Increase in rental property's equity


I

iforsyth

How do I record a double entry increase in equity to my rental
property value fixed asset account based on current housing market
conditions? Using Quickbooks.
 
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J

John

iforsyth said:
How do I record a double entry increase in equity to my rental
property value fixed asset account based on current housing market
conditions? Using Quickbooks.

is this for a personal financial statement? otherwise, you cannot increase
equity because you think an asset has increased in fair market value.
 
W

Wayne Brasch

iforsyth said:
How do I record a double entry increase in equity to my rental
property value fixed asset account based on current housing market
conditions? Using Quickbooks.
For accounting purposes, assets are recorded at whatever you paid for them.
Generally accepted accounting principles does not allow for an entry to
increase the asset to fair market value. You may indicate the increased
value in the notes to the financial statements, but not on the statements
themselves.

Wayne Brasch, CPA, M. S. Taxation
 
B

Bill Lentz

How do I record a double entry increase in equity to my rental
property value fixed asset account based on current housing market
conditions? Using Quickbooks.
Create an account in your equity section called something like "FMV
Adjustment", or "Mark to Market", then record a journal entry that
will Debit (increase) the Fixed asset account and Credit (also an
increase) the FMV Adjustment account.
 
A

Allan Martin

Bill Lentz said:
Create an account in your equity section called something like "FMV
Adjustment", or "Mark to Market", then record a journal entry that
will Debit (increase) the Fixed asset account and Credit (also an
increase) the FMV Adjustment account.
I would recommend using a contra asset account called allowance for mark to
market, rather than debiting the fixed asset account. The statments should
disclose the fact that the property is being reported at fair market value.
 
?

.

Does this also apply to M2M for "capital recovery payments" or how do you
set up this type of investment (chart of accounts)? I was advised by a CPA
that it is an expense and equity transaction from the owners investment in
rental property (HUD).
 
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W

Wayne Brasch

Allan Martin said:
I would recommend using a contra asset account called allowance for mark to
market, rather than debiting the fixed asset account. The statments should
disclose the fact that the property is being reported at fair market value.
I believe that you will find that mark-to-market applies only to tax
treatment for security traders as well as commodities dealers and traders.
It has nothing at all to do with the valuation of real estate.

Wayne Brasch, CPA, M. S. Taxation
 
B

Bill Lentz

I believe that you will find that mark-to-market applies only to tax
treatment for security traders as well as commodities dealers and traders.
It has nothing at all to do with the valuation of real estate.

Wayne Brasch, CPA, M. S. Taxation
I was answering the question that was asked, which was "How do I do
this?" Others in the thread had already answered questions that
weren't asked.

Bill Lentz, CPA, M. S. Accounting
 
W

Wayne Brasch

Bill Lentz said:
I was answering the question that was asked, which was "How do I do
this?" Others in the thread had already answered questions that
weren't asked.

Bill Lentz, CPA, M. S. Accounting
From the answer you gave, it appears that you are telling the original
poster who asked the question, that it is proper to make such an adjustment
to the fair market value of real estate. It is not in compliance with
generally accepted accounting principles to do this, though, as you know.

Wayne Brasch, CPA, M. S. Taxation
 
A

Allan Martin

Wayne Brasch said:
I believe that you will find that mark-to-market applies only to tax
treatment for security traders as well as commodities dealers and traders.
It has nothing at all to do with the valuation of real estate.
I agree after seeing this post. However I still would use some type of
contra account rather than debiting the asset account.
 
B

Bill Lentz

From the answer you gave, it appears that you are telling the original
poster who asked the question, that it is proper to make such an adjustment
to the fair market value of real estate. It is not in compliance with
generally accepted accounting principles to do this, though, as you know.

Wayne Brasch, CPA, M. S. Taxation
I'm not sure I agree that my answer implied that it was proper, but I
probably should have added a reference to the other responses or a
disclaimer that writing up assets is generally not done, and that if
he was giving the FS to a third party he should appropriately disclose
any such adjustments. And, as you know, many users find
(appropriately supported) fair market value on real estate to be a
useful financial statement presentation.

But I do think that too often we accountants tend to answer questions
with "You can't do that." rather than try and find out what the
individual is trying to do and helping them do it.

Bill
 
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D

Duane Bozarth

Bill said:
....
But I do think that too often we accountants tend to answer questions
with "You can't do that." rather than try and find out what the
individual is trying to do and helping them do it.
Isn't that precisely what got a bunch of fairly prominent
accountants/firms (and their clients) into real trouble recently???
 
S

Steve

Duane Bozarth said:
Isn't that precisely what got a bunch of fairly prominent
accountants/firms (and their clients) into real trouble recently???

right - getting results for the customer!
why not help that "mark to market" real estate poster prepare a nice looking
set of financial statements for his banker, just be sure to tell him to act
honestly !
 
J

Jim Hudspeth

Duane said:
Isn't that precisely what got a bunch of fairly prominent
accountants/firms (and their clients) into real trouble recently???
I would say yes. There are times and situations where the only appropriate
response is "You can't do that".

On the other hand, there are times and situations where it is entirely
appropriate to "try and find out what the individual is trying to do and
helping them do it".

Reporting real estate values at fair market value can fall on either side of
the line, depending on the facts and circumstances surrounding the
situation.

Jim Hudspeth
 
W

Wayne Brasch

Allan Martin said:
I agree after seeing this post. However I still would use some type of
contra account rather than debiting the asset account.
A contra account by definition is an account that is deducted from
something. This being true, I don't see how this could work even if it were
in compliance with generally accepted accounting principles-which it is not.

Wayne Brasch, CPA, M. S. Taxation
 
B

Bill Lentz

Isn't that precisely what got a bunch of fairly prominent
accountants/firms (and their clients) into real trouble recently???
I don't think my responses rise to the level of Enron - I reiterate
that we weren't asked to describe GAAP for any type of financial
presentation, but were asked what the mechanics were for making a
quickbooks adjustment. Rather than answer, several posters seemed to
assume the OP was trying to defraud someone (which could be true.)

It's been at least 10 years since I've had to do any substantive
accounting research outside of my industry, but I do seem to remember
that FMV presentation of real estate information is not that unusual.

A quick perusal of some sites I "googled" reveals that is (or has
been) the case. IAS 16 apparently allows FMV as an alternative, and
apparently, the IASC at some time issued an ED that some interpreted
as applying to real estate:

Fair Value Accounting for Investment Properties
by George Yungmann and David Taube

The International Accounting Standards Committee (IASC) recently
issued an Exposure Draft (ED) which proposes that "investment
property" be carried at fair value on a company's balance sheet. In
addition, the ED recommends that increases and decreases in these fair
values be reported in net income and that the properties not be
depreciated. The proposed standard does not require the use of outside
appraisals. Under the proposal, property would be defined as
investment property if it meets the following conditions:


it is held to earn rentals and/or for capital appreciation, and
when the enterprise acquired the property, it expected that it would
be able to determine the fair value of the property reliably at all
times.
The ED includes a rebuttable presumption that an enterprise will be
able to determine reliably the fair value of investment properties.

The IASC is a private sector body working to achieve uniform
accounting standards around the world. Its members represent over 100
countries including the United States. Although not all of these
countries accept the use of IASC standards, many either require or
allow the use of them-especially by multi-national companies. The
Financial Accounting Standards Board (FASB) has indicated that it
intends to cooperate with other standard setting bodies to resolve
specific issues and reduce differences in accounting standards between
nations. IASC standards are not allowed to be used as U.S. Generally
Accepted Accounting Principles (GAAP) but will certainly influence
future FASB Standards.

Reporting Investment Properties at their Fair Value
Over the past 20 years, a number of real estate companies have
publicly reported the fair value of their property portfolio. These
presentations supplemented historical cost information required by
GAAP. This information was presented either in "letters to
shareholders," management's discussion and analysis, or in fair value
financial statements. A number of these presentations were covered by
audit opinions and were included in Securities and Exchange Commission
filings. For over a decade, financial statement users clearly utilized
this fair value information in evaluating the investment quality and
financial strength of these companies.

More recently, equity valuations have been based primarily on
multiples of operating measures such as Funds From Operations (FFO)
and adjusted FFO, while a company's valuation of its portfolio has
apparently become less relevant to financial statement users. In
addition, some financial statement users question the reliability of
the fair value estimates. Although fair value information continues to
be published on a limited basis by some companies, these disclosures
have become less extensive.

Potential Impact
There is no expectation that this international accounting standard
will apply to REITs and other publicly traded real estate companies in
the U.S. in the near term. However, some believe that this and other
movements toward fair value accounting may provide the basis for
gaining acceptance of a more appropriate method for depreciating
investment properties. NAREIT will consider these developments as it
continues its efforts to enhance the quality and relevance of the
industry's financial reporting.

George Yungmann is Senior Advisor, Financial Standards, and David
Taube is Financial Standards Analyst for NAREIT.

Bill
 
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D

Duane Bozarth

Bill said:
I don't think my responses rise to the level of Enron -
....and I don't (and hope I didn't infer directly) either--just struck me
as a significant point to be made that "the customer isn't <always>
right" is a worthwhile reminder in these times....again, I was meaning
it in a more general sense than as a <direct> response to this
particular instance--
 
A

Allan Martin

Wayne Brasch said:
A contra account by definition is an account that is deducted from
something. This being true, I don't see how this could work even if it were
in compliance with generally accepted accounting principles-which it is not.

Wayne Brasch, CPA, M. S. Taxation

A contra account can go both ways. If the asset account is to be reported at
fair market value then for control purposes it is advisable to record any
change in the valuation though the use of an account other than the one used
for historical cost. If the term contra seems to contra then I sugest a
brother or sister account.
 
W

Wayne Brasch

Allan Martin said:
A contra account can go both ways. If the asset account is to be reported at
fair market value then for control purposes it is advisable to record any
change in the valuation though the use of an account other than the one used
for historical cost. If the term contra seems to contra then I sugest a
brother or sister account.
Would you please for all of us, tell us what all the contra accounts are by
name in financial statement presentation?
I don't think you will find ANY that adds to ANY account.

Wayne Brasch, CPA, M. S. Taxation
 
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B

Bill Lentz

...and I don't (and hope I didn't infer directly) either--just struck me
as a significant point to be made that "the customer isn't <always>
right" is a worthwhile reminder in these times....again, I was meaning
it in a more general sense than as a <direct> response to this
particular instance--
Since my field is now retail (accounting), I can tell you that the
customer is seldom right (grin), but we allways tell them that they
are.

I left public accounting before the "customer is always right"
attitude became so prevalent, but I could certainly see it heading
that way. The last client that i was on was a large international
entity that had some significant reporting issues that required direct
consultation with the SEC several times, and they were pretty much
inclined to toe the line. Accordingly, we didn't face a lot of the
pressure that many other s faced.

Bill
 

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