Connect with us

Accounting For Real Estate: Acquisition, Development, And Construction



Investments in real estate projects require significant amounts of capital. For real estate properties that are developed and constructed, rather than purchased, project costs include the costs of tangible assets, such as land and other hard costs (sometimes referred to as bricks and mortar); intangible assets and other soft costs, such as architectural planning and design; and interest and taxes. Costs are often incurred before the actual acquisition of the project, which raises certain questions — for example: from what point in time should costs be capitalized? What types of costs are capitalizable?

Determining what types of costs to capitalize in the pre-acquisition, acquisition, development, and construction stages of a real estate project has been an issue for many years. Several decades ago, the “American Institute of Certified Public Accountants (AICPA)” issued the following accounting guidance relating to cost capitalization, reacting to significant diversity in practice:


  1. Industry Accounting Guide, Accounting for Retail Land Sales, issued in 1973
  2. Statement of Position (SOP) 78 – 3, Accounting for Costs to Sell and Rent, and Initial Rental Operations of, Real Estate Projects, issued in 1978 SOP 80 – 3, Accounting for Real Estate Acquisition, Development, and Construction Costs, issued in 1980
  3. In 1982, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 67, Accounting for Costs and Initial Operations of Real Estate Projects, extracting the accounting principles provided by these AICPA pronouncements.


Nevertheless, diversity in practice has continued to exist in some areas, including the capitalization of indirect costs during the development and construction period and the treatment of repair and major maintenance costs incurred subsequent to the completion of real estate projects.

The AICPA undertook another project to develop a comprehensive framework for cost capitalization and, in 2003, issued for public comment the proposed Statement of Position, Accounting for Certain Costs and Activities Related to Property, Plant, and Equipment. That proposed SOP was approved by the AICPA Accounting Standards Executive Committee (AcSEC), in September 2003; however, a fi nal SOP was never issued. In April 2004, the FASB decided not to clear that proposed SOP, mainly for the following stated reasons:

  1. Lack of convergence with International Accounting Standards
  2. The concept of componentization, particularly the amount of judgment allowed, which could potentially result in lack of comparability
  3. Implications for the capitalization of major overhaul expenses


FASB Statement No. 67 provides the primary authoritative guidance for the cost capitalization of real estate project costs. That Statement divides the costs incurred to acquire, develop, and construct a real estate project into pre-acquisition and project costs. Pre-acquisition costs encompass costs incurred in connection with, but prior to the acquisition of, real estate. Project costs include costs incurred at the time of the real estate acquisition, as well as costs incurred during the subsequent development and construction phase.

Illustration Of Cost Classification In Real Estate

Real estate developed by a company for use in its own operations other than for sale or rental is not within the scope of Statement 67. 1.  Because — aside from the proposed SOP, Accounting for Certain Costs and Activities Related to Property, Plant, and Equipment — there is no authoritative literature relating to the capitalization of costs for properties used by an enterprise in its own operations, the guidelines in Statement 67 are generally also applied to properties used by an enterprise in its own operations.

On the next post, we are going talk in more detail aboutPREACQUISITION COST

Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Are you looking for easy accounting tutorial? Established since 2007, hosts more than 1300 articles (still growing), and has helped millions accounting student, teacher, junior accountants and small business owners, worldwide.


Related pages

accrual expenseaccounting for consignmentias financial instrumentscpa exam textbooksdepreciation on office equipmentproduction budget template exceldelphi technique advantages and disadvantagescash budget accountinghow to calculate salvage value of cargoodwill impairment analysisdeferred tax on defined benefit pension schemesources of risk in capital budgetingwhat is the break even ebitaccounts payable procedures flowchartdefine operating leaseformula of roi return of investmentperpetual inventory system definitionresearch and development cost ifrscash skimmingzero based budgeting stepsaicpa sop 98 1preparing cash flow statement direct methodfranchise accounting ifrsdefine overhead ratefill in the blank promissory notesample of adjusting entriespromisary note formifrs38circular reference excel 2010common size statement value of inventory formulais patent an intangible assetcost of ppemanufacturing overhead costs formuladata flow diagram revenue cyclehr forecasting definitionformula of contribution marginebit in accountingformat for stop payment of chequehow to calculate profit margin in accountingcurrent liquidity ratio formulainternal use software capitalizationunderstated accounts payablebreakeven sales revenue formulabank reconciliation adjustmentsexample of cash outflowpassing cpa exam scoreclaim for refund and request for abatementformat of bank reconciliation statementstraight line amortization formulabaumol modelaccounting terminology dictionaryinvestments in marketable securitiesdisadvantage of outsourcingengagement letter for review of financial statementsvertical analysis balance sheet examplensf check journal entryhow to book a capital leasecapitalization of earnings methodhow to find contribution marginwhat is included in manufacturing overheadhow to calculate unit contribution marginp&l balance sheetjournal entry for cash received in advanceinventory perpetualfour column bank reconciliationcost accounting variances2014 cpa score releasepromissory note payeereinvestment formuladso days sales outstanding formulaasset turnover ratio calculation