Under U.S. ASC 606 guidance for real estate financed sales, revenue from customer contracts is strictly guided with the appropriate recognition. It helps companies identify the time and just how much revenue to record. In the case of real estate, it very often involves deals in which buyers finance their purchase. ASC 606 does ensure that the proper recording of revenue upon Derivative and, secondly, that the buyer's ability to perform in payment obligations are factored in. This understanding is crucial for real estate companies in terms of compliance with the applicable guidance within the United States, as well as for the prevention of misstatements.
How Does ASC 606 Apply to Real Estate Financed Sales?
ASC 606-10-55 Real Estate states that a company should recognize revenue when the performance obligation or obligations have been satisfied, so a real estate financed sale merely by the ink of the contract does not constitute revenue recognition. It is recognized at the time when control of an asset has passed to the buyer and there is a clear agreement concerning financing terms. The process often involves checking on the buying party's ability to pay over time, which makes it a major element of any real estate transaction.
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The contract has to denote the performance obligations.
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Transfer of property control impacts revenue recognition.
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Buyer's ability to finance impacts revenue recognition.
What is the 5-Step Model for ASC 606 Real Estate Guide?
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Identify the contract: Buyer and seller have to agree to and accept the terms of the sale.
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Identify performance obligations: Real estate sellers must outline their responsibilities.
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Determine transaction price: Determine the total payment amount, considering financing terms.
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Allocate transaction price: Link the payment to the various performance responsibilities.
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Recognize revenue: It is realized when the performance responsibilities are fulfilled and there is a transfer of control.
The above steps form the backbone of ASC 606 and provide the foundation upon which compliance with the guidance is achieved.
How Does ASC 606 Differ from Previous Real Estate Standards?
Whereas in the old revenue recognition standards like ASC 605, the revenues from real estate were recognized upon the transfer of risks and rewards of ownership, in the ASC 606 Real Estate Guide there is a shift of emphasis to the area of control rather than risk. This means that the transaction will only be recorded when the buyer assumes control of the property. Under the new standard, secondly, there shall be closer scrutiny than previously on a buyer's capability of financing.
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Control is more important than risk transfer
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Buyers have to be known for their ability to pay
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Recognition of income could be postponed, as conditions would have to be met
How does ASC 606 impact the financial reporting for Real Estate firms?
ASC 606 has a huge impact on financial reporting. The real estate companies will have to thoroughly study all their contracts and any performance obligations related to those contracts. For companies dealing with ASC 606 real estate sales, it means being more conservative in respect to the matching principle, especially if the transaction involves financing. Early recognition may lead to financial statement misstatements, regulatory issues, and other increased fines and penalties.
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Organizations need to rethink when and how revenue is recognized.
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Financial records need to be kept in high detail, and the contract terms should be very clear.
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This could lead to penalties or restatements.
Conclusion
Using the ASC 606 Real Estate Guide as part of your financial process will ensure the financial process is appropriate and follows all the guidelines for revenue recognition. There is also one more significant focus for ASC 606 on the transfer of property control with the related ability to finance by the buyer. This knowledge and principle are so important in a real estate company because it stop errors in financial reporting from happening in the first place. Fino Partners can offer expert guidance to square away your books and lead your company through the most current, sometimes confusing guidelines of ASC 606 in the sale of real estate. Let their services free up valuable time and resources that could be spent on making your processes compliant.
Fino Partners-Your Financial Compliance Experts!
Fino Partners is a specialist in real estate accounting and compliance. Our pool of experts develops solutions for intricate regulations such as ASC 606. At this point in history, companies rely on expert advice when it comes to revenue recognition to keep their businesses compliant and competitive.
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