FASB Narrowing Business Combinations Guidance, Deloitte Partner Says

Chris Dubrowski, a partner at Deloitte LLP, joined REIT.com for a video interview at REITWise 2016: NAREIT’s Law, Accounting and Finance Conference at the Marriott Marquis in Washington, D.C.

Dubrowski said the Financial Accounting Standards Board (FASB) is working to address differences between how acquisitions of operating properties are treated domestically and internationally.

Domestically, acquisitions of operating properties are treated as business combinations, which require that transactions costs be expensed. Internationally, however, these acquisitions are treated as asset acquisitions, which allows transaction costs to be capitalized, he explained.

According to Dubrowski, FASB said it would narrow the Business Combinations guidance so that when a company buys a property, it will be considered an asset acquisition. It will only be considered a business combination if a company buys a “substantive process,” he said. Dubroswki said an example of a substantive process would be when an office property is purchased and the new owner does not replace the existing management and leasing functions.

Dubrowski also noted that the revenue recognition standard from FASB and the International Accounting Standards Board “gets rid of some of the bright line tests for real estate sales, so there’ll be a little more judgement involved .” Overall, however, the basic business model isn’t going to change, he added.

Meanwhile, Dubrowski noted that FASB’s recently issued financial instruments classification and measurement standard will force equity shares that are owned by a REIT to be marked to market on the balance sheet, with changes in fair value recognized in net income on the income statement.

Another new standard coming from FASB deals with credit impairment, Dubrowski said, as it will change the model for how loan loss reserves are booked.

“Mortgage REITs are watching that very carefully. That might cause them to book loan loss reserves earlier than they are today,” he said.