ASPE Requirements for Real Estate and Construction Companies
In Canada, private enterprises (i.e., ones not publicly traded) can choose to adopt either the accounting standards for private enterprises (ASPE) or the International Financial Reporting Standards (IFRS). Either way, the company’s financial statements are considered to adhere to generally accepted accounting principles (GAAP) in Canada.
In this article, you will find brief overview of the ASPE requirements for most real estate and construction companies, including the recommendations provided by the Real Property Association of Canada (REALpac).
Most private companies in Canada choose to adopt ASPE over IFRS since users (lenders and investors) generally do not require IFRS financial statements. ASPE requirements are less complicated compared to IFRS, which reduces the cost of reporting for private companies. However, there are some circumstances where IFRS is required for the company, such as for a Canadian subsidiary owned by a public company.
Please keep in mind that this is not meant to be a comprehensive list of the accounting requirements, nor should it be interpreted as professional guidance. If you have any questions or would like advice on this subject, please contact a Smythe expert.
| Financing fees and transaction costs on debt | All financing fees and transaction costs incurred to obtain debt are capitalized against the debt and amortized over its term, unless the debt is measured at fair value. |
| Property acquisitions | Property acquisitions can either be an asset acquisition or a business combination. For asset acquisitions, transaction costs are capitalized and included as part of the purchase price. For business combinations, transaction costs are expensed as incurred. The purchase price of property is allocated to the identifiable components based on the fair value of the components. The common components include land, building and in-place leases at non-market rates. |
| Cost of construction | Costs relating directly to construction and development are capitalized to the property. Carrying costs, including interest, property taxes and revenues/expenses from incidental operations, are capitalized to the property until the property reaches its accounting completion date or the property is substantially complete and ready for use. |
| Rental properties – revenue recognition | Rental revenues are recognized on a straight-line basis over the term of the lease. For leases with step-rents (i.e., contractual rent increases over the term of the lease), there will be a receivable resulting from the difference between actual rents due and the straight-line revenue recognition. |
| Rental properties – leasing costs | Leasing costs (e.g., leasing commissions, tenant improvements) related to a specific lease are capitalized and amortized over the term of the lease. Tenant incentives and rent inducements (e.g., free rent periods or lower than market rent periods) are capitalized and amortized on a straight-line basis as a reduction to rental revenue over the term of the lease. Marketing costs are expensed as incurred, unless it meets the capitalization criteria as a tangible asset (e.g., leasing centres) in which case it would be capitalized and amortized over its useful life. |
| Rental properties – depreciation | Depreciation is recognized over the useful life of the property using either the straight-line or declining-balance method. |
| Real estate sales – revenue recognition and cost of sales | Sales revenues and cost of sales are normally recognized upon closing. Any deposits received prior to closing are recorded as a liability. Cost of sales are recognized using either the specific identification or net yield method. The net yield method allocates cost in proportion to the estimated market value of the unit, resulting in each unit having the same gross margin. If future costs are expected (e.g., remaining construction costs, warranties), the unit’s allocation of the estimated costs are included in cost of sales and a cost to complete liability is recorded. |
| Real estate sales – sales and marketing costs | Non-refundable commissions paid prior to the sale are recorded as a prepaid expense. The commission expense is recognized at the same time as the associated sales revenue. Marketing costs are expensed as incurred, unless it meets the capitalization criteria as a tangible (e.g., sales centres) in which case it would be capitalized and amortized over its useful life. |
| Impairment – property held for use | Property held for use is tested for impairment when events and circumstances indicate the carrying amount may not be recoverable. An impairment loss is recognized when the carrying amount is not recoverable and exceeds its fair value. The impairment loss is the amount by which the carrying value exceeds fair value. An impairment loss cannot be reversed if fair value subsequently increases. |
| Impairment – property held for sale | Property held for sale is considered as inventory and is stated at the lower of cost and net realizable value. Impairment is assessed each period and an impairment loss can be reversed if the net realizable value subsequently recovers. |
