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300.1 Until 1991, the
authoritative accounting literature did not specifically address
accounting for CIRAs. Thus, not surprisingly, industry accounting
practices were diverse because they often were based on a combination of
GAAP for commercial businesses, regulatory requirements, and income tax
rules. In response to increasing requests from accountants for guidance
in auditing and accounting for CIRAs, the AICPA issued an audit and
accounting guide titled Common Interest Realty Associations in
September 1991. The guide's objectives included increasing the
comparability of CIRAs' financial statements, which made them more
useful and informative to financial statement users, and providing
necessary guidance to accountants on the accounting principles that
apply to CIRAs and on providing services to them. The principal focus of
the guide was the accounting issues that were unique to CIRAs, which
included the following:
- • Accounting recognition and measurement of common property and facilities
- • Accounting and financial statement disclosures of funds for future major repairs and replacements of common property
- • Financial statement presentation for CIRAs
300.2 The requirements in the guide applied to all
types of residential and nonresidential common interest realty
associations, including condominium associations, homeowners'
associations, cooperative housing corporations, and time-share
associations. In addition
the guide included a chapter that provided additional guidance solely for cooperatives.
GAAP for CIRAs
300.3 Prior to June 2009, the only accounting guidance that specifically applied to CIRAs was
- the AICPA Audit and Accounting Guide, Common Interest Realty Associations. (See discussion beginning at paragraph 300.1.)
- Because the guide primarily dealt with transactions and events unique
- to CIRAs, accountants would have also needed to consider other
- accounting pronouncements in determining generally accepted accounting
- principles for CIRAs
300.4 In June 2009, the FASB issued SFAS No. 168, The Hierarchy of Generally Accepted Accounting Principles, which replaced SFAS No. 162 and authorized the FASB Accounting Standards Codification™ as the single source
of authoritative U.S. accounting and reporting standards for nongovernmental entities.
The authoritative version of the
Codification released on July 1, 2009, was effective for annual and
interim periods ending after September 15, 2009. Accordingly, there are
now only two levels of GAAP
authoritative and nonauthoritative
The FASB Accounting Standards Codification™ includes all previously existing GAAP issued by standard-setters from more than 20 sources, including
- Accounting Principles Board
- Opinions, Accounting Research Bulletins, FASB Statements, FASB Staff
- Positions, FASB Interpretations, AICPA Interpretations, AICPA Statements
- of Positions, EITF Abstracts, AICPA Practice Bulletins, and AICPA Audit
- and Accounting Guides
Thus, the FASB Codification superseded all existing GAAP guidance,
including the accounting and financial reporting guidance presented in
other publications such as the AICPA Audit and Accounting Guides, which
presented and maintained in the Codification. The accounting guidance previously included in the AICPA Guide, Common Interest Realty Associations, has been codified at FASB ASC 972.
Framework for Determining Appropriate Accounting Principles for CIRAs
300.5 FASB ASC 972 prescribes the appropriate accounting treatment for many transactions and events encountered by CIRAs, but
- but since it is not comprehensive, accountants should also look to other
- GAAP in the FASB Codification in deciding how to account for
- transactions and events that are not addressed in FASB ASC 972.
300.6 Are CIRAs Nonprofit Organizations?
When using the FASB Codification,
it is first necessary to consider whether CIRAs should be classified as
nonprofit entities. FASB literature broadly classifies entities as business enterprises or not-for-profit organizations. The nonauthoritative SFAC No. 4,
Objectives of Financial Reporting by Nonbusiness Organizations, Paragraph 6, distinguishes not-for-profit organizations from business enterprises because they have the following characteristics:
- a. Receipts of significant amounts of resources from resource providers
- who do not expect to receive either repayment or economic benefits
- proportionate to resources provided.
b. Operating purposes that are other than to provide goods or services at a profit or profit equivalent.
- c. Absence of defined ownership interests that can be sold, transferred,
- or redeemed, or that convey entitlement to a share of a residual
- distribution of resources in the event of liquidation of the
300.7 SFAC No. 4
notes that the line between not-for-profit organizations and business
enterprises is not always sharp since the incidence and relative
importance of the preceding characteristics in any organization are
different. CIRAs, for example
possess the second characteristic but generally are not considered to possess the first or last.
Are CIRAs then outside of the definition of not-for-profit organizations? Paragraph 7 of SFAC No. 4 states:
- Examples of organizations that clearly fall outside the focus of this
- Statement include all investor-owned enterprises and other types of
- organizations, such as mutual insurance companies and other mutual
- cooperative entities that provide dividends, lower costs, or other
- economic benefits directly and proportionately to their owners, members,
- or participants. The objectives of financial reporting set forth in
- Concepts Statement 1 [Objectives of Financial Reporting by Business Enterprises] are appropriate for those types of organizations
The characteristics and examples in Paragraphs 6 and 7 of SFAC No. 4 are repeated in the definition of not-for-profit organizations in FASB ASC 958-20, Appendix D of SFAS Nos. 116, Accounting for Contributions Received and Contributions Made, and 117, Financial Statements of Not-for-Profit Organizations. Thus, although SFAC No. 4
and the two FASB statements do not specifically exclude condominium
associations, homeowners' associations, housing cooperatives, and
time-share associations, the authors believe
- such associations fall in the excluded category of entities that
- operate for the direct economic benefit of members or shareholders.
- Consequently, they would not consider them to be nonprofit organizations
- for purposes of applying GAAP and would look to GAAP for commercial
- businesses for accounting guidance if it addresses transactions that are
- analogous to those encountered by CIRAs. Although CIRAs are not
- considered to be nonprofit organizations, they may be tax-exempt. The
- tax-exempt designation is used for purposes of applying tax law, not
- accounting principles. Tax-exempt CIRAs are discussed in Chapter 5.
300.8 Using the FASB Codification to Determine GAAP for CIRAs
As discussed in paragraph 300.4, FASB ASC 972
establishes accounting principles specifically applicable to CIRAs. In
addition, when accounting for a transaction or event is not specified
within a source of authoritative GAAP
- for that entity as well as to nonauthoritative guidance in the AICPA
- CIRA guide not incorporated into the FASB Codification. CIRAs should
- look to accounting principles for similar transactions of events within
- other authoritative GAAP in the FASB Codification. Thus, as a general
- rule, if CIRAs' financial statements reflect transactions or events that
- are the same as or similar to those in GAAP financial statements of
- commercial businesses, similar accounting treatment is appropriate. For
- example, a CIRA's significant accounting policies should be disclosed in
- conformity with FASB ASC 235-10-50 (formerly APB Opinion No. 22) and any contingencies should be recorded and disclosed in the financial statements in conformity with FASB ASC 450-10-50 (formerly SFAS No. 5).
- Other GAAP included in the FASB Codification might also be relevant to
- CIRAs in certain circumstances, such as accounting for leasing
- transactions FASB ASC 840 and classifying obligations when a violation of debt covenants is waived by creditors FASB ASC 470-10.
- If the accounting treatment for a transaction or event is not specified
- within authoritative GAAP, CIRAs then consider nonauthoritative
- guidance from other sources. Nonauthoritative sources of GAAP are
- discussed in paragraphs 300.9 and 300.11.
300.9 Industry Accounting Practices
With the effective date of the FASB
Codification, accounting practices that are prevalent and widely
accepted in a particular industry but are not included in the
Codification have the status of:
- nonauthoritative accounting
- guidance. (Previously, industry accounting practices that were prevalent
- and widely accepted were included in category d. of the GAAP hierarchy
- and could be considered as a source of GAAP in the absence of accounting
- guidance in a higher category of accounting guidance.)
However, FASB ASC 105-10-05-2
indicates that entities may consider prevalent industry accounting
practices when the accounting treatment for a transaction or event (or a
similar transaction or event) is not specified in authoritative GAAP.
(See also the discussion of grandfathered guidance in paragraph 300.10.) In the CIRA industry, however,
- it may be difficult to determine whether industry accounting practices
- not included in the Codification are accepted practice because industry
- practice has historically been so diverse. Accounting principles for
- CIRAs also tend to be heavily influenced by state regulations and income
- tax requirements, and even though reliance on regulatory and tax
- accounting practices is prevalent in the industry, it cannot necessarily
- be characterized as GAAP. Nevertheless, certain accounting practices,
- such as presenting unclassified balance sheets, have widespread
- acceptance in the industry and are considered accepted practice. The
- authors recommend that accounting guidance in the AICPA guide but not
- incorporated into the FASB Codification be considered accepted practice.
300.10 Grandfathered Guidance
According to FASB ASC 105-10-70-1, some of the guidance specified by industry practices is considered as “grandfathered.” What this means
- for CIRAs is that if a CIRA followed and continues to follow an
- accounting treatment that conformed to industry practice as of March 15,
- 1992, it need not change to follow the guidance in the AICPA guide (or
- other guidance in the FASB Codification whose effective date was before
- March 15, 1992). [However, the authors recommend all CIRAs follow the
- provisions of the FASB Codification (previously in the AICPA guide)
- because it is believed to be the best thinking of the profession on
- accounting for CIRAs.] Furthermore, all CIRAs must conform with the
- guidance in the FASB Codification if the underlying pronouncement became
- effective after March 15, 1992. In addition, all CIRAs initially
- adopting an accounting principle after March 15, 1992, including CIRAs
- formed after March 15, 1992, must conform with the Codification.
300.11 Nonauthoritative Guidance
As discussed in paragraph 300.4, with the effective date of the FASB Codification, there are two levels of GAAP
the accounting principles included in the Codification, which are
authoritative, and all other accounting guidance, which is
- • Practices that are widely recognized and prevalent either generally or in the industry (see also paragraph 300.9)
- • FASB Concepts Statements
- • AICPA Issues Papers
- • Technical Information Service Inquiries and Replies included in AICPA Technical Practice Aids
- • International Accounting Standards of the International Accounting Standards Board
- • Pronouncements of other professional associations or regulatory agencies
- • Accounting textbooks, handbooks, and articles
Accountants may consider nonauthoritative guidance when the accounting
for a transaction or event (or a similar transaction or event) is not
addressed in the FASB Codification. In that case, the appropriateness of
the nonauthoritative guidance depends on
- (a) its relevance to the circumstances, (b) the specificity of the
- guidance, (c) the general recognition of the issuer or author as an
- authority, and (d) the extent of use in practice. For example, FASB
- Concepts Statements normally would be more influential than other
Using Present Value Information in Accounting Measurements
300.12 The nonauthoritative SFAC No. 7, Using Cash Flow Information and Present Value in Accounting Measurements, provides a framework for using future cash flows as the basis for measuring assets and liabilities. 2 According to SFAC No. 7:
- • The Present Value of Future Cash Flows Should Be Used to Value
- an Asset or Liability Only When Observable Marketplace Transactions for
- Similar Items Are Not Available.
- • Estimated Cash Flows Should Reflect the Range of Possible Outcomes Rather Than a Single Amount. Even though present value measurements traditionally have used a single “most-likely” cash flow amount, SFAC No. 7 states that using all
- estimates of possible cash flows rather than the single “most-likely”
- estimate may be a more effective method for measuring cash flows in many
- • Estimated Interest Rates Should Reflect the Range of Possible Outcomes Rather Than a Single Rate.
- Even though present value measurements traditionally have used a
- single interest rate that reflects the risk associated with the future
- cash flows, SFAC No. 7
- states that such a rate cannot reflect uncertainties in timing. However,
- the “expected” cash flow method can be used to measure present value
- when the timing of cash flows is uncertain.
- • Financial
- Statement Preparers May Consider Cost-benefit Constraints When Deciding
- Whether to Use the “Expected” Cash Flow Method.
- • The Measurement of a Liability Always Should Consider the Credit Standing of the Debtor.
- The effect of a debtor's credit standing on a liability's fair value
- depends on the debtor's ability to pay as well as provisions that
- protect debt holders. SFAC No. 7
- states that the effect of a debtor's credit standing generally is
- considered by adjusting the interest rate in the liability's present
- value measurement.
- • A “Catch-up” Approach Is the Preferable Technique for Reporting Changes in Estimated Cash Flows.
- A “catch-up” approach adjusts the carrying amount of an asset or
- liability to the present value of the revised estimated cash flows,
- discounted at the original effective interest rate.
Although FASB Concepts Statements do not change generally accepted accounting principles, they establish
- the objectives and concepts that the FASB uses in developing standards
- of financial accounting and reporting. Additional information about SFAC No. 7 and FASB Concept Statements in general can be found in sections 1901 and 103, respectively, in PPC's Guide to Preparing Financial Statements.
Difference in Treatment of Specific Transactions for Financial Reporting and Tax Purposes
300.13 Accountants should be aware
that some transactions may be treated differently for financial
reporting and tax purposes. For example
- initial contributions required by
- new members upon purchase of their units to provide the CIRA with
- additional working capital are treated as contributed capital for
- financial reporting purposes but as revenue for tax purposes. Appendix 5C presents the financial reporting and tax treatment of several common CIRA transactions.