FASB Makes More Decisions About Its Upcoming Proposal on Fair Value Measurement of Investment Properties

Published on: 31 Aug 2010

In July, the FASB (the Board) decided to expose for comments a revised version of IAS 40, Investment Properties, as a proposed Accounting Standards Update (ASU). The proposed ASU is part of (1) the Board’s convergence project with the IASB and (2) the joint leasing project between the IASB and the FASB.

The proposed ASU would define investment properties as “property (land or a building — or part of a building — or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for: (a) use in the production or supply of goods or services or for administrative purposes; or (b) sale in the ordinary course of business.”

The guidance in the proposed ASU would generally be consistent with that in IAS 40, except that it would require that investment properties be measured at fair value through earnings rather than providing an option, as IAS 40 currently does. Note that under current U.S. GAAP, there is no option to measure investment properties at fair value. Additional potential differences between the proposed ASU and IAS 40 were discussed at today’s Board meeting.

During today’s meeting, the Board answered questions the FASB staff raised related to potential differences between the proposed ASU and IAS 40. The Board decided to require that entities:

  • Apply ASC 820, Fair Value Measurements and Disclosures, when measuring fair value, even when fair value cannot be reliably determined. The Board believes that ASC 820 provides guidance on the application of fair value measurements when markets are not active. The Board also believes that when properties are held for investment purposes, investors typically know how much the investment is worth.
  • Follow the fair value measurement guidance in ASC 820 for investment properties that are under construction. No practicability exception would be permitted.
  • Continue to measure an investment property held for sale at fair value until the property is sold, as opposed to measuring it at the lower of amortized cost or fair value less cost to sell. The Board believes that once properties meet the held-for-sale criteria, fair value measurement is more relevant.
  • Measure fair value of investment property with existing leases together as a bundle and refer to ASC 820 for the fair value measurement guidance. The Board will not provide prescriptive language (like that in IAS 40) on how to measure fair value of investment property with existing leases.
  • Apply the measurement uncertainty analysis disclosure requirement as outlined in the fair value measurement exposure draft.

The Board decided on a modified retrospective approach for implementation of the proposed ASU. Entities would be required to recognize the effect of adoption as a cumulative adjustment in beginning retained earnings for the period in which the guidance is first applied.

The proposed ASU is currently scheduled to be issued within the next few weeks. Issuance of the final ASU is expected to coincide with the timing of the final ASU on the leasing project, which is anticipated in the summer of 2011.

For more information about the investment properties project, see the project page on the FASB’s Web site.

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