee billings entirely to CAM if that would

result in an allocation to the lease and CAM that represents the relationship

between the stand-alone selling prices of those two components. The lessor

would not allocate those billings to both the lease and CAM. The lessor should

consider all the relevant facts and circumstances in these situations.

[606-10-32-

28, 32-34, 32-40]

KPMG Real Estate Revenue Handbook — page 96

Revenue: Real estate

G. Other matters

Question G23

If a lessor separates lease and non-lease

components, should it allocate variable CAM charges

entirely to the CAM non-lease component? Should a

lessor allocate any of the fixed lease payment to the

CAM non-lease component?

Interpretive response:

It depends. Because lease contracts that include

variable payments for CAM

services generally specify that those payments

relate to the maintenance services, those payments would be included in the

consideration in the contract. A lessor that separates lease and non-lease

components allocates those payments entirely to the CAM non-lease

component if this would result in an allocation to the lease and CAM that would

be consistent with the allocation objective of Topic 606. (See

Question G20

for

additional discussion about the practical expedient.)

While allocating only the variable CAM charges to the non-lease component

may not meet the allocation objective, allocating a portion of the fixed lease

payment to the non-lease component when combined with the variable

payments, may meet the allocation objective of Topic 606. The allocation

objective would not be met when allocating only the variable CAM charges

because those amounts are simply a pass-through of the lessor’s costs. They

do not include a profit margin and thus will not approximate stand-alone selling

price as discussed in

Question G22

. Once the lessor allocates an amount to the

CAM non-lease component, it may need to further allocate that amount to each

distinct service period within a single CAM performance obligation as discussed

Question G24

[606-10-32-28 – 32-29, 32-39 – 32-40]

We believe there may be a number of acceptable methods for allocating the

consideration in the contract (and changes to that consideration) to the lease

and CAM components, particularly when there are variable payments. In

evaluating its allocation methodology, we believe a lessor should focus on

whether the resulting reported amounts allocated to each component meet

Topic 606’s allocation objective. That is, do the allocated amounts reasonably

depict the amount of consideration to which the entity expects to be entitled in

exchange for transferring each of the components (e.g. the lease and CAM).

For example, we believe it would be inappropriate for a lessor to allocate fixed

or variable amounts between components in such a way that reported results

for any of the individual components ultimately, after considering all the

payment terms of the contract, differs significantly from the relative stand-alone

selling price of that component. This means that a lessor must consider the

result of its allocation on each of the identified components; it is not acceptable

to conclude that an allocation is appropriate solely because it faithfully

represents the amount to which the lessor expects to be entitled for providing

one or some of the components of the contract.

[606-10-32-28 – 32-29, 32-39 – 32-40]

Lessors should be careful not to include reimbursements for real estate taxes and

insurance in the variable payments allocated entirely to CAM. Real estate taxes and

insurance reimbursements are not components in the contract and are not specifically

related to CAM.

KPMG Real Estate Revenue Handbook — page 97

Revenue: Real estate

G. Other matters

Question G24

If a lessor separates a CAM non-lease

component, how should it determine the number of

performance obligations?

Interpretive response:

The lessor should determine the number of

performance obligations after allocating contract consideration to CAM as a

non-lease component as discussed in

Question G23

. This assumes that the

lessor has not elected, or does not qualify for, the non-separation practical

expedient discussed in

Question G20

). The lessor will need to determine

whether CAM comprises one or multiple performance obligations using the

guidance on identifying performance obligations in Topic 606.

We believe the nature of CAM is such that it will frequently comprise only a

single performance obligation under Topic 606 and, therefore, will be a single

non-lease component when allocating the consideration in the contract under

Topic 842. In many lease arrangements, CAM is substantially similar to the

hotel management services in Example 12A in Topic 606 (see discussion in

Question C30

) and the IT outsourcing services example discussed by the

Revenue Recognition Transition Resource Group at its July 2015 meeting. That

is, in fulfilling its promise to provide CAM (i.e. to maintain the common areas of

the multi-tenant property), the lessor performs a variety of underlying activities

to fulfill that promise, and those activities vary in terms of timing and quantity.

For example, at lease commencement, it is not known how much snow the

lessor will have to clear from the parking lot during the winter, the extent of

landscaping that will be required during the spring and summer months, when

or how often minor repairs will be needed or when unexpected janitorial needs

will arise. Regardless, the lessor commits to undertaking those activities as

needed to fulfill its overall promise to the lessee.

[606-10-55-157B – 55-157E]

The preceding paragraph notwithstanding, the characterization of an activity as

part of CAM does not necessarily mean it should not be a separate non-lease

component. The lessor will need to evaluate each activity that is promised in

the contract as part of CAM and potentially separately account for those that

provide a different or incremental benefit to the lessee beyond maintaining the

common areas of the property.

For example, the lessor will frequently provide the utilities needed by the lessee

(e.g. heating, water, electricity). In some cases, the provision of utilities is

characterized as part of, or will be billed together with, CAM. Despite its

characterization in the contract or how it is billed, the provision of utilities to the

lessee would generally be a separate non-lease component because the

provision of utilities to the lessee’s retail or office space is not an underlying

activity to maintaining the common areas of the property.

While CAM, appropriately defined, will typically be a single, integrated

performance obligation, entities may need to further consider whether that

single, integrated performance obligation comprises a series of distinct CAM

service periods (e.g. 36 distinct months of CAM). This conclusion may be

important if all or a portion of the payments to which the lessor will be entitled

for providing CAM are variable. If so, the lessor may, if the specified Topic 606

criteria are met, be required to allocate the variable payments to the distinct

CAM service periods to which each variable payment relates – e.g. allocate the

KPMG Real Estate Revenue Handbook — page 98

Revenue: Real estate

G. Other matters

variable CAM billing for Month 1 of the 36-month lease entirely to CAM

services provided in Month 1 – rather than to the 36-month CAM performance

obligation as a whole. Allocation to each distinct service period, rather than to

the entire performance obligation, may affect the lessor’s pattern of revenue

recognition.

[606-10-32-40]

Question G25

If a lessor separates a CAM non-lease

component, how should it allocate variable CAM

payments (and recognize revenue) when CAM is

determined to be a series of distinct service periods?

Interpretive response:

Any portion of the fixed payments in the contract that is

allocated to CAM relates to its performance obligation as a whole and is

recognized using a single measure of progress toward complete satisfaction of

the performance obligation under Topic 606. This assumes that the lessor is not

applying the non-separation practical expedient discussed in

Question G20

Meanwhile, a lessor will allocate variable payments that relate specifically to a

distinct service period to that distinct period if that allocation meets Topic 606’s

allocation objective. For example, CAM billings that relate to the lessor’s CAM

activities performed in Month 1 of a 36-month CAM service period generally will

be allocated entirely to Month 1. This is similar to the way a property manager

would allocate management fees (see additional discussion in

Questions E10

and

F130

Making this determination may frequently revolve around whether the lessor

concludes that the total amount of revenue allocated to each distinct service

period reasonably reflects the value of CAM services provided to the customer

for that period. For example, a lessor may conclude this is the case if the

amount(s) that will be allocated to each service period varies in reasonable

proportion to the extent of the activities the lessor undertakes.

If the variable payments for CAM are not allocable to the distinct service

periods within the larger performance obligation, those payments are estimated

subject to the Topic 606 variable consideration constraint and allocated to the

performance obligation as a whole consistent with the portion of the fixed

payments allocated to CAM. Together those payments are recognized using a

single measure of progress toward complete satisfaction of the performance

obligation under Topic 606.

KPMG Real Estate Revenue Handbook — page 99

Revenue: Real estate

G. Other matters

Question G26

How should a lessor account for CAM

provided in a lease after it adopts Topic 606 but before it

adopts Topic 842?

Interpretive response:

Accounting for existing leases before the adoption of Topic 842

Topic 606 is a ‘residual standard’ in that it requires the application of other

Topics

first

if those other Topics specify how to account for one or more parts

of the contract. Topic 606 only applies to the parts of the contract that other

Topics do not address. CAM expenditures are defined as ‘executory costs’, and

accounted for as part of the lease, under Topic 840. Therefore, CAM is not

governed by Topic 606 until an entity adopts Topic 842. That being said, after

the adoption of Topic 606, we would not object to an entity either:

[606-10-15-4]

•

analogizing to the guidance in Topic 606 to determine the measure of

progress to apply when recognizing CAM revenue; or

•

separately presenting CAM revenues as non-lease or service revenue.

If a lessor decides to separately present CAM revenue as non-lease revenue, it

is acceptable to allocate revenue between the lease and CAM using either: (1)

the requirements in Topic 840 or (2) the transaction price allocation guidance in

Topic 606. That separate presentation (if elected) should be reflected in the

comparative periods presented, even if the lessor elects to use the effective

date transition method to adopt Topic 842.

Topic 840 specifies that CAM is within its scope based on the following.

•

It defines maintenance as an executory cost.

•

It states that “if an arrangement contains a lease and related

executory

costs

[emphasis added], as well as other non-lease elements, the

classification, recognition, measurement, and disclosure requirements of

this Topic shall be applied by both the purchaser and the supplier to the

lease element of the arrangement.”

•

It characterizes related executory costs as part of ‘those for the lease’.

[840-10-25-1(d), 15-17, 15-19(a)]

Accounting for existing leases after the adoption of Topic 842

Assuming that lease classification is the same before and after adoption of

Topic 842, the lessor will not reevaluate the identification of and allocation to

lease and non-lease components. This applies unless the lease is modified on

or after the effective date and that modification is not accounted for as a

separate contract. The lessor will continue to account for CAM provided as part

of the lease contract as it did before the effective date of Topic 842 (see above).

Accounting for leases that commence on or after the adoption of Topic

842

For all leases that commence on or after the adoption of Topic 842, the lessor

will identify CAM as a non-lease component and account for it under Topic 606

if it does not elect the practical expedient discussed in

Question G20

KPMG Real Estate Revenue Handbook — page 100

Revenue: Real estate

G. Other matters

Question G27

After adopting Topic 842, how should a

lessor present in its income statement CAM revenue

and lease income?

Interpretive response:

If a lessor applies the practical expedient not to

separate lease and non-lease components (see

Question G20

), we believe that

all

the income from the lease (including payments contractually identified as

CAM, but accounted for as lease payments when the lessor applies the

practical expedient) should be classified in the income statement in a single line

item.

If a lessor is not applying the non-separation practical expedient, we believe a

lessor may either:

•

separate the lease income from CAM revenue; or

•

present lease income and CAM revenue within the same line item in the

income statement because Topics 606 and 842 do not require an entity to

separately present income streams within their scopes.

However, SEC registrants are prohibited from combining revenue from services

with income from rentals when either one is more than 10% of total sales and

gross revenues.

[Reg S-X Rule 5-03(b)]

Lessors that are not applying the non-separation practical expedient are

reminded that Topics 606 and 842 require specific disclosures relative to

transactions within their scopes. This means that CAM revenue and lease

income generally will need to be presented separately in the notes to the

financial statements even if they are not presented separately in the income

statement.

[606-10-50-4, 842-10-15-31]

Question G28

Is a lessor permitted to recast

comparative periods to conform to its Topic 842

presentation of revenue from lease and qualifying non-

lease components?

Interpretive response:

The specific lease and non-lease components for which

it would be acceptable for a lessor to recast its comparative period income

statement presentation differ if the lessor is an SEC registrant.

Non-SEC registrants

Topic 842 does not apply to the comparative periods presented when using the

effective date method. Therefore, Topic 250 should be considered.

We do not believe a change in income statement aggregation or disaggregation

is a change in accounting principle under Topic 250 (see Question 3.5.10 of

KPMG Handbook,

Accounting changes and error corrections

) if both the

previous and the new aggregations are acceptable under the applicable US

GAAP – i.e. Topic 840 in this instance. And because Topic 840 does not specify

separate or combined income statement presentation for the revenue items

KPMG Real Estate Revenue Handbook — page 101

Revenue: Real estate

G. Other matters

discussed in the background, we believe either was acceptable under Topic

840.

If a lessor changes its income statement aggregation for the comparative

periods, the notes to the financial statements should disclose the change. We

do not believe a preferability assessment under Topic 250 is required.

SEC registrants

We believe our response for non-SEC registrants also applies to SEC registrants

if, and only if, the item presented separately from lease revenue was an

executory cost element (e.g. maintenance, including CAM), rather than a non-

lease element (i.e. goods or a substantial service), under Topic 840.

However, because of the guidance in SEC Regulation S-X applicable to SEC

registrants, we do not believe income statement presentation of lease and non-

lease goods or substantial service revenues on a combined basis was an

acceptable accounting alternative for those lessors. Therefore, a lessor is not

permitted to change its comparative period income statements to combine

revenues from leases and non-lease goods or substantial services.

We do not believe lessee payments of executory costs were required to be

presented separately from lease revenue under Regulation S-X because Topic

840 characterizes those payments as part of ‘those for the lease’. Chapter 13A

of KPMG Handbook,

Leases

, provides additional discussion for lessors using

the effective date transition method.

Question G29

Is a lessor permitted to recast

comparative periods to conform to its Topic 842 gross vs

net presentation?

Background:

As discussed in

Question G20

, some lessors may be required to

change their presentation of lessor costs (e.g. property taxes) and lessee

payments thereof on adoption of Topic 842 from how they presented those

items historically under Topic 840. This may create noticeable differences

between a lessor’s adoption year and comparative period financial statements.

Topic 840 and SEC guidance

Topic 840 does not prescribe gross or net presentation for lessor costs such as

property taxes or insurance or lessee payments thereof, and there is no

relevant SEC guidance.

Interpretive response:

It depends. While Topic 842 would generally not permit

recasting the comparative periods, Topic 250 may provide an avenue to do so.

Topic 842 does not permit recasting the comparative periods because, under

the effective date method, Topic 842 does not apply before the effective date –

i.e. it does not apply to the comparative periods presented. Recasting the

comparative periods to, for example, separately present previously netted

income statement amounts would, in effect, be selectively applying the

comparative period method to adopt the amendments in ASU 2018-20, while

using the effective date method to adopt the remainder of Topic 842.

[842-10-65-

1(c)]

KPMG Real Estate Revenue Handbook — page 102

Revenue: Real estate

100

G. Other matters

Although Topic 842 does not apply to the comparative periods presented when

using the effective date transition method, Topic 250 may be considered. A

change in gross versus net income statement presentation is a change in

accounting principle under Topic 250 (see section 3.3 of KPMG Handbook,

Accounting changes and error corrections

). And because Topic 840 does not

prescribe gross or net income statement presentation for lessor costs and

lessee payments thereof, a lessor may be able to justify a change to its

comparative periods’ gross versus net income statement presentation to

conform to its post-effective date presentation as preferable. An entity’s facts

and circumstances will affect whether or not such a change is preferable, and

whether a preferability determination is required for the change.

[250-10-45-2 – 45-

Chapter 13A of KPMG Handbook,

Leases

, provides additional discussion for

lessors using the effective date transition method.

Question G30

Can an entity capitalize costs incurred to

sell real estate projects?#

Interpretive response:

Costs incurred to sell real estate projects are generally

evaluated for capitalization using the Subtopic 340-40 guidance on the

incremental cost of obtaining a contract and costs to fulfill a contract.

[340 40 25 1

– 25 8]

An incremental cost of obtaining a sales contract is a cost that would not have

otherwise been incurred if the contract were not obtained. An entity

capitalizes

those costs under Subtopic 340-40 if it expects to recover them.

Costs that an entity would have incurred regardless of whether it obtained a

sales contract are recognized under Subtopic 340-40 as an expense when

incurred unless those costs are capitalizable under other guidance or explicitly

chargeable to the customer regardless of whether a contract was obtained.

In many cases, the seller would have incurred indirect costs of obtaining a sales

contract such as model units and their furnishings, sales facilities, legal fees for

preparation of prospectuses and semi-permanent signs, regardless of whether

the seller obtained a contract. The seller generally does not attribute these

costs to a specific contract. As a result, the seller generally would expense

these costs as incurred, unless they are within the scope of another topic – e.g.

model units and sales facilities may be property, plant or equipment that are

accounted for under Topic 360.

If the costs incurred to

fulfill

a sales contract are in the scope of other guidance,

then the entity accounts for them using the other guidance (e.g. Topic 360).

Otherwise, an entity recognizes an asset only if the costs:

As a practical expedient, an entity may recognize the incremental cost of obtaining a

contract as an expense when incurred if the amortization period of the asset that would

have otherwise been recorded is one year or less.

KPMG Real Estate Revenue Handbook — page 103

Revenue: Real estate

101

G. Other matters

•

relate directly to an existing contract or specific anticipated contract;

•

generate or enhance resources of the entity that will be used to satisfy

performance obligations in the future; and

•

are expected to be recovered.

[340-40-25-5]

The costs associated with model units and their furnishings, rental facilities,

semi permanent signs, grand openings and unused rental brochures are

capitalized if they relate to, and their recovery is reasonably expected from,

future rental operations. Costs that do not meet the criteria for capitalization,

such as rental overhead, are expensed as incurred.

[970 340 25 16 – 25 17]

Initial direct costs associated with leasing activities are accounted for under

Topic 842. That guidance defines initial direct costs as incremental costs of a

lease that the lessor would not have incurred if it had not obtained the lease

(e.g. commissions, payments made to an existing tenant to incentivize that

tenant to terminate its lease).

[842 10 20 Glossary]

The guidance excludes from the definition of initial direct costs those costs that

the lessor would have incurred regardless of whether it obtained the lease.

These exclusions include the costs to negotiate or arrange a lease, such as

fixed employee salaries, general overhead, advertising, tax and legal advice, and

evaluating a prospective lessee’s financial condition. For more information on

Topic 842 and initial direct costs, see section 5.5 of Handbook,

Leases

[842 10 30

9 – 30 10]

KPMG Real Estate Revenue Handbook — page 104

Revenue: Real estate

102

Index of changes

This index lists the significant additions and changes made in this edition to

assist you in locating recently added or updated content. The following symbol

is used throughout this Handbook to indicate the revisions made in this edition

for sections, Questions, Examples and other items:

significant updates or revisions to the item

Scope

Questions

Question A20

What else is in the scope of Subtopic 610-20?#

Question A30

How does an entity apply the revenue (or other income)

recognition guidance when it sells property improvements (or

integral equipment) and leases the underlying land to a

customer?#

Question A70

Is a property or asset manager’s carried interest (or

promote) in the scope of Topic 606?#

Other matters

Question

Question G30

Can an entity capitalize costs incurred to sell real estate

projects?#

KPMG Real Estate Revenue Handbook — page 105

Revenue: Real estate

103

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KPMG Real Estate Revenue Handbook — page 106

Revenue: Real estate

104

KPMG Financial Reporting View

Access our US Handbooks

As part of

Financial Reporting View

, our library of in-depth guidance can be

accessed

here

, including the following Handbooks.



Accounting changes and error

corrections



Accounting for economic

disruption



Asset acquisitions



Bankruptcies



Business combinations



Business combinations

(SEC reporting)



California climate laws



Climate risk in the financial

statements



Consolidation



Contingencies, commitments and

guarantees



Credit impairment



Crypto assets



Debt and equity financing



Derivatives and hedging



Discontinued operations and held-

for-sale disposal groups



Earnings per share



Employee benefits



Equity method of accounting



Fair value measurement



Financial statement presentation



Foreign currency



GHG emissions reporting



Going concern



IFRS® compared to US GAAP



Impairment of nonfinancial assets



Income taxes



Internal control over financial

reporting



Inventory



Investment companies



Investments



Leases



Long-duration contracts



Non-GAAP financial measures



Research and development



Revenue recognition



Revenue: Real estate



Revenue: Software and SaaS



Segment reporting



Service concession arrangements



Share-based payment



Software and website costs



Statement of cash flows



Tax credits



Transfers and servicing of

financial assets

KPMG Real Estate Revenue Handbook — page 107

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