Proposed Guidance For Investment Properties Shelved As Board Navigates Minefield of Projects Affecting Commercial Property Owners and Tenants
In addition to its ongoing discussion about whether to require entities to capitalize leases on their balance sheets, the Financial Accounting Standards Board (FASB) has been entertaining rules that that would require certain entities to measure their investment properties
at fair value through net income.
It appears the board has decided to put the latter discussion on the shelf, at least temporarily. Instead, it appears the board plans to pivot and evaluate a possible asset-based approach to accounting guidance for investment properties, rather than requiring entities meeting certain criteria to account for their investment properties at fair value on balance sheets, as proposed in the FASB's exposure draft released to the public in October 2011.
Or, the board could choose to scrap the whole idea of issuing new guidance for investment properties, option members discussed at their Aug. 8 meeting when they discussed possible next steps on its proposed investment property rules.
The FASB noted it will continue to move forward with other projects on its agenda, such as the lengthy joint project with the International Accounting Standards Board (IASB) on leases, and a project to research the application of asset- or entity-based guidance to non-financial assets held in an entity, before taking further action on investment properties.
While the FASB took no action on a way forward for investment property accounting, the board tentatively decided to put the entity-based approach on hold.
That approach was proposed in October 2011, when the FASB proposed guidance that would have required entities that meet five criteria to measure their investment properties at fair value through net income. The goal is to better align U.S. GAAP (Generally Accepted Accounting Principles) with International Financial Reporting Standards (IFRS) in connection with the FASB and IASB’s joint project to bring accounting for property leases onto companies' balance sheets and bring more consistency to accounting and reporting by certain real estate entities.
Most stakeholders who commented on the investment properties exposure draft do not support an entity-based approach, and the board listened to suggestions for several other approaches at its Aug. 8 meeting, including the possibility of scrapping the project. One key issue noted by several board members is that recent decisions in the joint lease accounting project may eliminate a driving force behind the investment properties project, according to a briefing by Tom Wilkin, partner with the financial instruments team in PwC’s National Professional Services Group, PwC Senior Manager Lou DeFalco.
The board did not support dropping the project entirely, however, pending final resolution of the leasing project. The FASB and IASB on July 17 completed their re-deliberations of the lease accounting project and instructed the staff to begin drafting the revised exposure draft. The boards expect to issue the revised document by the end of November, with a 120-day comment period.
The 18-month-long reconsideration of the leases exposure draft spotlighted the difficulty and complexity of changing rules governing leased property for landlords and tenants. Members of each board said they could present alternatives to the revised project. Finalization of the lease rules isn't expected until mid-2013, with the likely transition date pushing into 2016.
At the Aug. 8 investment property entities project meeting, one alternative that generated a lot of discussion was to switch to asset-based guidance for investment properties. However, members voiced concerns about the FASB’s ability to actually define "investment property," obviously a critical part of making rules for it, according to the PwC briefing.
Board members were also concerned about whether the guidance should include a requirement or an option to measure investment property at fair value.
At previous meetings, the FASB discussed the possibility of merging certain aspects of the investment property entities project, such as presentation and disclosure matters specific to real estate funds, into a separate project to assess whether an entity is an investment company. A few board members were reluctant to take this approach, although the board did not take a position on the matter.
One challenge is that the investment company project, like lease accounting, is a joint project with the IASB, while the investment property project is a FASB-only project, making it unlikely consistency in rules governing real estate entities will be achieved in the near term.
It is unclear if such convergence will be achieved. The outcome will depend on whether the FASB decides to move forward with asset-based guidance for investment properties, according to PwC.
Under IFRS, entities have the option, similar to a one-time policy election, to measure all of their investment properties at fair value. Even if the FASB pursues asset-based guidance, it remains to be seen whether there will be differences in the FASB definition of investment property as compared to IFRS, and whether the FASB will include a requirement or an option to measure investment property at fair value.
The board next plans to evaluate the asset-based approach in conjunction with a current research project added in November 2011 focused on when a reporting entity should apply asset- or entity-based guidance to its non-financial assets. A preliminary report on that is expected in the next six to eight weeks, at which time the board is likely to reopen its discussion on investment property.