*Decisions Reached at the Last Meeting
Recognition
The Board has not discussed issues related to the effect of a transfer of seller financing on the applicability and application of the initial and continuing investments tests in Statement 66.
Initial Measurement
At the July 18, 2007 Board meeting, the Board reached decisions on several escalation issues identified during the course of the codification project. Escalation issues provide a means of communicating to the Board content that the staff proposes to include or exclude from the codification of U.S. GAAP. At that meeting, the Board decided that exchanges of real estate for nonmonetary assets other than real estate should be accounted for under Opinion 29 rather than under Statement 66.
The Board has not discussed any issues related to the application of Opinion 29 to exchanges of real estate for nonmonetary assets (both real estate and non-real estate).
*History and Background
Initial and Continuing Investment Tests
Many homebuilders own captive mortgage companies that are used to fund mortgage loans originated in connection with the homebuilder's home sales (the homebuilder and captive mortgage company are referred to collectively as the homebuilder). Usually, the homebuilder does not service or retain these loans, but sells the loans and the associated servicing rights to unrelated third-party institutional investors or government-sponsored enterprises within 60 days of the loan origination. These sale agreements typically include representations and warranties (that is, absence of known fraud in origination, conformity of loan documentation, and first lien perfection), and, in many cases, early payment default (EPD) provisions. The EPD provisions are generally one to six months in duration and provide the loan purchaser with the right to require the homebuilder to repurchase the loan if the homebuyer does not make any one of the first six mortgage payments subsequent to the purchase of the loan by the loan purchaser. EPD provisions have become customary in the mortgage banking industry as a tool to avoid significant disputes and legal fees incurred proving fraud existed in the sale of a note receivable.
Non-traditional forms of seller financing, such as minimal down-payment mortgages and non-amortizing loans, have become increasingly popular. However, these non-traditional forms of financing often result in homebuilders being unable to meet the initial and continuing investment criterion in paragraph 5(b) of Statement 66 in order to recognize profit by the full accrual method. Questions have arisen regarding what impact the transfer of the note receivable by a homebuilder would have on the homebuilder’s subsequent evaluation of the initial and continuing investment tests when either (a) the agreement governing the transfer of the note receivable contains an EPD provision or (b) the transfer of the note receivable does not qualify as a sale under Statement 140.
Opinion 29
Exchanges of real estate for real estate are excluded from the scope of Statement 66 and are addressed by Opinion 29. Questions have arisen regarding the interaction of Statement 66 and Opinion 29 when it is determined under Opinion 29 that the exchange should be based on fair value. These questions will have broader implications considering the Board’s decision at its July 18, 2007 Board meeting to exclude from the scope of Statement 66 exchanges of real estate for nonmonetary assets other than real estate.
