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May 14, 2010
NAREIT Urges Member Participation in Upcoming FASB/IASB Exposure Drafts
Several Exposure Drafts are expected to be issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) in May and June of this year. These Exposure Drafts are the products of major joint FASB and IASB projects that, if successfully completed, will significantly converge U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).
The FASB and IASB (the Boards) released a March 31, 2010 quarterly progress report, which included a brief status update for each project, milestones met in the first quarter of 2010 and the Boards' timetable for publishing documents between April 2010 and December 2011. For more information on each project and the status of the FASB and IASB convergence process, please CLICK HERE.
NAREIT will organize task forces to assist in the development of comment letters in response to these Exposure Drafts and strongly encourages members to participate. NAREIT will also work with its global partners of the Real Estate Equity Securitization Alliance (REESA) to continue to provide the Boards with global real estate industry views. The list below provides the Exposure Drafts on the current agenda of NAREIT and REESA and their expected date of issuance:
Discontinued Operations: Create a converged definition of a discontinued operation, as well as related disclosures – May 2010
Revenue Recognition: Refine the principles for recognizing revenue and develop a universal standard for revenue from contracts with customers under U.S. GAAP and IFRS – May 2010
Consolidations: Develop comprehensive guidance for consolidation of all entities, including voting interest entities, variable interest entities (not expected to significantly change from current U.S. GAAP) or similar interests – May 2010
Fair Value Measurement: Converge fair value measurement guidance so that fair value is consistently defined under U.S. GAAP and IFRS – May 2010
Lease Accounting: Establish common lease accounting requirements to ensure that the assets and liabilities arising from lease contracts are recognized in the statement of financial position – June 2010
Financial Statement Presentation: Provide a standard that will direct the content and presentation of information in the financial statements to improve the usefulness for financial statement users – June 2010
If you are interested in participating in any of the task forces that will develop NAREIT's positions on these projects, please contact Sally Glenn at sglenn@nareit.com.
FASB Reaches Out to NAREIT as it Examines the Potential Retirement of SFAS 66 Accounting for Sales of Real Estate
The decision of whether to eliminate the existing guidance focused on accounting for sales of real estate is one of the many decisions that occupy the agenda of the FASB. The FASB's current guidance, Subtopic 360-20 or Statement of Financial Accounting Standards 66 (SFAS 66), provides a very prescriptive approach in determining when and how to record revenue/gains from sales of real estate. If the FASB decides to remove the current guidance, accountants may be required to rely on the proposed principles-based revenue recognition standard currently being developed by the FASB and IASB.
NAREIT believes that the proposed revenue recognition standard would generally improve financial reporting by enhancing the relevance and the usefulness of financial statements. This conclusion is based on the belief that the application of the proposed standard would more faithfully reflect the substance of real estate sales transactions.
FASB Invites NAREIT to Discuss the Accounting for Sales of Real Estate
On April 28, 2010, George Yungmann, NAREIT's Senior Vice President, Financial Standards, and Sally Glenn, Director, Financial Standards, visited the FASB office in Norwalk, Conn., to discuss, with Board members and staff, accounting for sales of real estate in connection with the FASB and IASB joint revenue recognition proposal noted above.
Along with Teresa Neto, a representative of the Real Property Association of Canada (REALPac), NAREIT delivered a presentation focusing on: 1) the potential effects of the proposed standard on accounting for real estate sales; 2) the impact of the proposal on the accounting for specific common real estate sales transactions that include some form of continuing involvement, such as partial sales of real estate; 3) issues that may arise if current guidance is eliminated; and, 4) whether the proposed accounting would improve financial reporting. CLICK HERE to view the presentation.
NAREIT's views are based on the Boards' current tentative decisions and NAREIT's analysis to date, which are subject to change based on future developments made by the Boards and further analysis made by NAREIT.
FASB/IASB Proposed Revenue Recognition Model
NAREIT believes the proposed principle-based model would improve financial reporting and better portray the substance of real estate transactions because it would require that companies recognize revenue according to a single principle: when the seller satisfies a performance obligation – when the buyer takes control of the good or service. This principle would most likely increase the consistency of when companies record revenue.
In contrast, the measurement of revenue under the proposed model may vary from company to company. The proposal may provide inconsistent results in measuring revenue due to the determination of: 1) the transaction price (the probability-weighted estimate of the amount of consideration, which may be adjusted for variable consideration and collectibility); and, 2) the allocation of the transaction price to multiple performance obligations based on the relative standalone selling price of each performance obligation.
SFAS 66 vs. FASB/IASB Proposed Revenue Recognition Model
While SFAS 66 promotes consistently calculated results, the results may not always reflect the substance of real estate transactions. Recognition of revenue under SFAS 66 considers collectibility of the purchase price and significant continuing involvement, rather than the proposed model's single consideration of when a seller satisfies a performance obligation. The formula-driven guidance under SFAS 66 that focuses on the buyer's initial and continuing investments may prohibit revenue recognition when in fact the buyer has the present ability to direct the use of and receive the benefit of the asset.
Under both SFAS 66 and the proposed model, the total amount of revenue recognized over the term of the contract may be the same because total revenue is measured based on the contract price. However, the timing of revenue recognition under the two approaches may differ. In many cases, the proposal may allow for earlier recognition of revenue because the transfer of control to the buyer (which satisfies the performance obligation) triggers recognition, as opposed to SFAS 66's prescriptive guidance on collectibility and continuing involvement.
Collectibility
Under the proposal, collectibility would impact the amount of revenue recognized rather than the timing of revenue recognition. For example, assume that at the date of sale: 1) the seller receives a minimal (inadequate according to SFAS 66 criteria) initial investment by the buyer; 2) the buyer assumes control of the property; and, 3) the seller expects to receive the entire contracted amount. SFAS 66 would preclude recognition of revenue until the SFAS 66 "buyer's initial investment" criteria has been met. Conversely, the proposal would allow for the full amount of revenue to be recognized at the date of sale. If the seller does not expect to receive the entire contracted price, the proposal would require that revenue be recognized at the date of sale in the amount of consideration that the company expects to collect.
Continuing Involvement
Continuing involvement discussed extensively in SFAS 66 is not explicitly addressed in the current proposed model. The effects of the proposal on the accounting for sales transactions that entail continuing involvement depend on the type of continuing involvement. Under the proposal, continuing involvement may impact the determination of whether a contract exists, the identification of performance obligations, the determination of the contract price or the determination of whether control has transferred. For example, a guarantee to support operations after a sale may represent variable consideration and would be factored into the transaction price.
In other instances, continuing involvement may be taken into consideration when determining whether control has transferred, such as with certain repurchase agreements. In determining whether revenue should be recognized and, therefore, whether control has transferred, NAREIT believes the seller would assess the likelihood of reacquiring the property under the agreed upon circumstances. The FASB has yet to decide on the accounting treatment for repurchase agreements under the proposed model and welcomes the industry's views with respect to this issue (see below).
FASB Subsequently Considers Staff's Proposed Alternatives
Following its meeting with NAREIT, the FASB considered the following alternatives to account for real estate sales at a Board meeting on May 5:
Alternative A: Amend Subtopic 360-20 (formerly SFAS 66) so that it would apply only when an entity sells real estate that is not an output of the entity's ordinary activities. Sales of real estate that are part of the entity's ordinary activities would be accounted for in accordance with the proposed revenue model, since the current scope of the proposal applies to contracts with customers to obtain an asset that represents an output of an entity's ordinary activities.
Alternative B: Require that an entity apply the proposed revenue model for all sales of real estate. If real estate is part of an entity's ordinary activities, the entity would recognize revenue in accordance with the proposed model. Otherwise, an entity would recognize gains when applying the proposed revenue model. In other words, the same recognition principles would apply to both types of sales and only the presentation in the income statement would change.
Alternative C: If the sale of real estate is not part of an entity's ordinary activities, the entity would account for the real estate in accordance with the guidance on subsequent measurement of property, plant, and equipment in Section 360-10-35 (essentially SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets). The entity would derecognize the real estate when the buyer obtains control of the real estate (in accordance with the proposed revenue recognition guidance) and would recognize a gain for the fair value of the consideration in excess of the carrying amount of the real estate.
In its April 28 presentation, NAREIT raised concerns that became the basis of a broader Board discussion at its May 5 meeting. Specifically, the FASB questioned how the proposed FASB/IASB revenue recognition standard would be applied in the determination of the transfer of control for sales that involve repurchase agreements and sales that include non-recourse seller financing and whether such transactions constitute a sale, financing or lease. Additionally, as pointed out by NAREIT, the Board noted that there may be inconsistencies in how companies distinguish between activities that are ordinary and not ordinary.
As a result of the unresolved issues, the Board did not reach a conclusion on a preferred alternative at the meeting. Before moving forward with a firm decision, the Board decided to raise its overarching concerns around the transfer of control with the IASB to ensure consistency with other convergence projects.
The FASB requested that NAREIT continue to provide input on the issue as the Board continues its deliberations. If you have questions or comments regarding this issue, please contact Sally Glenn at sglenn@nareit.com.The Boards' project plan indicates that an Exposure Draft of the proposed revenue recognition standard will be issued in the second quarter of 2010 and a final standard will be issued in 2011.
FASB Initiates Project to Examine Reporting Investment Property at Fair Value
On March 10, 2010, the FASB added to its agenda a project that will:
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"consider whether entities should be given the option (or be required) to measure an investment property at fair value through earnings. The existing international accounting standard (IAS 40, Investment Property) provides such an option. This project also will consider how an entity should consider a lease when measuring the fair value of a leased investment property.
As part of this project, the Board also may address related issues that are within the scope of EITF Issue No. 09-D, Application of Topic 946, Financial Services – Investment Companies, by Real Estate Investment Companies."
FASB staff has reached out to NAREIT for support of this project.
For more FASB information regarding this project, CLICK HERE. For additional background information on this project as reported in the January edition of NAREIT's SFO Report, CLICK HERE.
A NAREIT task force will be formed to consider any FASB proposals with respect to this project. If you would like to participate in this task force, please contact Sally Glenn at sglenn@nareit.com.
NAREIT Comments on IFRS Taxonomy 2010 Exposure Draft
On April 22, 2010, NAREIT submitted a comment letter to the International Accounting Standards Committee (IASC) Foundation in response to the IFRS Taxonomy 2010 Exposure Draft. The Exposure Draft applies to preparers that issue IFRS financial statements in eXtensible Business Reporting Language (XBRL) format.
In the letter, NAREIT reasserted the same views that were previously provided in its May 2008 comment letter. NAREIT primarily recommended that the IASC Foundation offer industry specific tags to enhance the usefulness of XBRL financial statements that report on businesses with unique economic characteristics. For example, it would enhance the usefulness of XBRL financial statements if real estate companies could report net operating income. To read the letter, CLICK HERE.
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