Real Estate Held for Sale Considerations

This article discusses the held-for-sale accounting model for long-lived assets such as real estate and key considerations when a reporting entity explores disposal options for real property previously held for use.

The business community around the globe continues its fight to adapt to an ever-changing environment against a background of aftershocks from continuing COVID-19 variants. Meanwhile, the phased lifting of restrictions in most industrial countries has provided some momentum and positivity in the market. It is against this backdrop that the commercial real estate sector has witnessed a surge in transactions. As reported by CBRE, volume increased significantly across all sectors. In percentage terms, growth in transactions was strongest in the hotel sector, where price discounts and M&A activity boosted investment. As a result, many property owners are entertaining attractive exit deals.

Whether through development or acquisition, investments in real estate are generally presumed to be held for use (for purposes of this discussion, alternatives such as fair value reporting are disregarded) and are reported at cost net of accumulated depreciation and amortization and tested for impairment. In contrast, the held-for-sale accounting model, which entails measuring property at the lower of its carrying amount or fair value less costs to sell, is restricted to instances in which all six criteria for held-for-sale accounting are met, as follows:

• Management has authority to sell and commits to a specific plan to sell the asset.
• The asset is available for immediate sale in its present condition and subject only to terms that are usual and customary for sale.
• There is an active program to locate a buyer and management has initiated other actions required to complete the plan to sell the asset (for example, marketing efforts).
• Subject to a few considerations, the sale is probable to occur within one year.
• The asset is being actively marketed for sale at a reasonable price (indicative of management being serious about selling).
• Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

Care should be taken that the assessments and critical assumptions are appropriately vetted, as they involve significant judgement. When management determines that all six criteria are met to classify an asset as held for sale, key accounting considerations include:

• As noted above, property classified as held for sale is measured at the lower of its carrying amount or fair value less cost to sell.
• Assets classified as held for sale are no longer depreciated or amortized.
• For newly acquired assets, the carrying amount should be established based on the asset’s fair value less cost to sell at the acquisition date.
• When the carrying amount of an asset at adoption of held-for-sale accounting is greater than fair value less cost to sell, an impairment loss is recognized to reduce the carrying amount to fair value less cost to sell.
• Assets held for sale are presented separately in the financial statements. These can be reported either in the statement of financial position (the balance sheet) or in the notes to financial statements.
• While held-for-sale accounting is a prerequisite for qualifying for discontinued operations, it is not an automatic conclusion. An entity may have held-for-sale accounting but not be a discontinued operation. A clear understanding for this distinction is imperative for accounting and disclosure purposes.

As in many aspects of accounting and reporting in U.S. GAAP, management’s evaluation of change in accounting methodology entails considerable judgment. With all the uncertainties associated with the COVID-19 pandemic, communication is key – both internally, including those involved in asset and property management, and externally, including valuation specialists and auditors.