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August 10, 2012
FASB Abandons Entity-Based Approach to Investment Property, Retains REIT Scope Exception in Investment Companies Guidance for Equity REITs
On August 8, NAREIT observed a Norwalk, CT meeting of the Financial Accounting Standards Board (FASB or the Board) that focused on its Investment Property Entities (IPE) and Investment Companies projects. At the meeting, the Board tentatively agreed to abandon the entity-based approach to accounting for investment property. Additionally, the Board tentatively agreed to retain the REIT scope exception in its Investment Companies guidance for equity REITs. Issues relating to mortgage REITs will be discussed as part of the Investment Companies project at a future meeting.
The staff presented five alternatives for the Board to consider with respect to next steps on the IPE project, which included:
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Alternative 1 - Continue to develop the investment property entity concept and eliminate the REIT exception from Investment Companies guidance;
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Alternative 2 - Require all real estate entities to assess investment company criteria and eliminate the REIT exception from Investment Companies guidance;
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Alternative 3 - Develop asset-based guidance for investment properties and retain the REIT exception in Investment Companies guidance for equity REITs only;
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Alternative 4 - Require all real estate entities to assess investment company criteria, eliminate the REIT exception in Investment Companies guidance, and also develop asset-based guidance for entities that are not investment companies; and
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Alternative 5 - Remove the project on investment properties from the Boards technical agenda, and retain the REIT exception in Investment Companies guidance.
The majority of Board members supported either Alternative 3 or Alternative 5. However, the Board agreed to delay this decision while the staff conducts further research on how investors view investments in investment property and constituent views on the tentative decisions on lessor accounting. While the research could be completed over the next two months, constituent views on the tentative conclusions included in the Leases project re-exposure may not be available until the spring of 2013.
In NAREITs letter to the FASB on February 15, NAREIT advocated that the FASB suspend its efforts to develop an entity-based model and pursue an asset-based model for investment property similar to International Accounting Standard 40, Investment Property. Further, NAREIT recommended that the FASB retain the REIT exception in the Investment Companies guidance.
FASB reaffirms Investment Company Accounting for Entities Regulated by the 1940 Act
On August 8, the FASB reaffirmed a previous tentative decision that would automatically require entities regulated by the Securities and Exchange Commission Investment Company Act of 1940 to be covered by the standard. In so doing, these entities would not be required to meet the definition of an investment company that is included in the guidance in order to apply Investment Companies guidance. In NAREITs letter to the FASB on February 15, NAREIT argued that, if the FASB believes that it is important to include companies in the scope of the Investment Companies guidance simply because they are regulated under the 1940 Act, the FASB should exclude mortgages and other interests in real estate, which are statutorily excluded from the 1940 Act. The FASB plans to discuss issues relating to mortgage REITs at a future meeting on its Investment Companies project.
Update on FASB Repurchase Agreements and Similar Transactions Project
On August 1, the FASB tentatively decided that repurchase agreements that involve similar, but not identical, financial assets (e.g., mortgage dollar roll transactions) would be accounted for as secured borrowings, provided that it meets certain criteria (discussed below). NAREIT member companies operating as mortgage REITs will be particularly interested in the Board's latest decisions, given the prevalent use of repurchase agreements as a source of financing in this sector.
At its June 27 meeting, the FASB tentatively decided that a repurchase agreement involving the sale and repurchase of an identical financial asset would be accounted for as a secured borrowing, provided that the transaction meets all of the following criteria:
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It involves a transfer of existing financial assets at the inception of the agreement;
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It involves both a right and an obligation to repurchase financial assets;
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The initial transfer and forward repurchase agreement involve the same counterparty;
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The agreement to repurchase the financial assets is entered into contemporaneously, or in contemplation of, the initial transfer;
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The repurchase price is fixed or readily determinable; and
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The financial assets specified under the forward repurchase agreement are identical to the financial assets transferred at inception of the contract.
The FASB intends on issuing an exposure draft during the fourth quarter of 2012. The Board has not established an effective date for the proposed guidance. Once the Board issues the exposure draft, NAREIT will establish a task force to evaluate the proposal and consider whether NAREIT should comment on the exposure draft.
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