2014 Real Estate Industry Update
Making headway in today’s real estate market
Chris Dubrowski
Industry Professional Practice Director
Real Estate Services
Deloitte & Touche LLP
Wyn Smith
Deputy Industry Professional Practice Director
Real Estate Services
Deloitte & Touche LLP
Agenda
Standards Setting
FASB Projects
Regulatory Update
Copyright © 2013 Deloitte Development LLC. All rights reserved.
Disclaimer
• This presentation does not provide official Deloitte & Touche LLP
interpretive accounting guidance
• The views expressed are solely those of the presenter and are not
formal Deloitte & Touche LLP positions
• Check with a qualified advisor before taking any action
• See slides at the end for additional resources available on these topics
Copyright © 2013 Deloitte Development LLC. All rights reserved.
Standards Setting
Where are we and where are we going?
Convergence Progress in 2013 and 2014
• Approximately 30 FASB meetings and 20 IASB meetings during 2013
• In addition, approximately 10 Joint FASB/IASB meetings during 2013
• The majority of the FASB meetings included convergence topics
• The Boards have also held several education sessions and roundtables
• Project
–
–
–
–
–
–
–
Revenue recognition
FI - classification and measurement
FI – impairment
Leases
Investment companies
Consolidation
Insurance contracts
Current Path
Converged
Diverged
Diverged
Converged
Partially Converged
Partially Converged
Partially Converged
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Convergence Challenges
Hans Hoogervorst (IASB):
• Recent appointments of Americans to the IASB illustrate direct U.S. participation
in the IASB standard-setting process.
• However, the future level of U.S. leadership at the IASB would need to be
proportionate to its support of IFRS.
• IFRS constituents need the United States to clearly communicate its level of
commitment to a single set of global standards.
Leslie Seidman (former FASB Chair):
Accounting standards, to be usable in the U.S. cultural environment, must be:
• Open to consistent interpretation over time and between companies
• Accompanied by additional interpretive guidance, even after the implementation
period
Russ Golden (current FASB Chair):
• “I envision a long-term global standard-setting environment in which the FASB,
the IASB and other major capital market standard setters co-exist and
cooperate.”
• FASB’s first priority is to improve financial reporting for the benefit of investors
and other users of financial information in U.S. capital markets.
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Joint FASB and IASB Projects
Expected date
2012
H1
Projects
Investment Companies
Comments
2014
2013
H2
Final
Effective
Consolidation - Agent v. Principal
Final
Leases
ED
Comments
???
FI: Classification & Measurement
ED
Comments
Final
FI: Impairment
ED
Comments
Final
Final
(IASB Only)
FI: Hedging (General Model)
Revenue Recognition
Insurance Contracts
Comments
Final
ED
Comments
???
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Major FASB-only Projects
Expected date
2012
H1
Projects
Financial Instruments: Liquidity & Interest Rate
Disclosures
ED
Liquidation Basis of Accounting
ED
Going Concern
2013
Clarification of the Definition of a Business (formerly
Asset- or Entity-based Guidance for Nonfinancial
Assets)
H2
H1
Final
ED
Transfers and Servicing: Repurchase Agreements
Discontinued Operations
2014
Final
ED
Final
???
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Small GAAP vs. Big GAAP
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Private Company Council
• In May 2012 the FAF (FASB’s parent foundation) decided to establish
the Private Company Council (PCC) to
– Determine whether exceptions or modifications to existing U.S. GAAP would
benefit private company financial statement users
– Advise the FASB on how private companies should treat current active
projects
• The FASB still has the final say
– All exceptions and modifications proposed by the PCC are subject to FASB
ratification
– This is similar to how the EITF functions
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Private Company Council
The PCC has tentatively decided to:
Tenant
relationships
may no longer
be recognized
•
Not require separately recognizing non-contractual based intangibles
•
Allow goodwill to be amortized over the life of the primary asset, not to
exceed 10 years and use of simplified impairment model
• ASU 2014-02, Intangibles—Goodwill and Other (Topic 350), was issued
January 16, 2014; early adoption permitted.
•
Provide for a simplified hedge accounting treatment for “vanilla” variable-tofixed interest rate swaps
•
Can assume 100% effectiveness
•
Carry swap at settlement amount
•
Hedge designation/documentation can wait until financials are ready to
issue
• ASU 2014-03, Derivatives and Hedging (Topic 815) was issued January
16, 2014; early adoption permitted.
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Projects Impacting the Real Estate Industry
Clarification of the Definition
of a Business
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Asset- or Entity-Based Guidance
Current GAAP is inconsistent – Commercial property acquisitions are
generally business combinations, but dispositions are treated as asset
sales
For business combinations, expense acquisition costs, but for asset
acquisition, capitalize acquisition costs
The FASB has added a project that will:
• Determine whether asset-based or business-based accounting literature
would apply to entities that substantially consist of non-financial assets
(e.g., in-substance real estate)
• Reassess the definition of a business – maybe narrower
• Will NOT address accounting for acquisition costs
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Asset- or Entity-Based Guidance
The project will address the existing accounting differences between assetbased and business-based guidance that include:
• The measurement and timing of gain or loss recognition on sales of
assets when continuing involvement exists, including situations
whereby companies sell partial interests; and
• The measurement of retained interests that occur when a company
sells a partial interest in an asset
For the proposed revenue guidance, from whose perspective do you
evaluate “control” in a partial sale? If I sell you a part of an asset and we
now have joint control, I have given up “control” but you haven’t taken
“control” either!
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Conflict of Accounting Treatment
on Partial Sales
Transaction
Sell 50% interest and
lose control
ASC 810 (FAS 160)
ASC 360-20 (FAS 66)
Accounting Treatment Accounting Treatment
Gain on the 50%
interest sold AND for
the difference
between FV and
carrying amount of
40% retained
Gain only on the 50%
interest sold; retained
interest stays a book
value
Business
Asset
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Partial Sale Guidance - Example 1
REIT owns an office building with a carrying amount of $500 and fair value
of $1,000. REIT and Investor form a JV. Investor contributes $600 for a
60% interest in JV. REIT contributes the building and receives a 40%
interest in JV and a cash distribution of $600. The JV is now jointly
controlled.
Question: What literature governs REIT’s accounting for this transaction?
Question: What is REIT’s accounting?
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Partial Sale Guidance - Example 1 (continued)
ASC 360-20 (FAS 66) guidance on partial sales addresses the REIT’s
accounting:
Why? – Transaction is a sale of real estate
The journal entry to record the transaction:
Cash
$600
Investment in JV ($500 X 40%)
200
Building
$500
Gain on partial sale $600-($500 X 60%)
300
The REIT’s investment in JV is recorded at its carryover basis.
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Partial Sale Guidance - Example 2
REIT has a wholly-owned subsidiary that provides commercial real estate
brokerage services. The carrying amount of the subsidiary is $500 and it
has a fair value of $1,000. REIT sells a 60% interest in the stock of the
subsidiary to Investor for $600 cash. The subsidiary is now jointly
controlled.
Question: What literature governs REIT’s accounting for this transaction?
Question: What is REIT’s accounting?
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Partial Sale Guidance - Example 2 (continued)
ASC 810 guidance on deconsolidation of a subsidiary governs this
transaction:
The journal entry to record the transaction:
Cash
$600
Investment in unconsolidated sub
Net assets of consolidated sub
Gain
400
$500
500
The gain on the 60% sold is $300 ($600-($500X60%)). The retained
investment in the subsidiary is adjusted to fair value ($1,000 X 40%),
resulting in an additional gain of $200 ($400-($500X40%)).
So total gain is $500.
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Partial Sale Guidance - Example 3
REIT has a wholly-owned subsidiary whose assets consist solely of an
office building. The carrying amount of the subsidiary is $500 and it has a
fair value of $1,000. REIT sells a 60% interest in the stock of the
subsidiary to Investor for $600 cash. The subsidiary is now jointly
controlled.
Question: What literature governs REIT’s accounting for this transaction?
Question: What is REIT’s accounting?
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Partial Sale Guidance - Example 3 (continued)
ASC 360-20 guidance on partial sales addresses the REIT’s accounting:
Why? Pursuant to EITF 98-8, Accounting for Transfers of Investments That Are in
Substance Real Estate:
“…the sale or transfer of an investment in the form of a financial interest that is in
substance real estate should be accounted for in accordance with ASC 360-20.”
The journal entry to record the transaction:
Cash
Investment in unconsolidated sub($500 X 40%)
$600
200
Net assets of consolidated sub (building)
$500
Gain on partial sale ($600-($500 X 60%))
300
Same accounting as Example 1
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Business Combination or Asset Acquisition?
ASC 805-10-55:
A business consists of inputs and processes applied to those inputs that
have the ability to create outputs. Although businesses usually have
outputs, outputs are not required for an integrated set to qualify as a
business.
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Business Combination or Asset Acquisition?
ASC 805-10-55:
To be capable of being conducted and managed for the purposes defined,
an integrated set of activities and assets requires two essential
elements—inputs and processes applied to those inputs, which together
are or will be used to create outputs. However, a business need not
include all of the inputs or processes that the seller used in operating that
business if market participants are capable of acquiring the business and
continuing to produce outputs, for example, by integrating the business
with their own inputs and processes.
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Business Combination or Asset Acquisition?
ASC 805-10-55:
Determining whether a particular set of assets and activities is a business
should be based on whether the integrated set is capable of being
conducted and managed as a business by a market participant. Thus, in
evaluating whether a particular set is a business, it is not relevant whether
a seller operated the set as a business or whether the acquirer intends to
operate the set as a business.
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Business Combination or Asset Acquisition?
Hotel?
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Business Combination or Asset Acquisition?
Office Building?
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Business Combination or Asset Acquisition?
Corporate Headquarters Building
Simultaneously Leased Back to
Seller/User?
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SEC Comments
“You acquired two properties and simultaneously leased them back to
the seller, and these acquisitions were accounted for as asset
acquisitions. Please tell us how you evaluate each purchase
transaction to determine whether the acquired assets meet the
definition of a business or are an asset acquisition. Please tell us the
basis for your conclusion and cite the relevant accounting literature
relied upon.”
“Given that you did not acquire a lease in the acquisition of the
property, please tell us how you determined it would be appropriate to
allocate value to an in-place lease intangible asset as well as a belowmarket lease intangible liability.”
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Business Combination or Asset Acquisition?
Vacant Industrial Building?
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Business Combination or Asset Acquisition?
Industrial Building Leased NNN
to a Single Tenant?
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SEC Comment
“Please tell us how you determined that your acquisitions of 100%
net leased industrial buildings were business combinations as
opposed to asset acquisitions. Please refer to ASC 805-10-55.”
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Business Combination or Asset Acquisition?
Apartment Complex?
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Business Combination or Asset Acquisition?
Four-Unit Apartment Complex?
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Sign That the Apocalypse is Upon Us
Single-Family Home with a Lease in
Place?
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Single family homes are businesses?
“Please explain how you determine whether a home is accounted for
as a business or an asset upon acquisition. Explain to us how you
determined that all of your property acquisitions to date should be
accounted for as asset acquisitions, including the extent to which your
portfolio includes properties that had in-place leases versus properties
that were vacant upon acquisition.”
This comment resulted in a restatement – Corp Fin Staff believes that
a single family home with a lease in place is a business!
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Joint Ventures
Joint Ventures – Accounting at Formation
• Generally contributed assets and businesses are recorded by the JV at
historical cost
– Step-up possible when an equivalent amount of cash is contributed
• SFAS 160 became effective in 2009
– Loss of control of a business in return for an equity method
investment results in gain/loss (change in basis) for venturer
– Does this change the “historical cost” of the contributed assets for
the JV’s accounting?
• Data points
– Big 4 discussed with the SEC Staff a few years ago; no resolution
– E&Y joint venture guide seems to allow flexibility in step-up
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Joint Ventures – Example
• Businesses (not in-substance real estate) contributed by A and B, each
for a 50% interest
– A: Book value of $100, fair value of $500
– B: Book value of $300, fair value of $500
• SFAS 160 gains to A and B
– A: $400, resulting in investment carrying value of $500
– B: $200, resulting in investment carrying value of $500
• Basis at joint venture level
– Generally would be carryover basis of $400 ($100 plus $300)
– “SFAS 160” view would be $1,000 ($500 plus $500)
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Revenue Recognition
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Revenue Project Timeline
Larry Smith, FASB - the Board has spent more than a decade writing its revenue recognition
standard, longer than it took to meet the 1960s goal of putting a man on the moon.
- 1999 (Dec)
SEC Staff Accounting Bulletin No. 101 issued
- 2000 +
Various EITF activity related to revenue recognition
- 2002 (Jan)
FASB discusses revenue recognition project
- 2002 (May)
Revenue recognition project added to FASB’s agenda
- 2008 (Dec)
FASB Discussion Paper
- 2010 (June)
Exposure Draft on revenue recognition
- 2011 (Nov)
Revised Exposure Draft (360 comment letters)
- 2014 (1st Q)
Final Standard on revenue recognition expected
- 2017
Effective date of final standard (2018 nonpublic)
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Revenue Project
Overview
Core principle: Recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration the entity
expects to be entitled in exchange for those goods or services
Identify the
contract
with a
customer
(Step 1)
Identify the
performance
obligations
in the
contract
(Step 2)
Determine
the
transaction
price
(Step 3)
Allocate the
transaction
price to
performance
obligations
(Step 4)
Recognize
revenue as the
entity satisfies a
performance
obligation
(Step 5)
Revenue recognition under the model is control based.
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Revenue Project
Scope
− Applies to an entity’s contracts with customers
− Applies to a transfer or sale of nonfinancial assets (such as real estate)
that do not meet the definition of a business. Also includes “insubstance assets”
− Partial sales of nonfinancial assets are not addressed
− Does not apply to sale-leaseback transactions (continue to follow
current GAAP)
− Does not apply to:
•
Lease contracts (ASC 840),
•
Insurance contracts (ASC 944),
•
Certain financial instruments and other contractual rights or obligations,
•
Guarantees (other than product or service warranties), and
•
Nonmonetary exchanges to facilitate a sale to another party
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Potential Effects on Real Estate
Elimination of bright-line tests
• Prescriptive guidance provided by ASC 360-20 (Sales of Real Estate) and
ASC 605 (Construction) will be lost:
–
–
–
–
Buyer’s financial commitment
Collectibility of transaction price
Continuing involvement by seller
Sales to limited partnerships/joint ventures
- Guarantee buyer return
- Partial sales
- Condominium sales
• Will likely result in more transactions qualifying as sales of real estate with
gains being accelerated
– Example: Consider probability of a conditional repurchase obligation outside the
seller’s control
• UPDATE: Collectibility threshold was added in the October 30 joint board
meeting
– Must be probable (not necessarily reasonably assured) that the entity will
ultimately collect the consideration it is entitled to receive
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Investment Companies
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Investment Companies
Three Phases
I. Revised
definition and
certain disclosure
requirements (ASU
2013-08)
III. Accounting for
investments in real
estate in context of
investment
companies
II. Disclosure about
investments in
another investment
company (fund of
funds)
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Investment Companies
Two Phases
I. Revised
definition and
certain disclosure
requirements (ASU
2013-08)
III. Accounting for
investments in real
estate in context of
investment
companies
II. Disclosure about
investments in
another investment
company (fund of
funds)
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Overview of Phase I – ASU 2013-08
Scope
• Does not impact regulatory classification (e.g. 1940 Act)
• Will amend definition, provide measurement requirements and additional
disclosures
• Retains the REIT scope exception – REITs are not investment
companies (yet) (well, unless already investment companies)
• The Board does not intend to change practice for real estate entities for
which it is industry practice to issue financial statements that are
consistent with the measurement principles in Topic 946.
• IASB issued final guidance October 2012, effective January 1, 2014;
early adoption is permitted
• FASB issued final guidance (ASU 2013-08) on June 7, 2013, effective
January 1, 2014; early adoption prohibited
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Definition and Typical Characteristics of an Investment
Company
Required Attributes
Obtains funds from
investor(s) and provides
professional investment
management service
Business purposes &
substantive activities are to
invest funds for returns from
capital appreciation,
investment income, or both
Investment
Company
Additional 5
characteristics
(Not required to
meet all of these
criteria)
Multiple
investments
Multiple
investors
Unrelated
investors
Do not obtain benefits from
their investments that are
either:
• Other than capital
appreciation or investment
income
• Not available to other
noninvestors / not normally
attributable to ownership
interests
Equity or
partnership
interests
Manages and
evaluates its
investments on a
fair value basis
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Measurement and Consolidation
• Accounting for non-IC parent’s interest in IC subsidiary:
‒ Parent entity retains specialized accounting used by an investment
company subsidiary (consistent with current GAAP)
‒ Not converged with IASB
• IC controls another IC:
‒ No guidance on how an investment company would measure its
controlling interest (allow current industry practice to prevail)
‒ Not converged with IASB
• IC has non-controlling interest in another IC:
‒ Record at FV
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Disclosure and Presentation
Additional
required
disclosures
• Disclose that entity is an investment
company applying specialized
accounting
• Change in status and reasons for
change
• Financial support to any investees:
• Provided to investees during
reporting period
• Support contractually required & not
previously contractually required
• Contractually required but not yet
provided to investees
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Leases
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The Neverending Story
52
Original Exposure Draft (ED)
Issued in August 2010
Comment period ended
December 2010
Over 750 letters received
Revised ED
Issued in May 2013
Comment period ended
September 13, 2013
Over 600 letters received
Final Standard
Expected to be issued 2014?
Effective Date
Expected to be no sooner than 2017
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Lessee Accounting
A lessee’s determination of the appropriate expense recognition pattern
would be based on “whether the lessee acquires and consumes more
than an insignificant portion of the underlying asset”
Yes
Is the leased asset
“property”?
Lease term is a major
portion of asset’s remaining
economic life OR PV of fixed
lease payments accounts for
substantially all of the FV
Yes
Financing Approach
(Type A)
No
Straight-line
Expense Approach
(Type B)
No
Lease term is insignificant
to asset’s total economic life
OR PV of fixed lease
payments insignificant
relative to asset FV?
Yes
No
Straight-line
Expense Approach
(Type B)
Financing Approach
(Type A)
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Lessor Accounting
A lessor’s determination of the appropriate expense recognition pattern
would be based on “whether the lessee acquires and consumes more
than an insignificant portion of the underlying asset”
Yes
Is the leased asset
“property”?
Lease term is a major
portion of asset’s remaining
economic life OR PV of fixed
lease payments accounts for
substantially all of the FV
Yes
Receivable and
Residual Approach
(Type A)
No
Operating Lease
Approach
(Type B)
No
Lease term is insignificant
to asset’s total economic life
OR PV of fixed lease
payments insignificant
relative to asset FV?
Yes
No
Operating Lease
Approach
(Type B)
Receivable and
Residual Approach
(Type A)
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Respondent Feedback
In general…
• Most agree with stated objectives of the leases project and many support rightof-use asset approach
• Overall view is proposal does not satisfy the project’s objectives
• General feeling that the cost and complexity introduced by new model will not
result in any meaningful benefits to financial statement users
• Lessor model is not sufficiently built out – might make sense to keep existing
GAAP
• Substantially all recommend at least 3 to 5 years for implementation
On lease payments…
• Generally agree with definition of fixed lease payments.
• Mixed views on considering variable payments based on index/rate and on
reassessing lease payments.
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Respondent Feedback
On lease and non-lease components…
• Consider allowing lessees to estimate standalone selling price when an
observable standalone selling price is not available.
• Account for arrangement as a service when observable standalone price is not
available
• Additional guidance needed to understand the accounting for executory costs
such as common area maintenance, insurance, and taxes.
On lease classification…
•
•
•
•
Some recommend a single-model approach rather than dual-model approach.
Do not support classification of lease based on nature of the underlying asset.
Classification should be based on basis similar to ASC 840 and IAS 17
Definition of property needs to be expanded to include assets of similar
economic characteristics (integral equipment).
• Many feel land should always default to Type B classification as it is not
consumed.
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The Critics Have Spoken!
“Certain constituents…may advocate that all leases be accounted for under a
single approach. NAREIT would not object to this conclusion… so long as the
single approach mirrors the currently proposed approach for Property or Type B
leases. We believe that the vast majority of financial statement preparers and
users support the straight-line lease expense pattern…proposed for Type B
leases.”
- NAREIT
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The Critics Have Spoken!
“Certain constituents…may advocate that all leases be accounted for under a
single approach. NAREIT would not object to this conclusion… so long as the
single approach mirrors the currently proposed approach for Property or Type B
leases. We believe that the vast majority of financial statement preparers and
users support the straight-line lease expense pattern…proposed for Type B
leases.”
- NAREIT
“We have significant concerns with the approach... We also believe that the
boards have not yet sufficiently developed the ROU model for lessors and have
not made a compelling case that the information provided by the proposed lessor
accounting model represents a significant improvement over the existing
accounting model. Rather, the model introduced in the ED, if implemented, may
obscure the financial statements of lessors…”
- Deloitte
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More Rave Reviews!
“…costs to preparers of obtaining and reporting the information required by the
proposed new standard would be demonstrably higher with no definite benefits to
users. A standard that creates unneeded uncertainty at such a high cost without
guaranteeing an improvement for all parties is not a standard that should be
promulgated… We strongly recommend that the Boards abandon the proposed
lessor accounting changes at this time.”
- Healthcare Realty Trust, Inc.
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More Rave Reviews!
“…costs to preparers of obtaining and reporting the information required by the
proposed new standard would be demonstrably higher with no definite benefits to
users. A standard that creates unneeded uncertainty at such a high cost without
guaranteeing an improvement for all parties is not a standard that should be
promulgated… We strongly recommend that the Boards abandon the proposed
lessor accounting changes at this time.”
- Healthcare Realty Trust, Inc.
“Having to unwind an accounting construct put on the balance sheet and then
having to do my own analysis is not very desirable. I’d rather just have the data
there, and let me do with it what I think I ought to do with it.”
- David Trainer, Member of FASB’s Investor Advisory
Committee
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The Hits Just Keep On Coming!
“Critics think the rule-change is a costly solution to a minor problem. People who
read company accounts are all sophisticated enough to take into account firms’
lease obligations when they assess them. The change would force businesses to
set up central databases to record every lease of a year or more, even for items
such as coffee-machines that are now lumped into branch offices’ petty expenses.
In most cases there is no jiggery-pokery behind a company’s decision to lease: it
is often just a convenient way of spreading the cost of a vital but expensive asset.”
- The Economist
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The Hits Just Keep On Coming!
“Critics think the rule-change is a costly solution to a minor problem. People who
read company accounts are all sophisticated enough to take into account firms’
lease obligations when they assess them. The change would force businesses to
set up central databases to record every lease of a year or more, even for items
such as coffee-machines that are now lumped into branch offices’ petty expenses.
In most cases there is no jiggery-pokery behind a company’s decision to lease: it
is often just a convenient way of spreading the cost of a vital but expensive asset.”
- The Economist
“We believe the current proposals do not represent an improvement over current
GAAP, will not satisfy users, and will not justify the costs of implementation and
ongoing application. Change for the sake of change does not necessarily equate
to progress. We believe the Boards should aim for a high quality accounting
standard, not settle for the least bad compromise.”
- KPMG
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So what now?
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FASB Staff Proposals – Lessor Accounting
• Stick with existing “risks and rewards” model in IAS 17, which says a
lease is a sale or financing transaction when the lease:
‒ Transfers ownership at the end of the lease
‒ Grants a purchase option with significant economic incentive to exercise
‒ Otherwise transfers risks and rewards, for example-
• Lease term is for major part of economic life of the asset
• PV is substantially all of the fair value of the asset
• Asset is so specialized that lessor would have no alternative use
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FASB Staff Proposals – Lessor Accounting
• Go to a lessor “business model” approach
‒ Sale or financing lessors typically• Lease the asset only once or maybe twice
• Price any associated services separately
• Purchase the asset only as a result of the lease
‒ Operating lessors typically-
• Lease the asset multiple times to multiple lessees
• Lease a long-lived asset
• Price the lease as a commodity, not for a specific return
• Embed some services in the lease payments
FASB and IASB are jointly meeting next Tuesday and Wednesday
to discuss!
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Consolidation: Principal vs.
Agent
Consolidation Project Overview and Timeline
FASB
issues
FAS 167
IASB publishes
ED 10
Dec
2008
FASB defers FAS
167 for certain
investment
funds
FASB & IASB
agree to
develop single
model
June
2009
Oct
2009
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Jan
2010
FASB votes to
converge on
some, but not all
aspects of IASB
model
FASB holds
public
roundtables
Nov
2010
FASB begins to
redeliberate
certain aspects of
the model
IASB issues
Consolidation
Standards;
FASB exposes
principal vs.
agent
Jan
2011
Q4
2011
FASB to issue
guidance on
principal vs.
agent
Sept
2013
2nd Half
2014
FASB Principal vs. Agent: Overview
• Contains a single model for qualitatively assessing whether a decision
maker (or general partner) is a principal or agent of the other
stakeholders
• When assessing whether the reporting entity has “the power to direct the
most significant activities of the VIE that most impact the VIE’s economic
performance” in ASC 810, the reporting entity would need to evaluate its
decision-making authority as a principal or an agent
• Proposal would revise the definitions of “participating rights” and “kickout rights” and would align the analysis of theses rights under variable
interest entities, voting interest entities, and partnership models
• Would eliminate the deferral from ASU 2009-17 (formerly FASB
Statement No. 167) for certain investment fund advisors
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FASB Principal vs. Agent: Factors to Consider
1) Rights held by other parties (including kick-out and participating
rights)
– Substantive participating rights held by other parties are an indicator
that the decision maker is an agent
– Substantive kick-out rights held by a single party would be
conclusive decision maker is an agent
– Removal rights requiring the agreement of multiple parties (including
BOD) may still be considered substantive but would not, in isolation,
allow a decision maker to conclude that it is an agent.
– As number of multiple parties required to come together to exercise
removal rights increases, the likelihood that those rights would be
substantive decreases
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FASB Principal vs. Agent: Factors to Consider
2) The decision maker’s compensation
– Is the compensation of the decision maker commensurate with the
services provided?
3) Exposure to variability in returns from other interests (including
exposure through related parties)
– Magnitude and variability associated with the decision maker’s
economic interests (e.g., investments and guarantees)
– Is there exposure to both positive and negative returns?
• An interest that only exposes the decision maker to positive
returns would be less indicative of a principal relationship
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Financial Instruments
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Classification and Measurement – IASB Model
Debt-instrument financial assets (e.g., debt security, loan,
receivable)
Financial
liabilities –
amortized
cost*
FV option
for debt is
eliminated
Financial
assets –
assess cash
flows
SPPI
Not SPPI
• With certain
exceptions
Assess
business
model
Held to collect:
amortized cost
Hold & sell:
FV-OCI
SPPI =
Solely payments of
principal and interest
FV-NI (residual)
Do not assess
business
model
FV-NI
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Classification and Measurement – FASB Model
Overview
Debt instrument financial assets (e.g., debt security, loan receivable)
• FASB is further analyzing, and considering improvements of current
requirements related to the classification and measurement of loan
receivables and investments in securities under U.S. GAAP
• Outcome will either be a single classification and measurement model
for both loans (including trade receivables) and investments in debt
securities, OR retain the separate accounting guidance under U.S.
GAAP for classifying and measuring investments in debt securities and
loans
Financial liabilities – amortized cost (with certain exceptions)
• Fair value option for debt is eliminated
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Classification and Measurement – FASB and IASB
Investments in equity securities
New (tentative) Approach
• Marketable and nonmarketable
equity securities —at FV-NI
Practicability exception —
Nonmarketable equity securities at
cost less impairment plus or minus
changes in observable prices.
What’s Changed?
• For marketable equity securities, no
AFS category with changes in FV
recorded in OCI.
• Equity method — Investors that have
significant influence apply the equity • The FVO for equity method
investments replaced by an FV-NI
method of accounting unless the
requirement for equity investments that
investment is held for sale, in which
are held for sale. Present HFS
case FV-NI.
separately.
• Single-step impairment approach to
nonmarketable equity securities and
equity method investments.
• Entities would no longer be required to
determine whether impairment losses
are other than temporary.
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Impairment
Overview
FASB
• Issued a proposed ASU in December 2012 and received approximately
350 comment letters
• Proposal presents FASB’s model for the impairment of financial assets
(including loans, debt securities and trade receivables) measured at
amortized cost or at FV-OCI
IASB
• Proposed amendments to IFRS 9 issued in March 2013 with comments
due early July
• Proposals are similar in scope, but present a different model for the
impairment of financial assets
Joint deliberations began in the 4th Quarter of 2013
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Impairment
FASB proposed model - current expected credit loss model
• Single measurement method for all financial assets
(not limited to 12 months and no transfer notion)
• Current expected credit losses – i.e., current
estimate of future contractual cash flows that
management does not expect to collect during life of
financial assets
Measurement
Objective
• Contemplates “all supportable internally and externally
available information…, including past events, current
conditions, and reasonable and supportable
forecasts”
• Requires consideration of a scenario where a loss
occurs.
Observation: Lifetime loss allowances on otherwise
“performing” balances could occur.
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Impairment
IASB proposed model – 3 bucket approach
Bucket 1
Bucket 2
Bucket 3
Financial assets classified
as amortized cost or FVOCI generally start in this
bucket (excluding certain
receivables and purchased
credit impaired loans)
Financial assets evaluated
as a group …
Financial assets evaluated
individually …
Allowance: Lifetime losses
taking into account the
probability of default over
the next 12 months
… for which there has been a significant deterioration in
credit quality since initial recognition (except high quality
assets)
Allowance: Lifetime losses taking into account the
probability of default over the life of the loan
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Discontinued Operations
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Discontinued Operations
• Project objective
– To improve the definition and reporting of discontinued operations
– Converges with IFRS
• Raises the threshold for reporting disc ops
– The component or group of components is part of a single coordinated plan
to dispose of a separate major line of business, or
– A separate major geographical area of operations
• Current scope exception for equity method investments is now
removed
• Transition – will be effective prospectively
• Timing
– Standard to be issued in March or April of 2014
– Will be effective on January 1, 2015 for public companies and January 1,
2016 for private companies
– Early adoption will be permitted
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Regulatory Update – PCAOB and SEC
PCAOB Update
PCAOB Proposed Changes to Audit Report
PCAOB proposed two new standards on the auditor’s reporting model
and on the auditor’s responsibilities.
Changes would include:
•
Addition in the auditor’s report of a new section in which critical audit matters (CAMs)
specific to an audit would be communicated
•
Enhanced language in the auditor’s report about the auditor’s responsibilities, and new
statements in the report intended to communicate more information about the audit and
the auditor, including disclosures about auditor independence and tenure
•
An expansion to specify the auditor’s responsibilities for other information in the annual
report, and disclosure about this responsibility in the auditor’s report, along with a
statement about the results of the new required evaluation of that other information
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PCAOB Proposed Changes to Audit Report
NAREIT comments on Critical Audit Matters
The requirement to disclose critical audit matters in the audit report could potentially:
“Confuse and mislead users with a piecemeal discussion of audit procedures that readers of
the financial statements have no context or basis to understand;
“Introduce situations when the auditor is disclosing sensitive information that is not otherwise
required to be disclosed by the issuer:
Duplicate information already disclosed by the issuer:
Increase audit fees for, among other things, the senior level time the auditor would incur
describing the critical audit matters for purposes of drafting the proposed disclosure and
incremental time discussing those matters and the related disclosure with management and
the audit committee; and
Exacerbate existing time pressures to meet financial reporting deadlines.”
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PCAOB Inspection Findings
• Internal controls over non-routine transactions
• Internal controls over cash flow statement
• Internal controls over evaluation and documentation of accounting
issues
• Revenue completeness testing
• Journal entry testing
• Information Produced By the Entity (IPE) used in the performance of a
control
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SEC Comments on Real Estate
Companies
SEC Review Process
• About 9,000 domestic and 1,000 foreign registrants
• All issuers reviewed at least every three years
Percentage of issuers reviewed:
• Continuous reviews of large financial services registrants
• New Office of Disclosure Standards – clarity, repetition
• Use of data analytics in the review of filings (ROBOCOP)
• Staff is listening to analyst/earnings calls, reviewing press releases and
websites and issuing comments
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Give examples in your response
“Where a comment below requests additional disclosures to be made,
please show us in your response what the revisions will look like.”
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Yes, they follow up on their comments!
“We note that, in response to our comment 7 of our comment letter
dated you stated that you will revise future Exchange Act reports to
include the statement that “the Company believes that these rents are
indicative of rents to be achieved on leases expiring in the next
period.” We have been unable to locate this disclosure.”
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MD&A – results of operations
“Please revise your MD&A to include a more detailed discussion of
the consolidated operating results of the company prior to your
discussions of segments. In this regard, we believe your segment
analysis should be used as a supplement to, not a replacement of, a
discussion and analysis of the line items presented within your
audited financial statements.”
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Cash flow statement – investing activities
“Please disclose the cash outflows from real estate acquisitions,
development, and lease costs separately for each year presented in
your statement of cash flows.”
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Debt covenants
“You are subject to financial covenants under your debt agreements.
Please disclose the specific terms of the covenants to which you are
subject with any required ratios/amounts. Please disclose the actual
ratios/amounts as of each reporting date for any material debt
covenants for which it is reasonably likely that you will not be able to
meet, along with the computations used to arrive at the actual
ratios/amounts with corresponding reconciliations to US GAAP
amounts.”
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Consolidation
“We note that you own a 75% interest in XX LLC, but do not
consolidate the entity since you share decision making abilities and
control with your joint venture partner. Please provide us with your
analysis of this entity, including how you determined that you share
decision making and control with the joint venture partner, your
determination of whether or not the entity is a variable interest entity,
and how you identified the primary beneficiary.”
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Dividends per share
“We note that you have included “distributions per share” on the face
of your income statement versus in the notes to your financial
statements. Tell us how your disclosure complies with the guidance in
ASC 260-10-45-5.”
Here’s ASC 260-10-45-5:
Per share amounts not required to be presented by this Subtopic that
an entity chooses to disclose shall be computed in accordance with
this Subtopic and disclosed only in the notes to the financial
statements…
OK, I GOT IT, GAAP SAYS NOT ON THE FACE,
BUT…
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Dividends per share (continued)
SEC’s 10-Q rules say:
S-X 210.10-01(b): “the following additional instructions shall be
applicable for purposes of preparing interim financial statements:
(2) If appropriate, the income statement shall show earnings per share
and dividends declared per share applicable to common stock.”
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Exhibits - Certifications
“We note that in paragraphs 4 and 5 you have deleted the "(s)"
following "certifying officer(s)," you have replaced “directors” with
“trust managers” and have deleted the parenthetical "(or persons
performing the equivalent functions)." In future filings, please file your
certifications exactly as set forth in Item 601(b)(31)(i) of Regulation SK.”
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Reclassifications
“Given the types, amounts, and number of reclassifications from prior
year, please provide to us management’s assessment as to whether
these changes were the result of errors in previously issued financial
statements.”
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Please include reading glasses
“We note that your cover page is written using a type size that is
difficult to read, especially with its concentration of text. Please ensure
that the prospectus is printed in size 10-point font or greater.”
“Please increase the size of the chart so that it is legible.”
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Deloitte Publications and Resources
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– See more information at www.deloitte.com/us/techlibrary
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Questions?
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About Deloitte
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This presentation contains general information only and Deloitte is not, by means of this
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