September 27, 2013
Highlights of this Issue:
G-20 Leaders Call for Completion of Convergence Projects by Year-EndOn Sept. 6, leaders from the Group of 20 (G-20) called for the Financial Accounting Standards Board and the International Accounting Standards Board (IASB) (collectively, the Boards) to complete the remaining convergence projects by the end of the 2013. The leaders remain concerned that the Boards have not developed “a single set of high-quality accounting standards” in the five years since the financial crisis. This would appear to be a near impossible goal to achieve given the remaining work that the Boards have on Revenue Recognition, Leases, Financial Instruments and Insurance. FASB/IASB Joint Leases ProjectOn Sept. 12, NAREIT filed its submission on the Leases Proposal (the Proposal). While NAREIT recommended a number of modifications to the Proposal, NAREIT strongly supported the model that the Boards propose for most property leases. NAREIT indicated that if the Boards desired to develop a single model for all leases, NAREIT would not object to such a model so long as the lease income and expense would be recognized on a straight-line basis (i.e., the Type B model developed for property in the Proposal).
The Boards continue to hold public roundtable meetings at which they are collecting further input on the proposals. NAREIT, its partners in the Real Estate Equity Securitization Alliance (REESA) and representatives from NAREIT member companies have participated in the roundtables in London, UK on Sept. 16, in Norwalk, CT on Sept. 23, and are scheduled to participate in the roundtable to be held in Los Angeles, CA on Oct. 3. Representatives from NAREIT member companies that participated in the roundtables included Arthur Flashman, Vice President, Principal Accounting Officer, Boston Properties; Heidi Roth, SVP, CAO & Controller, Kilroy Realty Corporation; Robert Meyer, Senior Vice President, Finance/Corporate Controller, American Tower; and, Stephen Theriot, Chief Financial Officer, Vornado Realty Trust. On Oct. 7, NAREIT representatives, including a Chief Executive Officer of a NAREIT member company and industry investors and analysts, are scheduled to meet with and share their views on the Leases Proposal with three FASB members and staff in Norwalk, CT. Based on conversations that NAREIT has had with FASB members, the Boards plan to commence re-deliberations on the Proposal as early as November, and anticipate finalizing the standard by the end of 2014. While no effective date has been established, NAREIT anticipates that the effective date will be no earlier than Jan. 1, 2017. FASB/IASB Joint Revenue from Contracts with Customers ProjectThe FASB and IASB have continued to work together toward finalizing their re-deliberations of the proposed Revenue from Contracts with Customers Proposal (the Proposal or the Revenue Recognition Proposal). Over the summer months, the FASB reconfirmed that certain guidance in the revenue standard will also apply to transfers of non-financial assets (e.g., sales of real estate). Therefore, preparers will have to apply the new revenue recognition guidance with respect to i) identifying the contract; ii) transfer of control; and, iii) measurement.
FASB Reporting Discontinued Operations ProjectOn Aug.16, NAREIT submitted a letter with the FASB on the Reporting Discontinued Operations Proposal (the Proposal). NAREIT commended the FASB’s positive response to NAREIT’s request for a revised definition of a discontinued operation. In NAREIT’s view, a discontinued operation should represent a change in the strategic direction of a company. NAREIT offered the following recommended enhancements regarding the Proposal:
The Boards expect to commence re-deliberations in the fourth quarter. The Boards have not established an effective date for the Proposal. FASB/IASB Joint Financial Instruments - Credit Impairment ProjectOn May 31, NAREIT submitted a letter to the FASB in response to the Financial Instruments – Credit Impairment Proposal (the Proposal). While this project was a joint project between the FASB and the IASB, the Boards did not arrive at a converged Proposal. NAREIT’s evaluation and response was focused on the FASB Proposal.
The Boards commenced re-deliberations of the Proposals in the third quarter of 2013. The Boards have not established an effective date for the respective Proposals. FASB/IASB Joint Financial Instruments - Recognition and Measurement ProjectOn May 15, NAREIT submitted a letter to the FASB in response to the Financial Instruments – Recognition and Measurement Proposal (the Proposal). In the letter, NAREIT recommended that the FASB continue to provide companies with the ability to recognize and measure financial assets and financial liabilities based on a business model assessment. NAREIT commended the Board for working with the IASB in developing a mixed attribute model for the recognition and measurement of financial assets. This model would allow financial assets to be reported, based on the company’s business model, as one of the following:
While NAREIT supported the FASB’s mixed attribute model, NAREIT recommends the following enhancements to the Proposal:
The Boards commenced re-deliberations of the Proposal in the third quarter of 2013, and intend on issuing a final standard in the first half of 2014. The Boards have not established an effective date for the Proposal. FASB/IASB Insurance ProjectOn June 27, the FASB issued its Insurance Proposal (the Proposal) for public comment. The Proposal, if finalized, would represent a major change in the way that insurance contracts are recognized, measured and reported. The Proposal could impact both equity and mortgage REITs due to the Proposal’s change in scope. Some common transactions that may be impacted by the Proposal include:
While this project was a joint project between the FASB and the IASB, the Boards did not arrive at a converged Proposal. The FASB Proposal will be the focus of NAREIT’s evaluation. The scope of the Proposal would be a major change from existing U.S. GAAP. Under current GAAP, insurance accounting applies to insurance companies only; the Proposal would apply at the insurance contract level. Therefore, there could be situations when a REIT may have to apply the Proposal. The issuer in an insurance contract would be required to recognize an insurance contract liability when the insurance contract is originated. The liability would be measured based on a “current value” discounted cash flow model, with assumptions updated each period with discounting based on a liability rate, rather than an investment or pricing rate. Any excess of expected premiums over expected claims and expenses would be deferred as "margin" and amortized into income over future periods. The issuer would recognize expected losses on the insurance contract immediately. In an effort to address the volatility in net income from currently measuring the insurance contracts, changes in the liability’s value due to interest rates volatility would be recognized in other comprehensive income. A modified approach would apply for short-duration contracts (e.g., property and casualty insurance contracts) meeting specified criteria. The Proposal would require discounting of incurred losses with limited exceptions. In addition, the Proposal would result it changes to the earnings pattern of underwriting and net investment margins and changes in the pattern and amount of revenue. Further, the Proposal may create increased income statement volatility due to the requirement to update assumptions each period. Outlook The Board plans to commence re-deliberations in 2014, and intends to issue a final standard in 2015. The Board has not established an effective date for the Proposal. FASB Clarifying the Definition of a Business Project (formerly Application of Asset- or Entity-Based Guidance to Non-financial Assets held in an Entity)On May 29, the FASB added a project to its agenda to clarify the definition of a business with the objective of addressing whether transactions involving in-substance non-financial assets (e.g., real estate) should be accounted for as acquisitions (or disposals) of nonfinancial assets or as acquisitions (or disposals) of businesses. The project will include clarifying the guidance for partial sales or transfers and the corresponding acquisition of partial interests in a nonfinancial asset or assets.
FASB Proposed 2014 U.S. GAAP Financial Reporting TaxonomyOn Aug. 30, the FASB issued the proposed 2014 U.S. GAAP Financial Reporting Taxonomy for public review and comment. The proposed 2014 U.S. GAAP Financial Reporting Taxonomy contains updates for newly issued accounting standards and other recommended improvements to the official taxonomy, which is used by public issuers registered with the SEC.
PCAOB Proposal on Proposed Auditing Standards on the Auditor's Report and the Auditor's Responsibilities Regarding Other Information and Related AmendmentsOn Aug. 13, the Public Company Accounting Oversight Board (PCAOB) issued a proposed auditing standard (the Proposed Standard) and related amendments (the Proposed Related Amendments) (collectively, the Proposed Standards) to enhance the auditor's reporting model. The Proposal would impact all NAREIT members due to the fundamental change in the audit report and auditor responsibilities with respect to “other information” included in company filings. If you are interested in participating in NAREIT's task force that will evaluate the Proposed Standards and consider whether NAREIT should submit a comment letter, please contact Christopher Drula at cdrula@nareit.com by Oct. 15. Comments are due to the PCAOB by Dec. 11.
The scope of "other information" in an annual report filed on Form 10-K would include, among other items, selected financial data and management's discussion and analysis. Outlook The Proposed Standards would be effective, subject to approval by the SEC, for audits of financial statements for fiscal years beginning on or after Dec. 15, 2015. The PCAOB is considering whether it will hold a public roundtable in 2014 to discuss the Proposed Standards and comments received. ContactFor further information, please contact George Yungmann, NAREIT's SVP, Financial Standards, at gyungmann@nareit.com or Christopher Drula, NAREIT's Vice President, Financial Standards, at cdrula@nareit.com. |