FASB Readies Exposure Draft for Investment Property Accounting
Over the past several months, the FASB has been working on a project to determine how investment property (e.g., investments in real estate) should be measured in the financial statements. This project represents an effort to more closely align U.S. GAAP with international standards on investment property (e.g., IAS 401) and has implications for the boards’ joint project on leasing.
|
Editor’s Note: The FASB has informally indicated that there is a need to finalize the investment property entity project within a time frame consistent with the leases project. This is because lessors of investment property that are investment property entities would primarily use a fair value accounting model for the investment property and not the lessor accounting models discussed in the leases project. |
The Board’s approach to this project has involved deciding what constitutes an investment property entity and how such an entity should measure its investments in investment properties (e.g., at fair value through earnings as of each reporting date). Unlike the IASB, which permits a fair value option (and does not limit the application to investment property entities), the FASB has tentatively decided that investment property held by an investment property entity must be measured at fair value as of each reporting period.
This project affects entities with substantive activities related to investing in real estate properties that meet certain other conditions. Examples of entities that would need to pay close attention to this project include real estate funds that are investment companies and real estate investment trusts (REITs).
Investment Property Entity
Entities that meet the following criteria would measure investment properties (generally, as defined in IAS 402) at fair value through earnings:
a. Business activities — The entity’s substantive activities relate to investing in real estate properties.
|
Editor’s Note: By emphasizing that an investment property entity’s primary business activities relate to investing in “real estate properties,” the Board hopes to minimize the potential for overlap between the scope of the specialized accounting for investment companies (under ASC 9463) and the new topic on accounting by investment property entities. |
b. Business purpose — The express business purpose of the entity is to primarily invest in real estate properties for total returns, including capital appreciation, and the entity has potential strategies for realizing capital appreciation, including selling a property to maximize its total return. The entity’s business purpose is not to hold real estate properties for “use in the production or supply of goods or services or for administrative purposes, rental income only, or sale in the ordinary course of business.”
c. Unit ownership — Ownership in the entity is represented by units of investments, such as shares or partnership interests, to which proportionate shares of net assets can be attributed.
d. Pooling of funds — The entity has one or more unrelated investors that hold significant ownership interests in the entity.
|
Editor’s Note: Entities with a single investor that currently account for investments at fair value, as required or allowed by U.S. GAAP (e.g., pension plans), would be exempt from criteria (c) and (d) above. Such entities would measure investment properties at fair value if they meet criteria (a), (b), and (e). Single-owner entities might include entities owned by a group of related investors. |
e. Reporting entity — The entity can be a legal entity.
Leased Investment Property
When an investment property entity is the lessee of an investment property, the entity would measure the right-of-use assets (e.g., those that result from the boards’ leasing project) related to the lease at fair value, with changes in fair value recognized in net income. Right-of-use assets related to non-investment-property assets would be carried at amortized cost. Non-investment-property assets held by investment property entities would be accounted for under other applicable U.S. GAAP.
Consolidation
An investment property entity would be prohibited from consolidating controlling interests in non-investment-property entities unless the controlling interest is in an operating entity that provides services to the investment property entity. Controlling interests in an operating entity that provides services to the investment property entity and controlling interests in another investment property entity would be accounted for under ASC 810.4
Presentation Requirements
Investment property entities would be required to present their rental income separately from investment properties and related expenses in the income statement. On the face of the balance sheet, an investment property entity would separately present investment property assets and related debt.
Disclosure Requirements
Investment property entities would provide specific disclosures about their investment properties. For example, the standard would require a reconciliation of changes in the opening and closing balances of investment property. In addition, the Board noted that any fair value measurements of investment property would be subject to the fair value disclosure requirements in ASC 820.5
Transition
Entities would be required to record the effect of adoption as a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption.
Next Steps
The Board expects to publish an exposure draft in the second quarter of 2011 and a final standard in the second half of 2011.
[1] IAS 40, Investment Properties.
[2] IAS 40 defines investment property 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.”
[3] FASB Accounting Standards Codification Topic 946, Financial Services — Investment Companies.
[4] FASB Accounting Standards Codification Topic 810, Consolidation.
[5] FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures.
