Cousins Properties Incorporated 2006 Annual Report - SNL Financial

For the foreseeable future, the Company expects to continue to pursue its business model by focusing much of
its efforts on creating value through development. Management believes that this strategy has been successful in the
past and should continue to maximize the total return to stockholders.
Critical Accounting Policies. The Company’s financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America, and the Notes to Consolidated Financial
Statements included in Item 8 herein include a summary of the significant accounting policies for the Company. A
critical accounting policy is one which is both important to the portrayal of a company’s financial condition and
results of operations and requires significant judgment or complex estimation processes. The Company is in the
business of developing, owning and managing office, retail and industrial real estate properties, developing multifamily
residential units, and developing single-family residential communities which are parceled into lots and sold
to various home builders. The Company’s critical accounting policies relate to its long lived assets, including cost
capitalization, acquisition of operating property, depreciation and amortization, and impairment of long-lived
assets (including investments in unconsolidated joint ventures); revenue recognition, including residential lot sales,
land tract sales, multi-family residential unit sales and valuation of receivables; and to accounting for investments in
non-wholly owned entities.
Long-Lived Assets
Cost Capitalization. The Company is involved in all stages of real estate development. The Company
expenses predevelopment expenses incurred on a potential project until it becomes probable (more likely than not at
the point the decision is made) that the project will go forward. After the Company determines the project is
probable, all subsequently incurred predevelopment costs, as well as interest, real estate taxes and certain internal
personnel and associated costs directly related to the project under development, are capitalized in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 34 “Capitalization of Interest Cost” and SFAS No. 67
“Accounting for Costs and the Initial Rental Operations of Real Estate Properties.” If the project’s probability
comes into question, a reserve may be placed on the assets. If the decision is made to abandon development of a
project that had been deemed probable, all previously capitalized costs are expensed or charged against the reserve,
if one was established. Therefore, a change in the probability of a project could result in the expensing of significant
costs incurred for predevelopment activity. The Company had approximately $17.5 million of capitalized
predevelopment assets as of December 31, 2006.
At the time the Company determines that a development project is probable, the Company estimates the time
and cost of construction to complete the project. A change in the estimated time and cost of construction could
adversely impact the return on the project and the amount of value created from the development of the project.
Additionally, determination of when construction of a project is substantially complete and held available for
occupancy requires judgment. In accordance with SFAS Nos. 34 and 67, the Company capitalizes direct and related
indirect project costs associated with development projects during the construction period. Once a project is
deemed substantially complete and held for occupancy, subsequent carrying costs, such as real estate taxes, interest,
internal personnel and associated costs, are expensed as incurred. The Company considers projects and/or project
phases substantially complete and held for occupancy at the earlier of the date on which the phase reached
occupancy of 95% or one year from the issuance of a certificate of occupancy. The Company’s judgment of the date
the project is substantially complete has a direct impact on the Company’s operating expenses and net income for
the period.
Acquisition of Operating Property. In addition to developing properties for investment purposes, the
Company also occasionally acquires completed and operating properties. The Company allocates the purchase
price of operating properties acquired to land, building, tenant improvements and identifiable intangible assets and
liabilities based upon relative fair value at the date of acquisition in accordance with SFAS No. 141, “Accounting
for Business Combinations,” which requires considerable judgment. The Company assesses fair value based on
estimated cash flow projections that utilize appropriate discount and/or capitalization rates. Estimates of future cash
flows are based on a number of assumptions including hypothetical expected lease-up periods, known and
anticipated trends, and local market and economic conditions, including probability of lease renewal and estimated
lease terms. The fair value of the tangible assets of an acquired operating property, including land, building and
tenant improvements, considers the value of the property as if it were vacant. Intangible assets can consist of above
38