Fair Value Reporting to be Major Change for U.S. REITs Under IFRS

Serena Wolfe, senior manager of Ernst & Young's Global Real Estate Center, spoke with REIT.com at the start of REITWise 2011: NAREIT's Law, Accounting & Finance Conference in San Francisco about the adoption of international financial reporting standards (IFRS) and what that means for REITs.

Wolfe has been involved directly in reporting under IFRS and in the development of global accounting standards.

"The major difference we are dealing with at the moment for U.S. REITs is the move to fair value," Wolfe said. "Those real estate companies that report under IFRS in Europe, Asia, Australia and Canada report their investment property at fair value."

Wolfe said U.S. GAAP reporters typically report their real estate investments at cost and they depreciate it over the useful life of the asset. If the move to reporting under IFRS is made in the U.S., companies will be marking their assets to fair value at each reporting period.

"There will no longer be a gradual decline in value due to depriciation. There will now be swings up or down depending on where you are in the economic cycle," Wolfe said.

Ernst & Young is in favor of convergence to a high-quality global accounting standard, Wolfe said.

"That is the issue. It is all about high-quality. We shouldn't rush to this move," Wolfe said. "We should move in a gradual step and make sure what we are adopting we are happy with and work toward convergence with the International Accounting Standards Board."

Wolfe recently analyzed the REIT industry's FFO reporting, and she said she found that 83 percent of the companies that reported FFO were in compliance with NAREIT's definition of FFO. Those not in compliance were adding back things like acquisition costs and other things that have changed since 2004 when the definition was written.

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Fair Value Reporting to be Major Change for U.S. REITs Under IFRS

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