January 29, 2010
FASB Considers Adding Fair Value Reporting of Investment Property to its Agenda
As a result of a tentative decision on lease accounting reached by the International Accounting Standards Board (IASB) on January 20, 2009, the Financial Accounting Standards Board (FASB) instructed its staff to prepare an agenda proposal for the potential adoption of a standard that would provide the option or requirement to report investment property at fair value under U.S. Generally Accepted Accounting Principles (GAAP).
The IASB's tentative decision was the product of a joint FASB/IASB meeting, which was attended by NAREIT. The discussion at the meeting was based on a staff agenda paper that is available by clicking HERE. The IASB reached a tentative decision to allow lessors to continue to account for leases of investment property as operating leases consistent with International Accounting Standard 40 (IAS 40) under certain circumstances.
IAS 40 requires investment property to be carried at fair value (with fair value adjustments recognized in net income) or at cost (similar to U.S. GAAP with the exception that fair value is provided in the disclosures). Under International Financial Reporting Standards (IFRS), rental income from investment property leases is recognized over the lease term, typically on a straight-line basis.
If lessors elect to report investment property at fair value under IAS 40, they would not be required to account for investment property leases pursuant to the proposed lease standard currently being developed by the Boards.
If lessors choose the cost approach for reporting investment property under IAS 40, these lessors of investment property would be required to apply the proposed new FASB/IASB lease accounting model. This new model would require landlords to report a receivable for the right to receive lease payments and a performance obligation for providing lessees with the right to use space. Additionally, the proposed new lease accounting would require interest income to be recognized in the income statement, which would preclude rental payments from being recognized in their entirety as rental income.
NAREIT staff expects that, if the FASB adds this fair value project to its agenda, it would complete the project as expeditiously as possible, since conclusions with respect to the leases project may depend on the conclusions in this project. The leases project is expected to be completed in 2011.
FASB/IASB Reach Tentative Decisions on Lease Accounting
In connection with the FASB/IASB discussions regarding the lease accounting project mentioned above, the Boards addressed the discount rates that would be applied to future rental amounts in measuring the lessee's obligation and lessor's receivable subsequent to initial recognition. At initial recognition, the present value of the lease payments would be discounted using: i) the lessee's incremental borrowing rate to measure the lessee's obligation; and, ii) the interest rate implicit in the lease to measure the lessor's receivable. The Boards agreed that the discount rates for lessees and lessors would not be revised for subsequent changes in the expected lease term and contingent rental payable (provided that the rentals are not contingent upon variable reference interest rates).
At the meeting, the Boards also addressed the application of the proposed new lease accounting model to short-term leases – leases with a maximum possible term of less than 12 months. For lessees, they tentatively decided to allow a simplified approach to the proposed lease accounting model that would report the gross rental amounts payable on the balance sheet without having to apply a discount rate. Therefore, rental payments would not be bifurcated between interest expense and payments on the rental obligation. For short-term lease accounting by lessors, the Boards are considering an option that would permit the application of the proposed new lease accounting model (or certain aspects of the model), or the current accounting requirements under U.S. GAAP.
The Boards will reconvene on lease accounting issues during their joint meeting in February 2010. The Exposure Draft is scheduled to be issued in the second quarter of 2010.
SEC Issues a Compliance and Disclosure Interpretation Referring to FFO
On January 11, 2009, the Securities and Exchange Commission (SEC or the Commission) issued Compliance & Disclosure Interpretations (C&DIs) that focus on reporting non-GAAP measures generally and Funds From Operations (FFO) specifically. To access the full C&DI, click HERE.
Question 102.01 of the C&DI asked:
Question: What measure was contemplated by "funds from operations" in footnote 50 to Exchange Act Release No. 47226, Conditions for Use of Non-GAAP Financial Measures, which indicates that companies may use "funds from operations per share" in earnings releases and materials that are filed or furnished to the Commission, subject to the requirements of Regulation G and Item 10(e) of Regulation S-K?
Answer: The reference to "funds from operations" in footnote 50 refers to the measure as defined and clarified, as of January 1, 2000, by the National Association of Real Estate Investment Trusts. The staff accepts this definition of FFO as a performance measure and, as a performance measure it may be presented on a per share basis. [January 11, 2010]
Question 102.02 of the C&DI asked:
Question: May a registrant present "funds from operations" on a basis other than as defined and clarified, as of January 1, 2000, by the National Association of Real Estate Investment Trusts?
Answer: Yes, provided that any adjustments made to "funds from operations," as defined in footnote 50 of Exchange Act Release No. 47226, comply with Item 10(e) of Regulation S-K. Any adjustments made to "funds from operations" as defined in footnote 50 must comply with the requirements of Item 10(e) of Regulation S-K for a performance measure or a liquidity measure, depending on how it is presented. If the adjusted measure is a performance measure, it may be presented on a per share basis; if it is a liquidity measure, it may not be. [January 11, 2010]
The full SEC Rule Conditions for Use of Non-GAAP Financial Measures is available by clicking HERE.
As a reminder, NAREIT recommends that amounts labeled Funds From Operations or FFO be measured consistent with the NAREIT definition of FFO and, if not consistent with the NAREIT definition, that any adjusted metric be clearly labeled as such, e.g. Adjusted FFO.