Deloitte Partner Discusses Impact of FASB Rules on REITs

Chris Dubrowski, partner at Deloitte LLP, joined REIT.com for a video interview during REITWise 2015: NAREIT’s Law, Accounting and Finance Conference held in Phoenix.

Dubrowski outlined how companies are preparing for the new revenue recognition standard issued by the Financial Accounting Standards Board (FASB). He acknowledged the difficulty in understanding new rules until they are applied to actual transactions. “I’m telling people to think about the different ways you recognize revenue within a REIT and think about whether those might be impacted,” he said.

Overall, however, Dubrowski said he does not expect the new standard to have a huge impact on the REIT industry. The new standard will likely not go into effect until 2018 for public companies and 2019 for private entities.

“We could probably use the additional time. FASB is going to make tweaks to the guidance and maybe give additional implementation guidance,” he noted.

Dubrowski also explained efforts currently underway at FASB to clarify the definition of a business.

According to Dubrowski, FASB rules are “inconsistent” in that when investors buy pieces of operating real estate, they are considered to be business combinations. If they buy pieces of empty real estate, however, those are considered to be asset acquisitions. The accounting methods for the two types of transactions differ.

“That’s always been sort of an irritant to the REIT industry,” Dubrowski said. FASB is also looking at partial sales of real estate, Dubrowski said. Currently, asset rules are used when an investor sells real estate, even though business rules are used when the property is purchased. That becomes important in the case of a partial sale, he said. A partial sale of a business recognizes profit on the part sold. The retained interest is marked to market, and the investor effectively gets 100 percent of the gain.

In the case of a partial sale of an asset, gains are only recognized on the part that is sold. The retained portion stays on the books at cost, he added. FASB is trying to square the inconsistency between marking retained interest to market and marking it at cost.

“We have a lot of partial sales in real estate. That could make a big difference in how you recognize your profit,” Dubrowski said.