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Participating Mortgage Loans AddressedFinally
T he American Institute of CPAs accounting standards executive committee has issued a Statement of Position, Accounting by Participating Mortgage Loan Borrowers , which is the culmination of a project originating with the AICPA real estate committee in 1979. The SOP establishes the borrower's accounting for a participating mortgage loan in which the lender is entitled to participate in the appreciation in the market value or the results of operations of the mortgaged real estate project. Entities are required to accrete a liability for the participation feature and charge a part of that to expense every period, according to John M. Lacey, professor and Ernst & Young research fellow at California State University, Long Beach, who drafted the SOP for AcSEC. Lacey, the immediate past chairman of the AICPA real estate committee, said practice in this area has long been diverse.
During the SOP's exposure period, many comment letters said the payment to the borrower under the participation clause should be added to the value of the asset instead of charged to expense. "Some people believe there is objective evidence of the increase in the value of the asset as a consequence of the participation payment to a third party, which is based solely on the appreciation of the asset," said Lacey. "However, AcSEC decided the payment should be an expense." The SOP includes a section on AcSEC's basis for conclusions.
Compromise decision
When AcSEC voted on an earlier version of this SOP in
1992, said Lacey, the committee split evenly three ways, with each
third voting for a different accounting treatment. Observers commented
then that it was one of the most acrimonious debates in AcSEC history.
The final conclusion, as approved by AcSEC and the Financial
Accounting Standards Board in this SOP, is that the addition to the
participation should be amortized over the remaining life of the loan.
"So as we increase this participation liability, we take that
increase and spread it over the remaining life of the loan,"
explained Lacey.
The SOP is effective for financial statements issued for fiscal
years beginning after June 30, 1997, with earlier application
encouraged. It will be published this summer.
AcSEC Becomes Strict on Fundraising
T he American Institute of CPAs accounting standards executive committee is issuing a new Statement of Position, Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund Raising . It supersedes guidance in SOP 87-2, Accounting for Joint Costs of Informational Materials and Activities of Not-for-Profit Organizations That Include a Fund-Raising Appeal , which was incorporated into the 1996 Audit and Accounting Guide Not-for-Profit Organizations .
"The new statement is broader and stricter than SOP 87-2," Kenneth Williams, past chairman of the not-for-profit organizations committee, told the Journal . "Reporting criteria are delineated more clearly. Reporting in this area had been problematic even before SOP 87-2, and we wanted to provide preparers and practitioners with some guidance to improve comparability of statements."
Definition problems
NPOs have had a lot of latitude in deciding what was a fundraising
activity and what was a program activity, that is, an activity
related to another aspect of the entity, such as providing shelter
to the homeless. "This SOP makes rules less vague. It provides
specific guidelines but there is still some room for judgment,"
said Williams. During the exposure period, many NPOs requested a
wide latitude for classification, while representatives of
regulatory and watchdog groups lobbied for more rigid standards for
determining a fundraising activity. The new guidance essentially
provides a function test and even a flowchart to help NPOs determine
how to classify a given activity.
Scope
The new standard, to be issued this summer, will be effective for
financial statements for years beginning on or after December 15,
1997. Earlier application is encouraged in fiscal years for which
financial statements have not been issued. It will apply to all NPOs
and state and local government entities required to report
fundraising expenses or expenditures. See "New Role for NPO
CPAs" (below) for details on how charities will be affected.
New Role for NPO CPAs
C harities want to report most expenses as program
services rather than as administrative or fundraising activities to
appear favorably to the public and attract potential donors.
Publications often rate charities based on the percentage of money
spent on fundraising, and state regulators are concerned as well.
Correction The cover line of the March 1997 Journal should have read "Computer Know-How: Five Must Technologies All CPA's Should Master." |