CIRA Revenue Recognition: Frequently Asked Questions About ASC 606 Implementation
Jun 10, 2020
FASB Accounting Standards Codification 606 (“ASC 606“) is a principals-based approach to revenue recognition. Here we provide a few frequently asked ASC 606-related questions and responses for practical application:
Download ASC 606 Considerations for Vacation Ownership Entities.
- How are special assessments accounted for under ASC 606?
- Similar to pre-ASC 606, special assessments are accounted for in two ways, depending on whether the performance obligation is at a point in time or over a period of time. For example, special assessments that are for a major project or renovation to the common property, the assessment revenue would be recognized over the same period as the underlying expenses are incurred. Conversely, if the special assessment is to fund deficit reduction, legal settlement, or some such similar type of expense, the assessment would be recognized immediately.
- If there is a fund deficit in the replacement fund, does this become a contract asset at implementation?
- Generally, no. A fund deficit present at implementation would remain as a fund deficit. Until the deficit is cured in the future, all replacement fund assessments would be recognized in the year assessed.
- Are constrained assessments (formerly bad debts) allocated to the replacement fund under ASC 606?
- Most often, uncollectible assessments are treated as an expense of the operating fund and should be budgeted as such. Replacement fund assessments are strictly held for their intended purpose and are recorded their gross amount. However, some associations located in certain states that do not require full funding of replacement fund assessments do allocate constrained assessments to the replacement fund.
- Is there a change in the contract liability for replacements when a unit owner changes?
- The contract liability stays with the association and the funds are maintained for use for their intended purpose.
- How is a transfer of excess operating funds to the replacement fund treated?
- A transfer of excess funds from operations is treated as a transfer of fund balance. The revenue cannot be recognized twice, and as it was recognized in the operating fund originally, it would create fund balance after the transfer in the replacement fund. This will create a situation where the replacement fund may have both a contract liability and fund balance at the same time.
- How is a transfer of replacement fund assessments/contract liability treated?
- For an approved transfer from the replacement fund to the operating fund, we believe that the most transparent and reflective way to show the transaction is to recognize the assessment revenue for the amount of the approved transfer. This would create fund balance in the reserve fund, which would then be transferred to the operating fund. We believe this reflects more clearly on the face of the financial statements the nature of the transaction that has occurred.
- If an association uses component funding for the replacement fund, does a reallocation between components trigger satisfaction of the performance obligations?
- We believe that the performance obligation in this scenario is just shifted to the new component.
- If there is a deficit in one or more components in the replacement fund but there is a net positive balance, does this create both a contract liability for the positive balances and a fund deficit for the negative balances?
- Our interpretation is that although one component may have borrowed from another to perform a specific task, this is a borrowing and does not change the character of the balance in its totality.
- How is revenue treated in the replacement fund if there are no expenses? (i.e. interest or other income, assessments)?
- If the replacement fund has no expenses in a given year, then any ancillary income such as interest earnings or salvage sales would inure to fund balance as there is no further performance obligation. Any assessment revenue would inure to the contract liability.
- How is the AICPA required supplementary information regarding the replacement fund and details by component presented when there is no fund balance under ASC 606?
- We believe the best practice in presenting this information is to change the nomenclature on the schedule and reconcile the contract liability by component for purposes of the require information.
- How does the allocation of interest to individual components in the replacement fund effect contract liabilities by component?
- We believe that best practices would be to treat interest and other income on the first-in, first-out basis whereby expenses in the replacement fund would be allocated here first.
- When would uncollectible assessments be considered bad debts versus constrained revenue?
- An association would recognize bad debts when uncollectible assessments are related to a credit loss. We believe it will be rare to have a credit loss in an association as it is impractical to distinguish constrained revenues from credit losses in most cases. In timeshare associations, we believe that uncollectible assessments on real estate taxes are classified as bad debt since this revenue is not recognized in the underlying financial statements.
- If unspent special assessments are transferred to the replacement fund at the completion of the project, does this trigger recognition of the revenue?
- We believe that this amount would remain a contract liability as there is still a performance obligation for the association, even though it has been shifted.
- If a CIRA performs replacements of common property which creates a deficit in the replacement fund, and such expenses are funded by debt with the intention to assess in the future, when is revenue recognized?
- In this scenario, a fund deficit would be recognized for the deficit. Presuming regular periodic assessments are planned in the future to fund the debt repayment, those assessments would be recognized in the year they are assessed until the debt is paid.
- If the Developer is involved and significant assessment revenue is derived from that entity, how are the replacement fund assessments allocated between entities in regard to the future contract liability on a go forward basis?
- Pre-ASC 606, typically assessment revenue would have been allocated to a developer on the face of the financial statements based on amounts billed. To the extent this creates a contract liability, the future revenue allocation could become increasingly complicated to split between the developer and owners other than the developer. We think best practices would be to include all assessments revenue on one line on the face of the financial statements and disclose the amounts assessed to the developer in the notes to the financials statements, including the gross amount assessed to the replacement fund.