FASB Adds Fair Value Reporting of Investment Property to its Agenda

On March 3, 2010, the Financial Accounting Standards Board (FASB) decided to examine the possibility of requiring or permitting investment property to be reported at fair value under U.S. Generally Accepted Accounting Principles (GAAP).

This FASB agenda decision was triggered by a tentative decision made by the International Accounting Standards Board (IASB) in January 2010 in connection with the FASB/IASB leases project. The IASB determined that if lessors report investment property at fair value in accordance with International Accounting Standard 40 (IAS 40), they will not be required to account for leases pursuant to the proposed new standard for leases being developed by the two Boards.

Because U.S. GAAP requires investment property to be reported at cost, the FASB decided to explore a potential investment property standard similar to IAS 40. IAS 40 currently gives landlords/lessors the option to report investment property at fair value (with fair value adjustments recognized in net income) or cost. If investment property is carried at cost under IAS 40, the fair value must be disclosed in the financial statement notes. Further, under IASB guidance, rental income from investment property leases is recognized over the lease term, typically on a straight-line basis. Therefore, revenue recognition by lessors of investment property under IASB guidance is currently equivalent to U.S. GAAP.

The FASB's agenda will not only consider the option to report investment property at fair value similar to IAS 40, but it will also evaluate whether to make such fair value reporting the sole requirement for investment property. If the FASB makes it a requirement to carry investment property at fair value, the IASB may have to consider modifications to IAS 40 for convergence purposes. Consequently, NAREIT believes that this new agenda item may provide an opportunity to improve the existing guidance under IAS 40.

If FASB provides an option to report investment property at fair value or cost, those entities that choose to account for investment property at depreciated cost would be required to adopt the proposed new lease accounting standard.

The proposed new lease accounting standard would require lessors to report on the balance sheet:

• A receivable asset representing the present value of rents to be received under current leases.


• A liability in an equivalent amount that would represent the lessor's "performance obligation."

As rent is received by the landlord, it would be bifurcated into two parts – interest income and a reduction of the receivable asset.

As a result, a lessor would reflect income in two ways in the income statement:

• Interest income (on the receivable asset); and,


• Rental revenue equal to the amortization of the performance obligation.

While the Boards have not reached a tentative conclusion, we believe the performance obligation would be amortized on a straight-line basis. If this is a final conclusion, a major issue raised by this accounting for rents is that the combination of a decreasing amount of interest income on the decreasing receivable and straight-line amortization of the performance obligation would result in decreasing revenue from leases in place.

NAREIT staff expects that the FASB will complete the investment property fair value agenda item as expeditiously as possible, since conclusions with respect to the leases project may depend on the conclusions in this project. A final leases standard is planned for 2011.