accounting for time-share

7/29/2019 Accounting for Time-Share

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A major segment of the real estate industry has evolved in recent decades to market and

sell time-shares, whereby parties acquire the right to use property (typically, resort

condominiums or other vacation-oriented property) for a fixed number of weeks per year

(known as intervals). While a vast variety of property types and transaction structures

exist, there are certain common features and complexities that have challenged the

accountingprofession. This post describes accounting standard for time-share transactions ofreal estate and property. Enjoy!

Time-sharing transactions are characterized by the following:

Volume-based, homogeneous sales Seller financing Relatively high selling and marketing costs Upon default, recovery of the time-sharing interval by the seller and some forfeiture of

principal by the buyer

Detailed guidance for resolution of these issues is provided in SOP 04-2, Accounting for

Real Estate Time-Sharing Transactions. Also, FAS 152 amends FAS 66 and FAS 67 to makereference to the guidance provided by SOP 04-2. Specifically, FAS 66 has been amended toprovide that time-share transactions are to be accounted for as nonretail land sales, and FAS 67

has been amended to exclude time-share transactions from certain provisions otherwise

applicable to incidental rental operations.

Accounting for Time-Share Transactions

SOP 04-2, Accounting for Real Estate Time-Sharing Transactions, provides guidance for a

sellers accounting for real estate time-sharing transactions, including:

Fee simple transactions in which non-reversionary title and ownership of the real estatepass to the buyer or a special-purpose entity (SPE).

Transactions in which title and ownership of all or a portion of the real estate remain withthe seller.

Transactions in which title and ownership of all or a portion of the real estate pass to thebuyer and subsequently revert to the seller or transfer to a third party.

Transactions by a time-share reseller.

The major conclusions of this very detailed, specialized standard are as follows:profit

recognition,effect of sales incentives,reload transactions,uncollectibles, cost of sales,costs

charged to current period expense,incidental operations, SPEs and other complex

structures, and continuing involvement by seller or related entities. Lets discuss about these
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a little bit. Read on

Profit Recognition

A time-share seller should recognize profit on time-sharing transactions as set forth by the

provisions of FAS 66 that specify the accounting for other than retail land sales . In order to

justify recognizing profit, non-reversionary title must be transferred. If title transfer is

reversionary, on the other hand, the seller must account for the transaction as if it were anoperating lease.

For a time-sharing transaction to be accounted for as a sale, it must meet the following

criteria:

The seller transfers non-reversionary title to the time-share.

The transaction is consummated. The buyer makes cumulative payments (excluding interest) of at least 10% of the sales

value of the time-share.

Sufficient time-shares would have been sold to reasonably assure that the units will notbecome rental property.

Effect OfSales Incentives

The SOP requires that certain sales incentives provided by a seller to a buyer to

consummate a transaction are to be recorded separately, by reducing the stated sales price

of the time-share by the excess of the fair value of the incentive over the amount paid by the

buyer. For purposes of testing for buyersfinancialcommitment as set forth under FAS 66, the

seller must reduce its measurement of the buyers initial and continuing investments by the

excess of the fair value of the incentive over the stated amount the buyer pays, except in certainsituations in which the buyer is required to make specific payments on its note in order to receive

the incentive.

Reload Transactions

A reload transaction is considered to be a separate sale of a second interval, and the second

interval is accounted for in accordance with the profit recognition guidance of FAS 66. For an
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upgrade transaction, that guidance is applied to the sales value of the new (upgrade) interval, and

the buyers initial and continuing investments from the original interval are included in the profit

recognition tests related to the new interval.

Uncollectibles

The term un-collectibles is used in SOP 04-2 to include all situations in which, as a result of

credit issues, a time-share seller collects less than 100% of the contractual cash payments of

a note receivable, except for certain transfers of receivables to independent third parties by

the seller. An estimate of uncollectibility that is expected to occur should be recorded as a

reduction of revenue at the time that profit is recognized on a time-sharing sale recorded underthe full accrual or percentage-of-completion method.

Historical and statistical perspectives are used in making such a determination of anticipateduncollectible amounts. Subsequent changes in estimated uncollectibles should be recorded as an

adjustment to estimated uncollectibles and thereby as an adjustment to revenue. Under the

relative sales value method, the seller effectively does not record revenue, cost of sales, orinventory relief for amounts not expected to be collected. There generally is no accounting effect

on inventory when, as expected, a time-share is repossessed or otherwise reacquired.

Cost Of Sales

The seller should account for cost of sales and timesharing inventory in accordance with the

relative sales value method.

Costs Charged To Current Period Expense

All costs incurred to sell time-shares would be charged to expense as incurred except for

certain costs that are:

Incurred for tangible assets used directly in selling the time-shares; Incurred for services performed to obtain regulatory approval of sales; or Direct and incremental costs of successful sales efforts under the percentage-of-

completion, installment, reduced profit, or deposit methods of accounting


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Incidental Operations

Rental and other operations during holding periods, including sampler programs and

minivacations, should be accounted for as incidental operations. This requires that any excess ofrevenue over costs be recorded as a reduction of inventory costs.

SPEs And Other Complex Structures

The accounting treatment for more complex time-sharing structures such as time-sharing SPEs,

points systems, and vacation clubs should be determined using the same profit recognition

guidance as for simpler structures, provided that the timesharing interest has been sold to the enduser. For balance sheet presentation purposes, an SPE should be viewed as an entity lacking

economic substance and established for the purpose of facilitating sales if the SPE structure is

legally required for purposes of selling intervals to a class of nonresident customers, and the SPEhas no assets other than the timesharing intervals and has no debt. In those circumstances, the

seller should present on its balance sheet as time-sharing inventory the interests in the SPE not

yet sold to end users.

Continuing Involvement By Seller Or Related Entities

If the seller, sellers affiliate, or related party operates an exchange, points, affinity, or

similar program, the programs operations constitute continuing involvement by the seller,

and the seller should determine its accounting based on an evaluation of whether it will

receive compensation at prevailing market rates for its program services .

accounting for time-share

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