In brief: FASB debates the path forward for investment property entities (No. 2012-34)
In brief
The FASB met on August 8, 2012 to discuss the next steps on its project on investment property entities. The FASB did not make a final decision on the path forward; however, the board tentatively decided not to continue developing an entity-based approach for investment property. This In brief article provides an overview of the key issues and what's next for the project.
What's new?
The FASB (the board) met on August 8, 2012 to discuss the next steps on its project on investment property entities. The FASB did not make a final decision on the path forward; however, the board tentatively decided not to continue developing an entity-based approach for investment property.
Background
In October 2011, the FASB proposed guidance1 that would have required entities that meet five defined criteria to measure their investment properties at fair value through net income. The primary objectives of the project were to: (1) better align U.S. GAAP with IFRS in connection with the FASB and IASB’s joint lease accounting project and (2) narrow the diversity in practice related to accounting and reporting by certain real estate entities. Refer to Dataline 2011-34, Investment property entities: The good, the bad and the ugly, for more background on the proposal.
The feedback on the proposal revealed that the majority of stakeholders do not support an entity-based approach, and the board received suggestions for several other approaches. At its August 8 meeting, the board discussed various alternatives focused on how (or whether) to proceed with this project, including alternatives recommended by stakeholders.
What are the key issues?
Several of the board members observed that recent decisions in the joint lease accounting project may eliminate a driving force behind the project. However, pending final conclusions on the joint leasing project, the board did not support dropping the project at this time.
The board debated numerous alternatives, ranging from continuing to develop an entity-based approach to completely discontinuing the project. One of the alternatives that generated significant discussion was to develop asset-based guidance for investment properties.
However, concerns were raised about the board’s ability to define “investment property.” Additionally, board members expressed concern about whether such guidance should include a requirement, or an option, to measure investment property at fair value.
For now, the board tentatively decided not to continue developing an entity-based approach for investment property. However, a final decision on the direction of the project was deferred to a future date.
How does this project interact with the investment company project?
At previous meetings, the FASB discussed the possibility of integrating certain aspects of the investment property entities project (such as presentation and disclosure matters specific to real estate funds) into the investment company project. While the board did not make a formal decision, a few board members indicated their reluctance to take this approach. One challenge is that the investment company project is a joint project with the IASB, while the investment property entities project is a FASB-only project. As a result, it is unlikely that certain areas of diversity in practice related to real estate entities will be addressed in the near term.
Is convergence achieved?
At this point, it is unclear if convergence will be achieved. The outcome will depend on whether the FASB decides to develop asset-based guidance for investment properties. Under IFRS, entities have the option (similar to a one-time policy election) to measure all of their investment properties at fair value. Even if the FASB pursues asset-based guidance, it remains to be seen whether there will be differences in the FASB definition of investment property as compared to IFRS, and whether the FASB will include a requirement or an option to measure investment property at fair value.
What's next?
The board plans to evaluate an asset-based approach to investment property in conjunction with a current research project (added in November 2011) focused on when a reporting entity should apply asset- or entity-based guidance to its nonfinancial assets. A preliminary report is expected in the next six to eight weeks. The board is likely to reconvene its discussion on investment property at that time.
Questions?
PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams that have questions should contact the Financial Instruments team in the National Professional Services Group (1-973-236-7805).
1Accounting Standards Update, Real Estate—Investment Property Entities (Topic 973)
Authored by:
Tom Wilkin
Partner
Phone: 1-973-236-4251
Email:tom.wilkin@us.pwc.com
Lou DeFalco
Senior Manager
Phone: 1-973-236-4141
Email:louis.defalco@us.pwc.com
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