Real estate traditionally lends itself to joint investment with
various investors. Real estate deals are constantly evolving,
mirroring the developments occurring in economics, markets, and
investors. With the change in the structure of these arrangements,
the accounting for them has become complex and at times
inconsistent. This has resulted in joint investment accounting not
being faithfully represented.
Like investors' confidence, which reflect the true nature of
real estate deals, accounting standards also need to evolve
alongside this economic reality. Currently, Canadian private
investors have multiple accounting options for these
The International Financial Reporting Standard for joint
arrangements was recently revised and is applicable to publicly
At the heart of this standard is the understanding of the
concept of joint control – what investors actually own and
The Canadian Accounting Standards Board has also undertaken the
task to review this concept and a revised standard (s.3056, Joint
Arrangements) is expected later in 2014.
This revised standard will apply to entities that report under
Accounting Standards for Private Enterprises effective for fiscal
periods starting on or after January 1, 2016. This revised standard
considers the concept of joint control and investors' rights to
individual assets or net assets with the objective of making the
accounting treatment user friendly.
What is s. 3056 about?
Under the new standard, the classification of the investment
determines the accounting treatment. Some real estate deals involve
two or more investors bound by a contractual arrangement, which
establishes the rights and obligations of each investor.
The question to ask: are there two or more investors who
jointly control the arrangement? Joint control allows
investors to share power when determining strategic operating,
investing and financing policies. Simply, they act together to run
the business. But joint control need not be shared by all
As every arrangement is structured uniquely, the assessment can
only be made after careful review of the terms of the contractual
arrangement. Control is not limited to the form and/or structure of
the arrangement, such as partnership, co-tenancy, corporation,
joint venture or undivided interest. If joint control exists then
these investors follow s.3056 and elect to record all such
investments using either the cost* or the equity** method of
accounting. This is a simplification over the current standard of
(Note: If joint control doesn't exist, then the investor
should assess if it is a passive portfolio investment or if there
is significant influence, and record the investment
The investors do have the option of undertaking
further analysis of what they own and owe in the joint arrangement,
to see if they are required to apply the third method of
accounting. The third method is the recording of the investor's
interest in individual assets and liabilities for which they have
rights and obligations. Alternatively, if the investor has the
right only to the net assets of the arrangement, then this option
is not available and the equity method will have to be used.
So what's next?
Assessing whether joint control exists in a real estate
investment is not always a straightforward task. Further, this
determination will direct the accounting choices available. The
accounting choice affects the investors' financial statements
significantly. For example, one-line equity accounting versus cost
versus a proportionate consolidation style accounting. Each choice
has its place and purpose and needs to be evaluated on an
Please consult your Crowe Soberman advisor for further
clarification on the choices available and to determine which would
be most suitable for your situation.
*Under the cost method, the investment is initially recorded at
cost; earnings from these joint arrangements are recognized only to
the extent received.
**Under the equity method, the investment is initially recorded
at cost and the carrying value is adjusted thereafter to include
the investor's pro rata share of earnings of the joint
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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