Does anyone know where I can find any pronouncements or other guidance regarding recording liabilities? The exact situation is this:
Homebuilder is buying land from Developer, Inc. Part of the sales price is $20,000 per lot there are 100 lots. In addition, Homebuilder is required to pay Developer, Inc $1,000 sewer tap fee each time a home closes. The seller has a lien against each lot for the fee. So the question is, should a liability be recognized at the close of the land to reflect the sewer tap fees? I say yes, since it is a known amount and is required. I just can't seem to find any support for this opinion. I searched the FASB website, but was unsuccessful.
Although you know the amount, it's not "required" any more than the closing attorney is "required" to get paid at closing.
It would only be a liability, a true liability, if that fee is due if the lot was sold, either to another builder, or to an individual. Otherwise you are looking at a liability that wouldn't get paid if you flipped the lot to someone else.
Probably what happened is the developer had to pre-pay the county/city for the sewer lines, and he is just recouping the fees he had to pay in advance.
If it is actually due on the tapping of the sewer line, then it isn't really a liability of the current lot owner (your builder) till the sewer is tapped.
PAT> Although you know the amount, it's not "required" any more than the PAT> closing PAT> attorney is "required" to get paid at closing.
My presumption is that this fee is spelled out in the land contract, unlike an attorney fee.
PAT> It would only be a liability, a true liability, if that fee is due PAT> if the PAT> lot was sold, either to another builder, or to an individual. PAT> Otherwise you PAT> are looking at a liability that wouldn't get paid if you flipped PAT> the lot to PAT> someone else.
The fee does pass to whomever builds a house on the lot, since it is not paid until the house closes.
PAT> Probably what happened is the developer had to pre-pay the PAT> county/city for PAT> the sewer lines, and he is just recouping the fees he had to pay in PAT> advance.
PAT> If it is actually due on the tapping of the sewer line, then it PAT> isn't really PAT> a liability of the current lot owner (your builder) till the sewer PAT> is PAT> tapped. PAT> -- PAT> Paul A. Thomas, CPA PAT> Athens, Georgia PAT> snipped-for-privacy@bellsouth.net
I see where you are coming from, but is there any guidance with regards to liabilities?
On Tue, 25 Oct 2005 22:23:35 GMT, in alt.accounting "Joker" wrote in :
This is a contingent fee. Though the amount is known, neither the time nor the certainty is. If the builder never builds, the fee is never due.
Maybe not, the general rule is that the buyer's mortgage holder will not disburse unless the lien is cleared as part of the disbursement. I realize that as a practical matter this is a distinction without a difference.
This isn't a liability yet (no we don't have to go into Black-Scholes). Since the contract appears to allow Homebuilder an unlimited period of time to build (and does not collect if Homebuilder resells raw land) it needn't be shown on the books, though a footnote would be appropriate in an SEC environment.
DJ> On Tue, 25 Oct 2005 22:23:35 GMT, in alt.accounting DJ> "Joker" wrote in DJ> :
DJ> This is a contingent fee. Though the amount is known, neither the DJ> time DJ> nor the certainty is. If the builder never builds, the fee is never DJ> due.
DJ> Maybe not, the general rule is that the buyer's mortgage holder will DJ> not DJ> disburse unless the lien is cleared as part of the disbursement. I DJ> realize that as a practical matter this is a distinction without a DJ> difference.
DJ> This isn't a liability yet (no we don't have to go into DJ> Black-Scholes). DJ> Since the contract appears to allow Homebuilder an unlimited period DJ> of DJ> time to build (and does not collect if Homebuilder resells raw land) DJ> it DJ> needn't be shown on the books, though a footnote would be DJ> appropriate in DJ> an SEC environment.
The elements of a liability are 1) a present duty that entails the future transfer of assets at a specified or determinable date, on an occurrence of a specific event or on demand. 2) The obligation leaves little or no discretion to avoid the future sacrifice 3) the transaction or other event obligating the enterprise has already happened.
The situation I described fills number one because we know when the obligation is due, house closing. It fulfills number two since the only way out is to sell the lot, but even then, if we are selling to another party, there is likely a lien to secure performance, so there is little or no way to avoid the obligation. The event that obligates us is our contract event. So this seems to be a liability to me. How is it different than if we were to take out a loan to buy the property and the bank required us to repay the loan at each home closing?
On Wed, 26 Oct 2005 16:45:18 -0400, in alt.accounting "Paul A. Thomas" wrote in :
Agreed. As a practical matter, a publicly traded company has to book it or note it, a private company can book it if they want, but don't need to -- construction lenders do want to know about it, though.
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