Fair value reporting for investment properties under US GAAP

Technical corrections, integration, and conflict resolution
In addition to eliminating the ability to use historical cost, rule makers will need to consider other technical matters,
including (but not limited to) the following points. Some of these issues may be addressed by the IASB as technical
corrections to standards:
• Revising links to lease accounting – Existing references to lease accounting literature in IAS 40 for operating leases
will need to be eliminated, as that literature will no longer exist with the completion of the proposed new leasing
standard. Further, it is likely that the revenue model will convert from the straight-line rent model used today to
something more like a contract accrual basis – which is more consistent with fair value accounting for investment
companies. “Leases in” (e.g., underlying ground leases) could be accounted for consistent with the proposed new
leasing standard, but the resulting asset will need to be included in the carrying value of the investment property.
• Fair value premise – It is expected that the fair value premise will be consistent with ASC 820 (formerly SFAS 157).
Among other things, this will require consideration of “highest and best use” of the property, as well as appropriate
documentation of all significant assumptions. Sensitivity disclosures required by ASU 820 are also difficult to
provide for real estate valuations, which are affected by many interconnected assumptions, including discount
rates, cap rates, market rental rates, property operating costs, and capital expenditure costs.
• Reconsideration of existing fair value option elections for related real estate financing - As part of the
transition to the new Investment Property accounting in the US, existing fair value option guidance for financial
assets and liabilities may need to be modified to allow impacted entities to reconsider existing elections in place for
financing associated with the investment property. Absent the ability to reconsider fair value elections on related
financing, entities including financial institutions could have mismatches, creating unusual net results with liabilities
carried at amortized cost.
• Business combinations – There is a perceived conflict with the business combinations guidance in ASC 805
[formerly SFAS 141(R)] since most accounting practitioners in the US believe that ASC 805 currently includes the
acquisition of rental real estate in its scope as business combinations, which would be defined as investment
property under IAS 40. ASC 805 requires different accounting than the model used for investment companies -including
whether to expense or capitalize transaction costs; and the requirement under ASC 805 to allocate
purchase price amongst tangible and intangible assets and liabilities relating to the lease contracts that may be part
of the investment property. The business combination rules under ACS 805 and IFRS 3(R) were created under a
joint project and are nearly identical. However, internationally, many believe that:
- Investment properties would not be considered as businesses under IFRS 3(R)
- The guidance to fair value investment properties should specifically exclude investment properties from
certain aspects of IFRS 3(R), such as expensing transaction costs and allocating purchase basis to
acquired lease intangibles (e.g., above/below market rents, in-place lease value, tenant relationship
value).
It is expected that IFRS will likely address this issue in connection with its post-two-year implementation review of
IFRS 3(R).
In the United States, substantially all rental real estate is considered a business under ASC 805; consequently,
transaction costs are expensed and a portion of the purchase consideration is allocated to lease intangibles. We
believe these issues should be addressed by the FASB in its proposed investment property standard. Under the
business combination model, the deferred tax issue for “wrapper” transactions is easier to address.
Fair value reporting for investment properties 8 PricewaterhouseCoopers