On Sept. 19, a representative from the Financial Accounting Standards Board (FASB or Board) participated on the Financial Standards Update panel at NAREIT’s SFO Workshop held in Boston. During the session, the FASB staff member covered interpretation questions that the Board has received on the new Leases standard. Of particular interest to equity REITs were two key questions on the accounting treatment for common area maintenance (CAM).
NAREIT understands that the views included herein are those of the staff member only and do not necessarily reflect the view of the Board. The FASB will convene a meeting later this fall when they will consider formalizing the views covered in this Alert.
Disaggregation of CAM
The FASB staff has received questions about the level of disaggregation of CAM included in gross leases. Examples of CAM include security, snow removal, standard repairs and maintenance, landscaping and cleaning. The FASB staff indicated that if the revenue recognition pattern is the same (i.e., straight-line over the term of the lease agreement), disaggregation of CAM into its components would not be necessary. However, if there was a major capital expenditure (e.g., installation of a new roof) or another activity that has a different revenue recognition pattern, disaggregation would be appropriate based on materiality.
Developing an Estimated Stand-alone Selling Price for CAM
The FASB staff acknowledged that there is not an observable stand-alone selling price for CAM. The FASB staff noted that there are many different acceptable approaches that REITs could take to estimate the stand-alone selling prices for CAM and the lease component. The FASB staff cited a cost-plus approach whereby the lessor adds a profit margin to the cost of CAM as one reasonable approach to developing an estimate of CAM. One estimation approach for the lease component is to consider whether the difference between the contract price and the estimated stand-alone selling price for CAM is a reasonable estimate of the stand-alone selling price of the lease component. To assess whether this approach would result in a reasonable allocation, REITs could consider the nature of the CAM (for example, basic CAM versus highly complex or specialized services) and whether the overall allocation to the lease component is reasonable (for example, considering information the lessor knows about the market). Thus, this approach often would mean that consideration attributable to taxes or insurance effectively would be allocated to the lease component. The FASB staff indicated that companies could develop an accounting policy for the allocation process and that the key to the policy is that it should achieve the overall allocation objective in the new guidance.
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