ASC 972-20: Investment Property Depreciation Entries for REITs

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Accounting Standards Codification (ASC) 972-20, Real Estate Investment Trusts - Measurement Focus, provides guidance on the accounting for depreciation of investment properties held by Real Estate Investment Trusts (REITs). As REITs primarily invest in income-generating real estate properties, understanding the depreciation accounting treatment for these properties is essential for accurate financial reporting. In this article, we will discuss the key aspects of ASC 972-20 and provide examples of journal entries to illustrate the depreciation accounting treatment for investment properties.
 

ASC 972-20 Overview

ASC 972-20 applies specifically to REITs, which are entities that own and manage portfolios of real estate properties for investment purposes. The guidance encompasses various aspects of accounting for investment properties, including:
 

1. Initial recognition and measurement
 

2. Subsequent measurement and depreciation
 

3. Impairment and disposal
 

Initial Recognition and Measurement

Under ASC 972-20, investment properties are initially recognized at cost, which includes the purchase price, acquisition costs, and any costs directly attributable to bringing the asset to its intended use. Investment properties are subsequently measured at cost less accumulated depreciation and accumulated impairment losses.
 

Depreciation of Investment Properties

Investment properties are depreciated on a straight-line basis over their estimated useful lives, taking into account the residual value. The useful life and residual value should be reviewed at least at each financial year-end, and any changes in estimates should be accounted for prospectively.
 

Journal Entries

To illustrate the accounting treatment under ASC 972-20, let's consider a simplified example. A REIT acquires an investment property for $10 million and estimates a useful life of 40 years, with a residual value of $2 million.
 

1. Initial recognition:

Investment Property $10,000,000

Cash $10,000,000
 

2. Depreciation:

The annual depreciation expense is calculated as follows:

Depreciation Expense = (Cost - Residual Value) / Useful Life

Depreciation Expense = ($10,000,000 - $2,000,000) / 40

Depreciation Expense = $200,000 per year
 

The journal entry to record the annual depreciation expense would be:
 

Depreciation Expense $200,000

Accumulated Depreciation $200,000
 

3. Disposal:

Assume that at the end of the 10th year, the REIT sells the investment property for $8 million. At this point, the accumulated depreciation would be:
 

Accumulated Depreciation = $200,000 per year * 10 years = $2,000,000
 

The journal entry to record the disposal would be:

Cash $8,000,000

Accumulated Depreciation $2,000,000

Investment Property $10,000,000

Gain on Disposal of Investment Property $200,000

 

ASC 972-20 provides specific guidance on the accounting treatment for depreciation of investment properties held by REITs. By following this guidance, REITs can ensure accurate financial reporting and maintain compliance with accounting standards. The journal entries provided in this article offer a clear understanding of the application of ASC 972-20, enabling stakeholders to better comprehend the intricacies of investment property transactions in the context of REITs.