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Janice Latulippe

Accounting Treatment of Other Real Estate Owned (OREO): After almost a decade, OREO is still important to your financial institution


In good economic times, we need to use the foreclosure rules much less often than when times are tougher. However, it’s important to know the ins and outs of the accounting treatment for OREO in order to properly report them in financial statements and regulatory reports.

In general, the accounting and reporting standards for foreclosed real estate are set forth in Financial Accounting Standards Board Accounting Standards Codification (ASC) Topic 310-40, [Accounting for] Troubled Debt Restructurings by Creditors, and ASC Topic 360-10-35, [Accounting for the] Impairment or Disposal of Long-Lived Assets. 

Acquisition - Foreclosed real estate received in full or partial satisfaction of a loan should be recorded at the fair value less costs to sell the property at the time of foreclosure. This amount becomes the new cost basis of the asset. Costs to sell are the incremental direct costs to transact a sale, which include broker commissions, legal and title transfer fees, and closing costs that must be incurred before legal title can be transferred. 

The rationale for recording foreclosures and asset transfers at fair value is that they are not merely reversals of the original loans. They are distinct transactions between borrowers and lenders that represent exchanges of loans for other assets. The fair value of a foreclosed asset is used to establish an exchange price for recording the transaction.

Holding Period - After foreclosure, each foreclosed real estate asset must be carried at the lower of (1) the fair value of the asset minus the estimated costs to sell the asset or (2) the "cost" of the asset (i.e., the amount at which the acquisition of the asset was recorded, as described above). This determination must be made on an asset-by-asset basis. If the fair value of a foreclosed real estate asset minus the estimated costs to sell the asset is less than the asset's cost, under the regulatory guidance, the deficiency must be recognized as a valuation allowance against the asset which is created through a charge to expense.

The cost of repairs or physical improvements to a foreclosed asset should be capitalized if they significantly increase the fair value of the asset. Otherwise, they should be expensed as incurred.

Disposition Period - The primary source of accounting guidance for sales of foreclosed real estate is ASC Topic 360-20, [Accounting for] Real Estate Sales. This guidance, which applies to all transactions in which the seller provides financing to the buyer of real estate, establishes five methods to account for the disposition of OREO.  If a profit is involved in the sale of real estate, each method sets forth the manner in which the profit is to be recognized based on the terms of the sale. However, regardless of which method is used, any loss on the disposition of OREO should be recognized immediately.


The new revenue rules, which are effective in 2018 for public institutions and 2019 for everyone else, will change the accounting for sales of OREO at a gain in situations in which your institution financed the sale. We’ll be updating this guidance to reflect that change as the effective date draws nearer; in the meantime, if you have questions on the new rules, give us a call. Please contact our Accounting Principals: Tracy Harding or Janice Latulippe.