In This Issue:
MARCH madness is upon us

AHACPA has received many questions regarding the implementation of FASB’s Accounting Standards Update 2014-09 – Revenue from Contracts with Customers [Topic 606]. The consensus is that Topic 606 has little relevance for most multifamily housing revenues. The questions focus on the nature of disclosures for the new revenue recognition standard.

The primary sources of revenue for a multifamily project include the following items:

  1. Lease revenue from tenants
  2. Subsidy revenue from HUD/RD
  3. Other revenue sources (fees, penalties, parking and other similar types of revenue from tenants not covered by the lease)
  4. Other government grants

As far as we know, there is no official guidance from audit tool providers on how the standard should be applied, nor are there example footnotes. This lack of guidance is leaving clients and CPAs uncertain concerning the treatment of the standard for 2019 audits.

AHACPA believes that the overall approach follows a few general guidelines. First, lease revenue is exempted from the Standard specifically. Monthly tenant rent revenue (except for 232 projects) is governed by leases with durations of less than one year. Based on Topic 606 itself, tenant rent revenue is exempted from compliance.

Second, subsidy revenue would generally be covered under another new standard, ASU 2018-08 (Topic 958.) Although Topic 958 is generally regarded as applying only to NFP entities, the guidance on contributions applies equally to NFPs and for-profit entities. This standard established guidance on distinguishing certain revenues between exchange transactions and contributions. Items determined to be contributions are subject to the guidance in Topic 958 and not Topic 606. However, Topic 958 contains a specific reference of interest to multifamily housing.

958-605-15-6 e. Transfers of assets (typically from a government entity) that are part of an existing exchange transaction between a recipient and an identified customer. Some examples include payments under Medicare and Medicaid programs, provisions of health care or education services by a government for its employees, and Pell Grants or similar state or local government tuition assistance programs. In those instances, an entity shall apply the applicable guidance (for example, Topic 606 on revenue from contracts with customers) to the underlying transaction with the customer, and the payments from the third parties would be payments on behalf of those customers.

Based on the above, rental subsidy payments would technically be subject to Topic 606 as they certainly qualify as third-party payments to an identified customer (tenant). Once again, practitioners will apply the lease exception and determine that such subsidy payments are a direct result of the tenant’s lease. We see very little impact of Topic 606 as a result of this revenue stream. Third, other tenant revenue, such as pet fees, parking, laundry and vending, do not appear to contain any exemptions and in these cases the Standard is applicable and should be adopted. For AHACPA these amounts will generally be considered immaterial. Nevertheless, given the current climate of peer review, many practitioners are concerned about the nature of the disclosures the Standard may require. Although there is no single answer for all situations, AHACPA would like to share a few ideas observed from other CPA firms.

These notes should not be seen as authoritative, rather as ideas which may be adaptable to individual circumstances.
Example Footnotes – Multifamily/Subsidy

[Policy Footnote]
Revenue Recognition - The Project's primary revenue stream is rent charges for residential units under leases with durations of less than one year. The Project records revenue for such leases at gross potential rent as prescribed by HUD. The rental value of vacancies and other concessions are stated separately to present net rental income on the accrual basis. Subsidy revenue for low-income eligible tenants is provided under a Section 8 housing assistance payment contract. This contract requires tenants to contribute a portion of the contract rent based on formulas prescribed by the Department of Housing and Urban Development (HUD). The difference from the calculated subsidy and the contract rent is paid by the HUD. The current contract expires on June 12, 2034.

Subsidy income is considered part of the lease and is not considered a contribution under ASC 958. This standard indicates that government payments to specifically identified participants are to be considered exchange transactions and potentially subject to ASC 606. The Project believes that such both rental and subsidy income streams are exempted from compliance with ASC 606 due to their inclusion under current and future lease standards. Revenue streams subject to ASC 606 include: tenant reimbursement of consumption-based costs paid by the Project on behalf of the tenant, such as utilities and other monthly fees. Additional revenue includes laundry, vending, pet and parking fees as well as damages. Such fees are ancillary to the lease process and are recognized as revenue at the point in time such fees are incurred.

If the project does not have subsidy, eliminate the highlighted portion above and include the following:

No Subsidy
The Project believes that the rental stream is exempted from compliance with ASC 606 due to its inclusion under current and future lease standards.  
Note X - Recently Adopted Accounting Pronouncements:
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASC 606) and all related amendments. ASC 606 supersedes most existing revenue recognition guidance. ASC 606 provides a principles-based framework for recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects in exchange for the goods or services provided. It also requires enhanced disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Project adopted ASC 606 and all related amendments using the modified retrospective transition method. The Project concluded that the adoption of the new standard did not require an adjustment to the opening shareholders` equity balance. In November 2016, the Financial Accounting Standards Board (FASB) published Accounting Standards Update (ASU) No. 2016-18, which changes the presentation and disclosure of cash, cash equivalents and restricted cash or restricted equivalents (Cash) in the statement of cash flows. The standard requires that change in all cash when reconciling the beginning and ending cash balances shown on the statement of cash flows. The standard does not change the definitions of restricted cash or restricted cash equivalents. Previous U.S. GAAP allowed changes in in restricted cash to be shown as investing activities.
Possible Nursing Home Note:
Recently Adopted Accounting Pronouncements: In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASC 606), and all related amendments. ASC 606 supersedes most existing revenue recognition guidance including guidance related to the healthcare industry. ASC 606 provides a principles-based framework for recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects in exchange for the goods or services provided. It also requires enhanced disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Project`s primary revenue stream is rental charges for the lease of the facility to the operator in a long-term lease. The Project believes that the rental stream is exempted from compliance with ASC 606 due to its inclusion under current and future lease standards.
ONE LAST THOUGHT – ASC 958 AND CAPITAL ADVANCES

There have also been several questions regarding the implications of ASC Topic 958 and its application to Capital Advance (202/811) projects. As a reminder, in June 2018 FASB issued ASU 2018-08 – Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made (Topic 958). The standard revises the guidance for recognizing revenue from contributions. Under the standard, the project is required to first determine whether a transaction is an exchange or a contribution. Once we know that a contribution has taken place, a determination is then made as to whether the contribution is conditional or unconditional. A contribution is conditional if both of the following exist:

  •  A right of return/release must exist; and
  • The agreement includes a barrier the recipient must overcome to be entitled to resources

Application to Capital Advance Transactions
Traditionally Capital Advances have been accounted for as either debt or restricted net assets. We have also seen some CPAs record Capital Advances as unrestricted net assets. Nevertheless, the primary choices are debt or equity. Prior to Topic 958 there was no stated GAAP preference in how these transactions should be recorded.

Does the issuance of Topic 958 change that accounting? That depends. If the client elected to record the Capital Advance as a mortgage/debt, then no immediate accounting change is required. Revenue will be recognized at the expiration of the 40-year restriction/repayment period. If the client elected to record the amount as either restricted or unrestricted net assets, then the entire amount was recognized in a prior period. Luckily, the standard does not require any previously booked revenue to be unrecorded.

However, if your client is a lucky recipient of one the few newer Capital Advance recipients, your decision process may be significantly different. Based on the standard, you will to determine that the money received is not an exchange, but a contribution. You will further note that the contribution is conditional as the Regulatory Agreement requires an explicit repayment (right of return). Additionally, the Agreement also requires that the project operate the project consistent with the Agreement throughout its life thus establishing a barrier.

Based on the criteria it does not appear that the client will be able to recognize revenue until the barriers are meet and the right of return expires (40 years). This leaves the client with two choices for recording the Capital Advance - debt or deferred income. Given that, we assume few will want to carry a 40-year deferred income, debt may become the requirement. Since there are so few new Capital Advance transactions, we do not anticipate too many changes in accounting.

These accounting issue may also impact other NFP clients who receive loans/grants from state or local governments that do not contain specific repayment terms.

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Register before 11/05 for
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Objective: To learn HUD accounting, auditing, and electronic submission requirements and how to efficiently implement those requirements.
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