Fair value reporting for investment properties under US GAAP

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Table of contents Executive summary .......................................................................................................................................................1 History of the US investment property standard proposal...............................................................................................1 History of investment property standard under IFRS......................................................................................................3 Definition of investment property under IAS 40 ..............................................................................................................4 Examples of investment property under IAS 40..............................................................................................................6 Difficulties in applying IAS 40 and Fair Value Accounting for Investment Property .........................................................6 Potential issues in applying an investment property standard in the United States.........................................................7 Timetable for the proposed standard ...........................................................................................................................10 Contact us ...................................................................................................................................................................11
Executive summary At its July 14, 2010 meeting, the Financial Accounting Standards Board ("FASB") tentatively decided to issue a proposed Accounting Standard Update (“ASU”) to attempt to achieve convergence with International Accounting Standards (“IAS”) on accounting for investment properties. However, the FASB concluded that, as opposed to the international accounting standard on investment property, which provides an option to account for investment property at cost or fair value, the US standard, would require an investment property to be measured at fair value. This new guidance is partially driven by the recently issued Exposure Draft for leasing. Assuming that both standards are adopted, lessors who are in the scope of the investment property guidance would not apply the new leasing standard. An investment property is defined as real estate (including integral equipment) held by the owner or held on a finance lease (under certain circumstances operating leases may also be classified as investment properties) to earn rentals, for capital appreciation, or both. This does not include owner-occupied property, property held for sale in the ordinary course of business (e.g., residential homes held by a home builder), or property constructed on behalf of third parties. The exposure draft could be issued as early as September 2010, with an abbreviated comment letter period expected to end December 15, 2010 (concurrently with that of the exposure draft on the Lease Project issued in August). If completed, it is expected that the new investment property standard will be adopted concurrently with the proposed new leasing standard. The date of adoption of the new leasing standard has not yet been determined, but could be as early as 2013/2014. Who could be affected? This new guidance will have broad implications to many owners/investors in real estate and could impact the following entities: • Real Estate Investment Trusts (REITs) • Real Estate Operating Companies (REOCs) • Insurance companies (e.g., general account investments) • Banks (e.g., real estate investments and some OREO assets) • Owner entities for “non-traditional” real estate that may be “leased” under take or pay/power purchase arrangements – including power plants, oil/gas pipelines, wind/solar farms, and production facilities • “Property Companies” in “OPCo./PropCo” structures used by private equity firms for certain portfolio investments • Owners of properties leased to other affiliated companies • Franchisors that lease property to franchisees • All other investors in rental real estate History of the US investment property standard proposal As part of the overall convergence efforts, the FASB and the International Accounting Standards Board (“IASB”) recently completed an exposure draft for their joint project on accounting for leases, which will result in significant changes to the accounting model for leases. The IASB included a scope exception within the exposure draft that if a lessor of “investment properties” measures those properties at fair value in accordance with International Accounting Standards (“IAS”) 40, Investment Property (“IAS 40”), it would not apply the proposed new lessor accounting requirements to the lease. Instead, it would continue to account for those leases as operating leases, as specified in IAS 17, Leases. This decision assumes that fair value is a more informative and preferred model. Currently, there is no Fair value reporting for investment properties 1 PricewaterhouseCoopers
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Page 7 and 8: Leasehold interests A property inte
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