Highlights of this Issue

• FASB and IASB Do an About-Face on the Leases Project
  
• FASB Finalizes Remaining Issues as it Commences with Drafting its Standard on Investment Properties
  
• FASB and IASB Decide to Re-expose the Revenue Recognition Proposal
  
• NAREIT Meets with SEC Staff to Discuss FFO and MFFO
  
• NAREIT Comments on the SEC's Proposed Rule Impacting the Issuance of UPREIT Debt and Meets with the SEC
  
• FASB and IASB Continue Deliberations on Accounting for Financial Instruments Projects
  
• FASB and IASB Finalize Joint Convergence Project on Fair Value Measurement
  
• FASB and IASB Align Financial Statement Presentation of Other Comprehensive Income
  
• FASB Issues Amended Guidance for Determining Whether a Restructuring is a Troubled Debt Restructuring
  
• SEC Looks at Condorsement as Possible Way to Converge U.S. GAAP with IFRS
  

FASB and IASB Do an About-Face on the Leases Project

NAREIT attended the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) (collectively, the Boards) joint meetings May 17 to May 19, 2011 in London to observe their ongoing redeliberations on the proposed leases standard. The Boards overturned certain key tentative decisions that would have amended the proposed leases standard related to the lessee and the lessor accounting models. At the same time, the lease accounting proposal continues to scope out lessors of investment property reported at fair value. NAREIT reminds readers of this report that the conclusions discussed are tentative at this time.

The previously-reached tentative decisions would have addressed some of NAREIT's most significant concerns with the Boards' exposure draft, including:

• Changing the classification of a portion of the rental revenue from rental income/expense to interest income/expense;


• Modifying the revenue/expense recognition pattern on the income statement from straight-line to a method that would front-load revenue/expense in a pattern similar to interest income/expense on amortizing debt; and,


• Replacing the existing lessor accounting model with a hybrid model that would require the recognition of a receivable for all payments to be received under a lease through the lease term and either:


• a liability for the obligation to continuously provide the leased asset (i.e., the performance obligation approach); or,


• revenue as if the leased asset were sold (i.e., the derecognition approach).

Lessee Accounting

At their May meeting, the Boards tentatively agreed that there should be only one type of lease. Thus, the Boards reverted to the original guidance for lessee accounting in the exposure draft. That guidance provides for a front-loaded expense pattern similar to interest expense on amortizing debt.

In previous meetings, the Boards tentatively acknowledged that there could be more than one type of lease than what was described in the exposure draft:

• Finance leases when the finance element is "significant"; and,
  
• Other-than-finance leases when the finance element is "insignificant."

The distinction between the two would have been important because the Boards were considering different expense recognition patterns. Other-than-finance leases, which NAREIT believes would have included most leases of investment property, would have recognized rental expenses on a straight-line basis.

Lessor Accounting

The Boards did not reach a converged tentative decision on the lessor accounting model at the May meetings.

Consistent with NAREIT's comment letter, the FASB voted to amend the exposure draft to allow lessors to continue applying the existing accounting model. If this tentative conclusion is finally adopted by the FASB, lessors, including all lessors of investment properties, would continue to report rental income as currently reported; avoiding any of the negative changes to lessor accounting as proposed in the exposure draft.

The IASB voted to amend the leases exposure draft to only include the derecognition approach, as described in the exposure draft. Under this approach, a lessor would account for a lease at its inception as if the leased asset had been sold. The lessor would record a receivable equal to the present value of all lease payments to be received under the lease. Additionally, the lessor would record a similar amount as revenue from transfer of leased property. Similar to accounting for a sale of property, the lessor would measure the cost of the leased asset and recognize that as a cost of sale, with any difference recorded as gain or loss. Again, this accounting recognition would occur at the date of lease inception. The lease receivable would be accounted for exactly like an amortizing loan, with rent payments allocated between principal payments and interest income. As a result, no rental revenue would be reported over the term of the lease. However, companies subject to International Financial Reporting Standards (IFRS) that report investment property at fair value under International Accounting Standard No. 40 Investment Property would not be required to apply the proposed Leases standard.

Both of the tentative decisions would overturn the hybrid approach to lessor accounting included in the leases exposure draft (i.e., derecognition and performance obligation approaches, respectively).

In light of the Boards' change in course with respect to the decisions on lessee and lessor accounting, the U.S. Chamber of Commerce and NAREIT, along with other Chamber members, submitted a comment letter to the Boards voicing concern over the recent tentative conclusions. The letter highlighted issues where the Boards should spend further time in redeliberations before finalizing the standard. Among the issues presented, NAREIT members will be particularly interested in the following views presented in the letter:

• Complicated recognition and presentation requirements that mask true economic activity and do not reflect the value of a contract;


• The front-ended lessee cost patterns that do not reflect true economic activity;


• Changes in behavioral actions that will depress commercial real estate values; and


• The potential breach of loan covenants and contractual arrangements.

Given the potential divergence in views on the accounting model for lessors, the Boards reconvened in London from June 13 to June 15, 2011. NAREIT attended these joint Board meetings to observe their ongoing redeliberations. The Boards continued to explore whether there should be one or more lessor accounting models; however, no tentative decisions were reached.

Next Steps

The Boards plan to continue to discuss lessor accounting at their next joint Board meetings in July 2011. The Boards have not reached a decision regarding whether they will re-expose the final standard for public comment. Additionally, the Boards have not selected an effective date for the proposed leases standard.

FASB Finalizes Remaining Issues as it Commences with Drafting its Standard on Investment Properties

The FASB has continued to develop a standard in U.S. Generally Accepted Accounting Principles (U.S. GAAP) that would require certain lessors to report investment properties at fair value, and thus be outside the scope of the proposed leases standard. However, as the FASB has considered its Investment Properties standard, two major differences between current FASB thinking and the existing guidance in IFRS (International Accounting Standard No. 40 Investment Property (IAS 40)) have surfaced:

• The FASB would require fair value reporting rather than allowing it as an option to reporting investment property at depreciated cost; and,
  
• The FASB would utilize an entity-based scope instead of the property-based scope in IAS 40.

Given these differences, the FASB staff has been reaching out to financial statement preparers and users to determine the spectrum of real estate companies that would meet the scope of the FASB's definition of investment property entities and therefore be covered by the standard.

The FASB staff has developed the following criteria that an entity would have to meet to be considered within the scope of the FASB's Investment Properties standard:

• Business Activities - the entity's substantive activities relate primarily to investing in real estate property;



• Business Purpose - the express business purpose of the entity is to invest in real estate for total return including an objective to realize capital appreciation. The entity has potential strategies for realizing capital appreciation, including selling a property to maximize its total return. The entity's business purpose is not to hold real estate properties for:


• Use in the production or supply of goods or services or for administrative purposes;


• Rental income only; or,


• Sale in the ordinary course of business;
• Unit Ownership - ownership in the entity is represented by units of investments, such as shares or partnership interests, to which proportionate shares of net assets can be attributed, e.g., shares or partnership interests to which shares of net assets can be attributed; and,
  
  
• Pooling of Funds - the entity has one or more unrelated investors that hold significant ownership interests in the entity.

Based on the FASB's tentative decisions, NAREIT believes that most equity REITs would meet the criteria to be covered by the Investment Properties standard. Some REITs, particularly mortgage REITs, may be covered by the separate Investment Companies standard being developed jointly by the FASB and IASB. Both of these standards would require that investment property be reported at fair value. However, the Investment Company standard may require that a company report its net investment in properties and its revenue as interest, dividends and other distributions from investments in property. As a result, the income statement for investment companies would not report the operating revenues and expenses of the properties.

NAREIT has communicated the Board's tentative decision to apply an entity-based approach to determining the scope of the standard to its global partners – member organizations of the Real Estate Equity Securitization Alliance (REESA). REESA is made up of seven representative real estate organizations around the world grounded in one or more facets of securitized real estate equity. REESA's broad mission is to improve the opportunities for investment in securitized real estate equity around the globe. The REESA member organizations are:

• Asia Pacific Real Estate Association (APREA);


• Association for Real Estate Securitization in Japan (ARES);


• British Property Federation (BPF);


• European Public Real Estate Association (EPRA);


• National Association of Real Estate Investment Trusts in the U.S. (NAREIT);


• Property Council of Australia (PCA); and


• Real Property Association of Canada (REALpac).

After consideration, REESA submitted a letter to the Boards urging that they maintain a property-based approach to defining the scope of a potentially converged standard for accounting for investment properties.

On June 13, 2011, NAREIT attended the FASB's education session for the members of the IASB in London. No formal decisions were made during the meeting. At the current time, it is unclear whether the IASB would:

• consider converging with the FASB direction of defining the scope of its Investment Properties standard based on the type of entity holding a property, or


• continue the application of IAS 40 Investment Property that relies on a definition of the type of property.

Next steps

The FASB Staff has commenced drafting the exposure draft, with FASB intending to issue it for public comment in July, with a finalized standard to be issued by the end of 2011.

FASB and IASB Decide to Re-expose the Revenue Recognition Proposal

NAREIT staff attended the FASB and the IASB joint meetings from June 13 – 15 in London to observe their ongoing redeliberations of the Boards' joint project on revenue recognition.

The Boards unanimously decided that they will re-expose the revenue recognition proposal during the third quarter of 2011, with a comment period of 120 days. Previously, the Boards published the revenue recognition exposure draft in June 2010 and received almost 1,000 comment letters. NAREIT and its global partners in REESA have been actively involved in this project, including participating in an education session with FASB that addressed how the proposed standard would be applied to the real estate industry. Additionally, both NAREIT and REESA submitted a comment letter on the original exposure draft.

The Boards decided to re-expose the exposure draft to provide constituents with the opportunity to comment on the revisions made to the original proposal. The Boards have not determined an effective date for the proposed standard. To read the Boards' press release, click here.

During the meeting, the Boards also tentatively agreed on transition methods. Companies will be provided the option to either apply the new standard on a fully retrospective or limited retrospective basis. Full retrospective implementation would require companies to restate prior years to allow for comparative financial reporting. Should companies choose the limited retrospective implementation option, they would be able to choose among the following options:

• not restate financial statements for contracts that begin and end in the same reporting period;


• utilize hindsight in estimating variable consideration;


• not perform the onerous contract test for comparative periods, unless an onerous contract liability was recognized previously; and


• not disclose the maturity analysis for remaining performance obligations in the first period of adoption.

The Boards have not yet concluded on an effective date for the proposed revenue recognition standard.

NAREIT Meets with SEC Staff to Discuss FFO and MFFO

On Apr. 21, 2011, NAREIT met with the staff of the Securities and Exchange Commission (SEC) Division of Corporation Finance to discuss current Funds From Operations (FFO) reporting practices, as well as the introduction of Modified FFO (MFFO) by the Investment Program Association (IPA).

On Nov. 2, 2010, the IPA issued a practice guide that defined MFFO as a supplemental performance measure for publicly registered, non-listed REITs. The practice guide uses NAREIT-defined FFO as the starting point for calculating MFFO. FFO is then adjusted for many income and expense elements, including but not limited to the following:

• Acquisition fees and expenses;


• Impacts of accounting for rents on a straight-line basis;


• Amortization of premiums and discounts on in-place leases recorded at acquisition;
  
• Impairment write-downs related to all real estate investments, i.e., investment property, loans receivable related to real estate, and equity and debt investments related to real estate;


• Realized gains/losses from debt extinguishment; and,


• Realized gain/losses on the extinguishment or sale of hedges.

Representing NAREIT at the meeting were Steve Wechsler, president & CEO, Tony Edwards, executive vice president & general counsel, George Yungmann, senior vice president, financial standards, and Christopher Drula, senior director, financial standards. The SEC staff included the Assistant Director of the Division of Corporation Finance and senior legal and accounting staff.

The SEC staff said that their clear focus over the next year would be on ensuring that non-GAAP measures are presented in accordance with Regulation G with a strong emphasis on the narrative disclosures required.

NAREIT Comments on the SEC's Proposed Rule Impacting the Issuance of UPREIT Debt and Meets with the SEC

Pursuant to requirements of the Dodd-Frank Wall Street and Reform Consumer Protection Act (Dodd-Frank Act), the Securities and Exchange Commission (SEC) has proposed to replace the current "investment grade standard", currently required for use of short-form shelf registration on Form S-3, with an alternative standard that may create unintended roadblocks to a REIT's access to the public debt capital markets. If the proposed guidance were adopted in its current form, many REITs that have been able to access the public debt capital markets (through the use by their operating partnership subsidiaries of the short-form shelf registration process under the Securities Act of 1933 in reliance on Form S-3 for primary offerings) would no longer be able to issue debt securities through this efficient process and could be compelled to issue debt through private placements.

On Mar. 28, 2011, NAREIT submitted a letter to the SEC commenting on the proposal. In the letter, NAREIT recommended that the SEC consider:

• Modifying the eligibility requirements for "well known seasoned issuers" (WKSI) to include a significant (such as $250 million) aggregate principal amount of non-convertible debt securities outstanding (rather than issued over the previous three years as provided in the proposed rule);



• Establishing a new test that permits a majority-owned subsidiary of a parent that is S-3 eligible (over $75 million of equity held by non-affiliates) to register non-convertible debt securities if the public equity float of the parent combined with the outstanding aggregate principal amount of non-convertible debt securities of the parent and/or the majority-owned subsidiary registrant exceeds $700 million (this proposal would help virtually all Operating Partnerships of listed REITs); and,



• Revising the definition of a WKSI to include the securities of the majority-owned subsidiary of a parent that is a well-known seasoned issuer of a WKSI, if the majority-owned subsidiary has at least $500 million in aggregate principal amount of non-convertible debt securities outstanding

On May 20, 2011, NAREIT staff met with SEC staff to discuss our concerns with the proposal. NAREIT staff had a constructive discussion about possible modifications to the SEC's proposal. While the SEC staff did not commit to any changes, NAREIT believes that they are open to consider our recommendations.

FASB and IASB Continue Deliberations on Accounting for Financial Instruments Projects

The FASB has been reconsidering certain aspects of the proposed changes to accounting for financial instruments. The tentative changes center on the following areas: classification and subsequent measurement, credit impairment, interest income recognition, and hedge accounting. The IASB has moved forward without the FASB in its deliberations on classification and subsequent measurement and hedge accounting, while the boards issued a joint proposal on credit impairment.

Classification and Subsequent Measurement

The FASB has tentatively agreed to amend its previous approach in the exposure draft, which would have required companies to measure most financial assets and financial liabilities at fair value. Due to the amount of displeasure identified in the comment letter process, the FASB has tentatively agreed to modify the model to identify three methods of accounting for financial instruments:

• Amortized cost;


• Fair value, with changes in fair value recognized in net income; and


• Fair value, with changes in fair value recognized in other comprehensive income.

The FASB tentatively agreed that classification and subsequent measurement of financial assets and liabilities will be based upon both:

• The characteristics of the financial instrument; and,


• The entity's business strategy for the financial instrument.

At its meeting on May 31, the FASB tentatively agreed to amend the application of the business strategy criteria for financial liabilities. The premise was to simplify the application of this guidance in practice for financial liabilities, such as bank core deposits or a company's own debt.

The Board agreed to include the following criteria that are specific to the classification of financial liabilities:

An entity would measure at amortized cost financial liabilities meeting the characteristics of the instrument, except when either of the following conditions is met:

• The financial liability is held for transfer at acquisition, issuance, or inception, and the entity has the ability and means to transact at the financial liability's fair value; or


• The financial liability is a short sale.

If either of the conditions is met, the company would report the financial liability at fair value, with changes in value reported in net income.

The FASB's approach to measurement of financial assets and financial liabilities is not converged with the approach taken by the IASB. Under the IASB's proposed model, there would be only two categories:

• Amortized cost; and,


• Fair value, with changes in fair value recognized in net income.

Credit Impairment

The FASB and the IASB continue to debate a converged credit impairment model for financial assets. At the joint board meetings in May, the Boards considered the feedback that they received, which consistently rejected the Boards' proposal, and encouraged a new converged model. As a result, the Boards have moved away from pursuing an approach that divided a portfolio of financial assets between a good book and a bad book. Instead, the Boards are considering a new approach where classification would determine the credit impairment as credit quality deteriorates during a financial asset's life cycle. Classification of financial assets would be made into one of three buckets:

• Bucket 1 includes financial assets that have not been affected by observable events that provide a direct relationship to possible future defaults. Companies would establish an allowance for credit losses at each reporting period equal to the expected losses anticipated in the next twelve months.


• Bucket 2 includes financial assets that have been affected by observable events that provide a direct relationship to possible future defaults. However, a direct relationship would exist at the overall portfolio level; not at the asset level. Companies would recognize an allowance for credit losses immediately in the income statement equal to the full expected lifetime losses.


• Bucket 3 includes financial assets that have been, or are expected to be, affected by credit losses at the individual asset level. Companies would recognize an allowance for credit losses immediately in the income statement equal to the full expected lifetime losses.

For more information, see IASB Agenda Paper 8/FASB Agenda Paper 99 for the meeting held on June 15, 2011.

Next Steps

No final decisions were reached by the Boards with respect to this new approach. NAREIT anticipates that the model will be debated further at the July 2011 joint Board meetings.

Offsetting Financial Assets and Liabilities

On June 14, 2011, NAREIT attended the joint Board meeting where the FASB and IASB debated whether the offsetting model should be based on an unconditional right of set-off or a conditional right of set-off. The Boards did not reach a converged tentative decision. The IASB favored the unconditional right of set-off approach, while the FASB supporting a conditional right of set-off approach. For more information, see IASB Agenda Paper 5A/FASB Agenda Paper 15A.

The unconditional right of set-off approach is consistent with that which was discussed in the FASB and IASB exposure drafts (Offsetting, and Offsetting Financial Assets and Financial Liabilities, respectively) issued on January 28, 2011. Under this approach, a company would be required to offset a recognized financial asset and a financial liability if it:

• has an unconditional and legally enforceable right to set off the financial asset and financial liability; and,


• intends to either settle the financial asset and liability on a net basis, or realize the financial asset and settle the financial liability simultaneously.

The conditional right of set-off approach is consistent with the exposure drafts as well; however, it provides a scope exception for certain derivative instruments that are executed with the same counterparty in master netting arrangements.

Next steps

Once the Boards complete their respective projects on Accounting for Financial Instruments, they plan to reconcile any differences before issuing a final joint standard by the end of 2011.

FASB and IASB Finalize Joint Convergence Project on Fair Value Measurement

On May 12, 2011, the Boards finalized their Joint Convergence Project that will achieve common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. To view the full Accounting Standards Update, click here. While this guidance represents a new standard for IFRS reporting entities, the guidance will be similar to what U.S. GAAP reporting entities implemented previously under Financial Accounting Standards No. 157, Fair Value Measurements. However, there were some changes to the language used in the updated literature to converge with IFRS. Additionally, the FASB clarified certain aspects of existing U.S. GAAP and made some amendments relating to:

• Application of highest and best use and valuation concepts;


• Valuation of instruments classified in shareholders' equity;


• Valuation of instruments managed in a portfolio;


• Accounting for premiums and discounts in fair value measurement; and,


• Disclosures about fair value measurements.

The new guidance is effective for U.S. public companies on a prospective basis only for interim and annual reporting periods beginning after Dec. 15, 2011. The new guidance is effective for private companies for annual reporting periods beginning after Dec. 15, 2011. Private companies are provided with the option to adopt the new guidance early for interim reporting periods beginning after Dec. 15, 2011.

FASB and IASB Align Financial Statement Presentation of Other Comprehensive Income

On June 16, 2011, the FASB issued Accounting Standard Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (ASU 2011-05). To view ASU 2011-05 in its entirety, click here. Also on June 16, the IASB issued an amendment to International Accounting Standard No. 1, Presentation of Financial Statements (IAS 1). The new guidance issued by the Boards is intended to align the reporting requirements for OCI, and thereby increase comparability of financial reporting.

Most notably, ASU 2011-05 eliminates the option that companies currently have to report other comprehensive income (OCI) and its components in the statement of changes in equity. The ASU provides companies with two options for the financial statement presentation of OCI:

• A single statement of comprehensive income, that would include:
• Components of net income;
• Total net income;
• Components of OCI;
• Total OCI; and
• Total comprehensive income; or

• A two-statement approach, where the first statement includes the components of net income and total net income. The second statement, which would appear immediately thereafter, would include the components of OCI, total OCI, and total comprehensive income.

For SEC registrants, ASU 2011-05 is effective for the first interim or annual period beginning on or after December 15, 2011. Full retrospective application is required, and early adoption is permitted.

For entities not registered with the SEC, ASU 2011-05 is effective for annual periods ending after December 15, 2012, including interim periods thereafter. Full retrospective application is required, and early adoption is permitted.

FASB Issues Amended Guidance for Determining Whether a Restructuring is a Troubled Debt Restructuring

On Apr. 5, 2011, the FASB issued Accounting Standard Update No. 2011-02, Receivables (Topic 310): A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring (ASU 2011-02). To view ASU 2011-02 in its entirety, click here. ASU 2011-02 provides further clarification to existing guidance that addresses whether a creditor should account for a debt modification as a troubled debt restructuring. The new guidance may impact REITs (especially mortgage REITs) that restructure receivables with debtors.

The consequence of falling within the scope of the troubled debt restructuring model includes recognizing impairment when calculating the allowance for credit losses and complying with recently issued disclosure requirements of Accounting Standard Update No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.

Due to the financial crisis, the number of debt restructurings has grown exponentially. Interested stakeholders have questioned whether creditors were consistently applying the existing accounting model for troubled debt restructurings. Thus, the FASB completed this project that addresses the perceived inconsistent application by creditors.

The new guidance clarifies that a debt modification should be accounted for as a troubled debt restructuring when both of the following criteria are met:

• The restructuring meets the definition of a concession to the borrower; and,
  
• The borrower is experiencing financial difficulties.

ASU 2011-02 provides further clarity on:

• Whether a concession is represented by a below-market interest rate;
• Whether a concession is granted due to an insignificant delay in repayment; and,
• Whether a borrower is experiencing financial difficulties, based on the creditor's determination of whether it is probable that the borrower will be in default on the existing terms of the debt instrument in the foreseeable future.

For SEC registrants, ASU 2011-02 is effective for the first interim or annual period beginning on or after June 15, 2011, with retrospective application to the beginning of the annual period of adoption required. Early adoption is permitted.

For entities not registered with the SEC, ASU 2011-02 is effective for annual periods ending on or after December 15, 2012, including interim periods within those periods. Early adoption is permitted.

SEC Looks at Condorsement as Possible Way to Converge U.S. GAAP with IFRS

On May 26, 2011, the SEC Office of the Chief Accountant issued a staff paper entitled "Exploring a Possible Method of Incorporation" (the staff paper) that further analyzes condorsement as a possible method to converge U.S. GAAP with IFRS. To view the staff paper, click here. The SEC has invited constituents to provide feedback on the staff paper. To comment, click here. Those members who wish to participate in developing NAREIT's comment letter should contact Christopher Drula at cdrula@nareit.com.

The staff paper builds upon the concept of condorsement that was initially introduced by Paul Beswick, SEC Deputy Chief Accountant, in a speech at the American Institute of Certified Public Accountants' (AICPA) National Conference on SEC and Public Company Accounting Oversight Board (PCAOB) Developments in December 2010. To read a transcript of this speech, click here.

The SEC continues to evaluate whether, when, and how to bring IFRS within the U.S. financial reporting infrastructure. Previously, the SEC has explored the following methods of achieving the goal of "a single set of high-quality, globally accepted accounting standards." These methods include:

• Full adoption of IFRS at a single point in time;
• Full adoption of IFRS via a staged adoption over a period of time;
• An option for U.S. filers to early adopt IFRS; and,
• Retention of U.S. GAAP while continuing to complete convergence projects.

The condorsement approach blends certain aspects of some of the previous methods, with the ultimate goal of establishing one set of global accounting standards. Whether or not U.S. companies would be provided the option to early adopt IFRS was outside the scope of the staff paper.

Under the condorsement approach, the FASB would continue to exist, but in a different role. As further discussed below, the FASB would provide input to the International Accounting Standards Board (IASB) in the development and improvement of financial reporting standards. The idea of having the FASB specifically involved at the forefront of international financial standards development would alleviate concerns in the U.S. that the FASB's views would not otherwise be considered in the IASB process. It would also ensure that the FASB's final conclusions would not diverge generally from the final guidance issued by the IASB. Further, the condorsement protocol would provide the SEC and the FASB with the ability to modify or supplement IFRS when in the public interest and necessary for the protection of investors (i.e., a "US-only IFRS").

Under this approach, the SEC would continue to oversee the FASB and maintain its ability to issue accounting principles and regulations to be followed by companies registered in the U.S. Additionally, the SEC would provide its perspectives to the IASB as well as the IASB's oversight board (i.e., the IFRS Foundation Monitoring Board).

In order to achieve ultimate convergence, the FASB would undertake a transition plan that would last between five and seven years. The FASB would evaluate a full inventory of similarities and differences between U.S. GAAP and IFRS. Afterwards, the FASB would classify the financial standards in three categories prior to converging with IFRS on a standard-by-standard basis:

• Standards subject to the memorandum of understanding – standards that are currently being jointly developed by the FASB and IASB;
  
• Standards currently included on the IASB's agenda; and,
  
• All other standards, including those that are not addressed by IFRS.

Through this classified transition plan, the FASB and the SEC would be able to minimize the potential negative impacts of moving to a new basis of accounting at a single point in time (i.e., what many refer to as a "Big Bang" approach.) For example, the FASB and SEC could work towards eliminating instances whereby a U.S. company would adopt an existing IFRS standard when there is new accounting guidance expected in the short term. The FASB and SEC could also seek to provide prospective adoption of IFRS standards as opposed to requiring retrospective adoption of new accounting standards.

In the staff paper, the SEC staff evaluated the benefits and risks of adopting the condorsement approach. The benefits of pursuing condorsement specified by the SEC include that the approach:

• Supports a flexible and tailored strategy, while giving U.S. constituents the ability to evaluate each standard in IFRS individually;
• Provides for gradual implementation, with potential cost savings through prospective application, when possible, and more time for preparer, user, and investor education;
• Provides for potentially greater investor protection with FASB endorsement than full adoption of IFRS at one point in time, by having the FASB represent the interests of the U.S. capital markets to the IASB in deliberating new and improved financial standards; and,
• Retains U.S. GAAP as a statutory basis of financial reporting, and in the process reduces the need to replace references to U.S. GAAP with IFRS in various laws and regulations.

Next steps

The SEC has issued an invitation to comment on the staff paper, as well as other possible mechanisms previously discussed to achieve a global set of generally accepted accounting principles. The comment deadline is July 31, 2011.

Contact

For further information, please contact George Yungmann at gyungmann@nareit.com or Christopher Drula at cdrula@nareit.com.