October 29, 2009
SEC to Focus on Decision to Adopt IFRS in the U.S.
The 2008 Securities and Exchange Commission (SEC) proposal that would require the 2014 adoption of International Financial Reporting Standards (IFRS) in the U.S. has resurfaced on the SEC's upcoming agenda. At the International Accounting Standards Committee Foundation (IASC Foundation) meeting on July 6, 2009, Mary Schapiro, SEC Chair, stated that the SEC is continuing its detailed analysis of all comment letters and will readdress the potential adoption of IFRS during the fall.
Among the 230 letters received by the SEC, the majority of respondents generally support a single set of high-quality global accounting standards. In its April 20 letter to the SEC, NAREIT recommends that, rather than the SEC requiring the mandatory adoption of IFRS for U.S. issuers within the aggressive timeframe proposed, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) should continue their deliberate convergence of U.S. Generally Accepted Accounting Principles (GAAP) and IFRS. In the SEC's 2010-2015 strategic plan, which was issued for public comment on October 8, 2009, the SEC affirms its commitment toward a single set of high-quality global accounting standards and on-going convergence initiatives between the FASB and IASB (collectively, the Boards).
While the SEC promotes its support for global accounting standards, it also acknowledges that undisputed independence for the IASC Foundation (the governing body of the IASB) is a critical issue tied to the adoption of IFRS – a major issue also raised by NAREIT in its letter. In a step toward achieving independence for the IASC Foundation, SEC Chair Schapiro now serves as a member of the Monitoring Board that was recently established to maintain the public accountability of the IASC Foundation in order to promote investor protection, market integrity and capital formation.
NAREIT/REESA Continue to Advocate Lessor Accounting Views with FASB/IASB
NAREIT and its global partners in the Real Estate Equity Securitization Alliance (REESA) continue to march forward and express their common views on the approaches to lessor accounting under consideration by the FASB and IASB. Background information on the Boards' proposals that would dramatically modify the current financial statements can be accessed in the July 2009 Financial Standards Update by clicking HERE. The July 2009 update also provides links to the comment letters previously submitted by REESA and NAREIT, which describe their opposition to the Boards' proposals.
REESA is actively engaged in evaluating IASB and FASB proposals and providing input to the Boards on those proposals that may impact accounting and financial reporting by real estate companies. Besides NAREIT, the REESA member organizations include:
- Asian Public Real Estate Association (APREA)
- Association for Real Estate Securitization (ARES)
- British Property Federation (BPF)
- European Public Real Estate Association (EPRA)
- Property Council of Australia (PCA)
- Real Property Association of Canada (REALpac)
REESA Meets with the IASB/FASB
Based on the staff's request during REESA's July 14, 2009 meeting with the IASB and FASB, REESA organized a follow-up meeting with the IASB, FASB and key industry investors and investment analysts to provide further support for REESA's views on the Boards' proposals.
On August 25, major real estate investors and analysts from the United States, Europe and the United Kingdom met with representatives of the IASB and FASB. These users of our industry's financial statements shared their methods of analyzing the investment quality of real estate companies and their views regarding the Boards' preliminary proposals, which corresponded to REESA's views.
John Lutzius of Green Street Advisors, one of the financial statement users in attendance, stated that "a change in accounting presentation to show real estate broken out between the net present value of leases in place and residual value would, in my view, be very disruptive to the user community in both the U.S. and Europe." Other industry financial statement users sharing their views with the Boards' representatives included: Harm Meijer, JP Morgan; Rogier Quirijns, Cohen & Steers; David Smetana, Morgan Stanley; Rafael Torres Villalba, APG; and Stuart Martin, First State Investors.
NAREIT/REESA Respond to FASB/IASB Possibility for Multiple Lessor Accounting Models
On September 8, FASB and IASB staff requested input on a possible lessor accounting model that may eliminate certain of the issues that landlords of investment property would face under the Boards' current proposals.
Until very recently, the Boards have been attempting to develop a single model for accounting by all lessors. The recent request asks whether there should be different leasing models depending on the business model of the company.
NAREIT and REESA responded that the Boards should develop at least two models that would recognize the substantive differences between leases that simply finance assets and those that are clearly an integral part of the operating business plan of the lessor – an "operating lease." To read the letter, click HERE. The response provided specific criteria that would be considered to determine whether a lease is an "operating lease." These criteria include:
- the leased asset can not be purchased/financed;
- multiple leases cover a larger asset – specific leases cover only a portion of a larger asset;
- the lessor maintains and operates aspects of the overall asset while the lease is in place;
- the lease agreement has no residual value or implicit interest rate;
- the lease has no purchase option at the end of the lease term;
- the lease terms are driven by the supply/demand for the leased asset – the leased space in a real estate lease;
- the term of the lease is substantially shorter than the useful life of the leased asset; and,
- the same portion of the larger asset will generally be leased multiple times during the asset's useful life.
NAREIT will continue its active participation in the Boards' process toward developing new lease accounting models. The Boards will consider this input as they develop a new converged global standard for the accounting of leases that is expected to be issued in 2011. The exposure draft is expected to be issued in the second half of 2010.
NAREIT/REESA Evaluate Fair Value Proposals
FASB Fair Value Disclosure Proposal
In August 2009, the FASB released its proposal to expand disclosures about fair value measurements. Most notably, the proposal would require entities to disclose the effects of alternative inputs on fair value measurements. The additional disclosures would provide information about the effect of "reasonably possible" alternative level 3 inputs and transfers in and/or out of the level 1 and 2 input categories, as well as increased disclosures of activity in level 3 measurements and other disclosures about inputs and valuation techniques. Level 3 inputs are unobservable inputs that include management's assumptions in determining fair value, while levels 1 and 2 involve observable inputs based on the market.
The proposals would apply to all entities reporting fair value measurement disclosures under U.S. GAAP. The majority of the proposed disclosures would be effective for interim and annual reporting periods ending after December 15, 2009, while the sensitivity disclosures for level 3 measurements would be effective for interim and annual reporting periods ending after March 15, 2010.
IASB Fair Value Proposal
REESA submitted a comment letter in response to the IASB's fair value measurement proposal and addressed the following main concerns:
- loss of fair value guidance currently part of IAS 40 Investment Property that has proven to be useful and relevant to measuring investment property fair value;
- issues regarding disclosure requirements for investment property pertaining to a sensitivity analysis of fair value and the impact of changes in valuation techniques;
- the requirement to disaggregate the fair value of investment property into land and building components;
- inconsistency in the accounting for transaction costs and the recognition of day one gains or losses; and,
- lack of full convergence with U.S. GAAP.
To read a summary of the proposal, click HERE. REESA's comment letter was submitted on September 24, 2009 and is available by clicking HERE.
EITF Reaches Tentative Conclusion on Retrospective Reporting of Elective Stock/Cash Dividends
As a result of the 2008 IRS Revenue Procedure that allows listed REITs to offer a combination of stock and cash to satisfy their dividend distribution requirement through 2009, a financial reporting question arose early in 2009 with respect to the impact of the stock portion of these dividends on reported per share amounts. Currently, there are two accounting treatments that have been equally applied by REITs. The retrospective treatment, which is similar to the treatment of stock splits or stock dividends, restates any prior period per share amounts to reflect the dividend arrangement as if the shares were outstanding during each period presented in the current financial statements. The alternative is the prospective treatment, which reports the dividend arrangement prospectively as if the stock portion of the dividend was a stock issuance.
The Emerging Issues Task Force (EITF) has examined this presentation issue of reporting the stock portion of the dividends, including the effects on the calculation of per share amounts, and discussed their considerations and alternative views with NAREIT on August 4, 2009.
On September 30, 2009, the EITF issued a proposal that the stock portion of elective stock dividends should be applied retrospectively. The final consensus is expected to be effective for year-end 2009 reporting. The comment deadline was October 26, 2009. NAREIT is asking its members concerned with this issue to submit comments to the EITF expressing their views, even though the due date for comments has technically lapsed.
SEC Examines Operating Partnership Capital Reporting
A number of NAREIT member companies have been responding to SEC comments regarding the classification of redeemable operating partnership (OP) capital on the financial statements of the OP. The primary concern of the SEC staff seems to be gaining an understanding of the basis of a company's conclusion with respect to the classification of OP capital and whether it should be reported outside of permanent capital under U.S. GAAP.
An important focus of the SEC staff is to understand the fiduciary relationship between the REIT and the OP, and whether there are potential conflicts of interest between the REIT and OP in terms of the decision to redeem OP units using cash or REIT shares. In comments to a number of REITs, the SEC staff has requested a legal analysis supporting a conclusion that no conflicts of interest exist that would preclude the REIT from providing shares to redeem OP units.
In a collaborative industry-wide effort, member companies, NAREIT staff, industry attorneys and representatives of accounting firms involved in responding to the SEC comments advocated that the REIT and the OP are functionally the same entity. At this time, based on its discussion with NAREIT members, their outside counsel and auditors, as well as staff of the SEC's Office of Chief Accountant, the SEC Division of Corporate Finance has, in the case of a number of REITs, concurred with the company's reporting for the capital in the OP.
SEC Extends Final Sarbanes-Oxley Deadline for Small Businesses
Non-accelerated filers, public companies with a public float below $75 million, are now required to include an auditor's report on the effectiveness of internal control over financial reporting beginning with their annual reports for fiscal years ending on or after June 15, 2010. The SEC previously issued a deadline of December 15, 2009; however, the SEC extended the deadline to perform cost analyses and to allow more time for smaller companies and their auditors to prepare for the auditor attestation required under the provisions of Section 404(b) of the Sarbanes-Oxley Act.
FASB Provides Fair Value Guidance for Investments in Investment Companies
In September 2009, the FASB issued an Accounting Standards Update for investments in certain entities that calculate net asset value per share, which is effective for reporting periods ending after December 15, 2009. Investors now may use net asset value reported by the investees to estimate the fair value of investments in investment companies that do not have a readily determinable fair value. This new guidance is permitted if the investees have the attributes of investment companies and the net asset values or their equivalents are calculated consistent with the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide, Investment Companies, which generally requires investments to be measured at fair value.
FASB defines an investment company as an entity that: 1) invests in multiple substantive investments; 2) invests for current income, capital appreciation, or both; and, 3) invests with investment plans that include exit strategies. Most notably, an investment company does not acquire or hold investments for strategic operating purposes, which may be a distinguishing factor when comparing an investment company to a REIT that owns and operates investment properties.
2009 NAREIT Financial Standards Events
Senior Financial Officers/Investor Relations Officers Workshop
NAREIT held its 2009 Senior Financial Officers/Investor Relations Officers Workshop on September 21 and 22 in New York City. Approximately 100 members attended the workshop, which was specifically designed for senior officers in the fields of accounting, financial reporting, capital markets, insurance and investor relations. Sessions focused on the latest developments and trends impacting the financial management of real estate companies. NAREIT extends its gratitude to the program directors, sponsors and presenters for their contributions toward the success of this event.
Internal Audit Forum
On August 18 and 19, BRE Properties, Inc. and Boston Properties, Inc. hosted the 2009 Internal Audit Forum in San Francisco, CA. This year's forum featured special guest speakers Constance Moore, President and CEO, BRE Properties, Inc. and NAREIT Chair; Hollis Skaife, Standards Advisory Council (SAC) of the IASB; and, Patricia Miller, Partner, Deloitte and former Chair of the Institute of Internal Auditors. The program covered topics such as enterprise risk management, data analytics, fraud and IFRS and included sector breakouts. NAREIT appreciates the hosts and presenters for providing another informative forum.