FAS 152: Accounting for Real Estate Time-Sharing

The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 152 to address inconsistencies in how companies recognized revenue and accounted for costs from time-share sales. The principles from FAS 152 have since been absorbed into the broader FASB Accounting Standards Codification (ASC). Today, the authoritative guidance for these transactions is found under ASC Topic 978, “Real Estate—Time-Sharing Activities.”

Core Principle of Profit Recognition

The primary method for recognizing profit from time-share sales under ASC 978 is the percentage-of-completion method. This approach allows a seller to recognize profits gradually as the project is developed, provided certain conditions are met. To apply this method, construction must have begun, and the seller must have the necessary experience and financial capacity to complete it. The buyer’s commitment must also be demonstrated through a minimum down payment.

Collectibility of the remaining receivable from the buyer must be reasonably assured. This involves an assessment of the buyer’s creditworthiness and a history of collections on similar receivables. If these criteria are not fully satisfied, more conservative profit recognition methods are required.

When the conditions for the percentage-of-completion method are not met, sellers must use other approaches. The installment method is used when the collectibility of the receivable is not reasonably assured, and profit is recognized only as cash payments are received. The deposit method is required when the buyer’s down payment is insufficient, where the seller records cash received as a deposit liability and does not recognize any profit until the conditions for recognition are met.

Accounting for Transaction Costs

ASC 978 requires that costs for a time-share project be separated into distinct categories, as their treatment on financial statements differs. This ensures that expenses are matched with the revenues they help generate.

Costs directly related to acquiring and developing the property, such as land, construction, and infrastructure, are capitalized as inventory. These amounts are recorded on the balance sheet and allocated to the cost of sales as individual time-share units are sold. This is done using a relative sales value method, which allocates the total inventory cost based on expected selling prices.

Costs to sell time-shares, including marketing and sales commissions, receive different treatment. These selling costs are also capitalized but are not part of the property inventory. They are charged to expense in the same proportion that the related sales revenue is recognized. For example, if 20% of a project’s revenue is recognized in a year, then 20% of the capitalized selling costs are expensed that same year.

Managing Uncollectible Receivables

The time-share industry involves long-term financing for buyers, which introduces the risk of customer defaults. ASC 978 mandates that sellers account for these potential losses by establishing an allowance for uncollectible receivables. This is an estimate of the portion of the sales price that the company does not expect to collect.

This allowance is created by recording a charge against earnings at the time of the sale. The estimate is developed using a systematic method, relying on the company’s historical collection experience as a primary factor. Other considerations include the aging of receivables, buyer credit profiles, economic conditions, and financing terms.

The allowance for uncollectibles directly reduces the carrying value of the notes receivable on the seller’s balance sheet. This estimate is not static and must be reviewed and adjusted regularly to reflect changes in experience and economic outlook.