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December 23, 2009
FASB/IASB Conclude on Converged Discontinued Operations Definition and Disclosures
On December 17, 2009, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) (collectively, the Boards) agreed that a discontinued operation should be defined as follows: a component of an entity that either has been disposed, or is classified as held for sale, and:
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(a) represents a separate major line of business or geographical area of operations;
(b) is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or
(c) is a business that meets the criteria to be classified as held for sale on acquisition.
The new definition is consistent with the recommendations of NAREIT and its global partners of the Real Estate Equity Securitization Alliance (REESA) as presented in comment letters on the Boards' initial exposure drafts. The Boards' conclusion will eliminate the financial reporting burden for those NAREIT member companies that regularly dispose of properties and, therefore, have been required to regularly and retroactively reclassify amounts between continuing and discontinued operations for sales of most individual investment properties. The conclusion may also eliminate the need for companies to reissue previously filed financial statements to reflect such sales as discontinued operations under certain Securities and Exchange Commission (SEC or Commission) rules. Disclosures for Discontinued Operations
The Boards also approved the following additional required disclosures with respect to disposals that qualify as discontinued operations under criteria (a) and (b) above: -
(a) the profit or loss disaggregated by major income and expense items (including impairments, interest, depreciation and amortization);
(b) the major classes of cash flows – operating, investing and financing;
(c) the carrying amounts of the major classes of assets and liabilities classified as held for sale and a reconciliation of these amounts to the total held for sale assets and liabilities presented on the statement of financial position;
(d) a reconciliation of the profit or loss for disposals in the notes to the after-tax profit or loss from discontinued operations on the statement of comprehensive income; and,
(e) if the discontinued operation includes a noncontrolling interest, the profit or loss attributable to the parent.
These disclosures would be required to be reported for all periods presented in the financial statements and would be required in addition to FASB's disclosure requirements as modified in the initial proposal. Further, the Boards determined that certain disclosures relating to the continuing involvement with discontinued operations and the continuing cash flows between entities and their discontinued operations would be required. Disclosures for Disposals of Significant Components of an Entity that are not Discontinued Operations
For the disposal of a significant component of an entity that does not meet the above discontinued operations definition, the Boards agreed that disclosures (c), (d) and (e) above, as well as the component's pre-tax profit or loss, will be required. The current IASB definition of a component of an entity will apply to these disclosures; however, companies will be required to determine whether such components are significant. Similar to the FASB definition, the IASB defines a component of an entity as operations and cash flows that can clearly be distinguished, operationally and for financial reporting purposes, from the rest of the entity.
This disclosure requirement is intended to continue to provide financial statement users with the information that they receive under the current discontinued operation reporting and disclosure requirements. Accordingly, NAREIT expects that most sales of investment property would be subject to these disclosure requirements. Disclosures for Disposals of Long-Lived Assets
In addition to the FASB and IASB disclosures already required for the disposal of long-lived assets that are not discontinued operations or significant components of an entity, disclosure (c) above would be required under the proposed guidance. Exposure Draft, Effective Date and Transition
The Boards anticipate the issuance of a revised Exposure Draft (ED) in the first quarter of 2010 with a 60-day comment period. The ED would include the decisions discussed above. The final standard is tentatively planned for the second quarter of 2010 and would be effective for fiscal years beginning after December 15, 2010 and interim periods within those fiscal years with early application permitted. For most NAREIT member companies, the new standard would be effective beginning the first quarter of 2011 unless the standard is adopted early. While the Boards originally proposed that the new guidance be applied on a retrospective basis, the final standard is now expected to be applied prospectively. Prospective application would ease the transition for NAREIT member companies in adopting this new standard.
The discussion above reflects information from a staff paper available here, NAREIT staff observance at the December 17, 2009 discussion of the staff paper and a follow-up discussion with FASB staff.
If you would like to participate on a task force to help develop the industry's views on this ED, please contact Sally Glenn at sglenn@nareit.com.
Update on FASB/IASB Lease Accounting Project
Lessor Accounting for Investment Property Leases
At the December joint meeting, the Boards rescheduled their discussion on the staff's recommendations for alternatives to lessor accounting of investment property for the January 2010 joint meeting. To read the staff's recommendations outlined in the previous issue of NAREIT's SFO Report, click here.
FASB/IASB Favor Contingent Rental Recognition
The Boards have agreed that a lessee's rental obligation, as well as a lessor's rent receivable, would include contingent rentals. For example, if a retail tenant that is obligated to pay a percentage of sales to the landlord, both the lessee and lessor would include an estimate of that rental in measuring the assets and liabilities under the lease. An extreme example of this proposed accounting is represented by the requirement for a ground lessee to pay a percentage of operating cash flow to the lessor over the life of the ground lease.
A discussion of this issue is contained in Agenda Papers 4A and 4B available here.
Leases of Non-Core Assets and Short-Term Leases
At the December 2009 joint meeting, the Boards determined that leases of non-core assets would be included in the scope of the lease accounting project. However, the Boards are considering the exclusion of short-term leases from the project's scope and directed the staff to research the issue further. Additionally, the Boards deemed short-term leases as those leases of less than one year under the possible scope exemption.
The Boards expect to issue an Exposure Draft on the joint leases project in the second quarter of 2010. If you would like to participate in NAREIT's consideration of the Exposure Draft, please contact Sally Glenn at sglenn@nareit.com.
SEC Provides Status on IFRS Roadmap
On December 9, 2009, SEC Commissioner Elisse Walter provided an update on the SEC's proposed roadmap toward the potential adoption of International Financial Reporting Standards (IFRS) for U.S. issuers. At the national conference of the American Institute of Certified Public Accountants, Commissioner Walter stated that the SEC staff is developing a recommendation for the Commission's review and the SEC would consider further action in early 2010.
The Commissioner added that, while most respondents to the proposal generally agreed on a goal to achieve a single set of high quality global accounting standards, respondents disagreed on how to attain a universal set of standards. She assured that the issues raised in the comment letters received from constituents are cautiously being considered and the SEC will "proceed deliberately and thoughtfully." The SEC will move forward with IFRS if it is "the right thing to do for investors."
With regard to the role of the FASB under an IFRS regime, the Commissioner does not believe that the FASB would be removed from the standard setting process. The FASB is expected to continue to be a crucial part of the standards setting process and would continue to report to the Commission.
NAREIT Participates on EITF Investment Companies Working Group
The Emerging Issues Task Force (EITF) of the FASB appointed George Yungmann, NAREIT's Sr. VP of Financial Standards, to serve on a working group designed to provide feedback to help eliminate differences surrounding the accounting and reporting by entities participating in the real estate investment industry today. These differences impact both statements of financial position and statements of income and were raised as a result of the EITF staff's observations of differences primarily existing among real estate funds that account for investments under FASB Codification Topic 946, Financial Services – Investment Companies, by analogy to Topic 946 or based on industry practice.
On December 14, the working group met to discuss, among other questions, whether an entity that is excluded from the scope of Topic 946, can carry real estate investments at fair value by analogy to Topic 946 or on the basis of industry practice. Further, they discussed the reporting of real estate properties that are owned directly by entities that carry real estate at fair value by analogy to Topic 946 or industry practice.
The EITF staff recognizes that at least two of the questions raised in this EITF project may be resolved under an accounting alternative being presented by the joint FASB/IASB leases project team. Under this alternative, lessors of investment property would be scoped out of the proposed lease accounting standard and, instead, account for leases in the context of International Accounting Standard 40, Investment Property (IAS 40). IAS 40 allows owners of investment property to choose to carry investment property at fair value or cost. If the cost approach is chosen, the fair value of the property would be disclosed in the notes to the financial statements.
The EITF staff will use the feedback received from the working group to develop an issue summary expected to be discussed at the March 17-18, 2010 EITF meeting.
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