Accounting for capital expenditures can cause confusion and doubt.  Prevalent Industry Practice (PIP) and Generally Accepted Accounting Principles (GAAP) do not always synchronize.  There are several things to consider when determining how to account for something you think might be a capital expenditure, including defining a capital expenditure, determining PIP, identifying if an association is a condominium or a homeowners’ association, and understanding if the asset has economic value.

Before we discuss how to account for capital expenditures, it is important to present and to clarify some terms.

Capital Expenditures:

Payments to acquire, maintain or upgrade assets like land, buildings and equipment, which are presented on a balance sheet.

Common Property:

Includes real property owned by members in common, such as condominium owners, real property owned by an association, and personal property owned by an association.

Real Property:

Includes assets such as land, buildings, parking areas, roads, recreation facilities, hallways and lobbies. Specifically for condominiums, real property also includes the land a building sits on, walls, roofs, major mechanical systems servicing common areas.

Personal Property:

Property that is used on the common property, including furnishings, vehicles, and equipment. Both condominium and homeowners’ associations should capitalize personal property.

Prevalent Industry Practice (PIP):

Official accounting rules for common interest realty associations (“associations”) do not provide accounting guidance for common real property, except to refer to prevalent industry practice (explained in more detail below).

Who owns common property?

Common real property in condominiums is owned by unit owners/members as tenants in common.  Ownership in common real property for homeowners’ associations is held by an association. Common personal property is generally owned by a condominium and a homeowners’ association.

Further to these definitions, are two categories of common real property.  (1) Property that is directly associated with owned units and (2) Property that is not directly associated with owned units.  Directly associated means common property needed for a unit to be occupied, including walls, roofs, land, roads. Indirectly associated means that property is not needed for the primary use of a unit and includes pools and recreational centers.

Capitalizing Common Real Property – Prevalent Industry Practice

Condominium and homeowners’ associations do not typically capitalize common real property that is directly associated with owned units.  Financial accounting standards require most condominium and homeowners’ associations to capitalize common real property that is not directly associated with owned units, but only given the following conditions:  (1)  The association has title and owns the real property AND (2) Either of the following are met (a) at the discretion of a board of directors an association can sell property for cash or a claim to cash (note) with the association retaining sales proceeds, OR (b) property is used by an association to earn significant amounts from owners based on usage or from non-owners.

Some associations capitalize common real property not directly related to owned units if they own the property, and do not consider whether they can dispose of the property and keep sale proceeds or generate significant revenues from the use of the property. Prevalent industry practices disagree with this approach because (1) if a board of directors is restricted by an association’s governing documents from selling or changing the use of real property, such property does not provide future economic benefit, i.e., generate funds.

The Financial Accounting Standards Board believes that associations should recognize assets in their financial statements the way other reporting entities present assets.   Thus, capitalize common real property not directly related to owned units regardless of whether the asset can be sold, proceeds retained, or significant cash flows earned.   If an asset does not provide economic value in terms of a sellable value or positive cash flow, it is potentially considered to be an impaired asset.  Even for assets to be held and used, if the asset’s book or carrying amount exceeds its fair value, an association should recognize an impairment loss the difference if it appears that the carrying amount is not recoverable. We believe there is an argument that common real property not meeting the sell and retain proceeds, or the significant cash flows criteria should be written down to fair value.  If fair value is zero, the asset should be written off.

Confusion or Conclusion?

It feels like the preceding discussion leads us to the point of confusion a lot of association accountants and boards experience.  Which way should we account for common real property.  Does GAAP conflict with prevalent industry practices?   Our recommendation is to use prevalent industry practice and record capitalized common real property only if the property meets the following criteria:

1. Property that is not directly associated with owned units.
2. The association has title and owns the real property, AND
   1. Either of the following are met
      1. The board of directors can sell property and the association retains proceeds, OR
      2. The property is used to earn significant amounts from owners based on usage or from non-owners.