FASB/IASB Confirm that Lessors of Investment Property Reported at Fair Value Would Be Scoped Out of Leases Standard
At a July 20, 2011 joint meeting, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) (the Boards) confirmed that lessors of investment property reported at fair value would be scoped out of the proposed converged standard that addresses the accounting for leases. These lessors would account for leases as currently reported. Therefore, these lessors would not recognize a receivable for all payments to be received under in-place leases separate from the investment property. The basis of this conclusion is that the fair value of the property includes the present value of payments to be received under in-place leases. In addition, these lessors would continue to report lease revenue over the term of the lease on a straight-line basis.
Also at this meeting, the Boards rejected a staff recommendation that, if a lessor of investment property reported under the cost approach has entered into numerous lease contracts for physically-distinct portions of a single larger asset, e.g., shopping malls, offices buildings, the lessor should continue to report leases in accordance with the current accounting for operating leases. NAREIT submitted a comment letter on July 11, 2011 on behalf of the Real Estate Equity Securitization Alliance (REESA) supporting this staff analysis and recommendation.
The Boards also confirmed at their July 20, 2011 meeting that leases with a maximum possible term of 12 months or less, including options to extend, would be scoped out of the proposed accounting. Lessees would have the option to account for the assets and liabilities with respect to these short term leases.
Staff papers discussing the issues identified above are available at the International Financial Reporting Standard's website.
We understand from discussions with the Boards' staff that there is a high probability that these and other recent conclusions will be re-exposed for constituent comment.