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IFRS
How wide is the GAAP?
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Why a subcommittee?
• Objectives and Concerns
• IFRS 9 Exposure Draft – Should we have commented?
• First project – Compare and contrast Fair Value and Revenue Recognition
• Smaller steps – There is a lot out there
• Conclusion – Must keep on top of issues
• Timing of conversion – 2014 still being stated but not likely
• No Investment Company treatment in IFRS
• Approach to “Convergence”
• Adopting other practices – FAS 157 = Fair Value Measurement Exposure Draft
• Concurrent development – Lease accounting
• Global issues – FASB to create a task force for addressing fair value for non-financial assets and liabilities.
• Definitions and terminology
• Existing words: Definitions do not necessarily match – Joint Venture? Borrowing Costs?
• New Words: Associate? Service Charge? Amortisation?
• State of flux
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REVENUE – STRAIGHT-LINE RENT
• US GAAP
• Historical Cost: Required per ASC 840-20-25
• Fair Value (REIS): REIS Chapter 2, 4.10(b) - Not recorded as rent until earned and billable.
• IFRS
• Required practice under IFRS
• IAS 17:50
“Lease income from operating leases shall be recognised in income on a straight-line basis over the lease term,
unless another systematic basis is more representative of the time pattern in which use benefit derived from the
leased asset is diminished.”
• No specific exemption in either IAS 39 (Financial Instruments: Recognition and Measurement) or IAS 40
(Investment Property) for fair value reporters.
• Industry practice and audited financials support treatment
• Performance Measurement Issues
• TWR for REIS – Not considered
• TWR (IPD) – Income included in numerator and asset not in denominator
• Income returns different until entire asset is amortized
• Appreciation returns may differ when asset is written off before full amortization.
• Which approach is correct?
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REVENUE – TENANT INCENTIVES
• US GAAP
• SEC Clarification: Potential for incentive treatment needs to be carefully evaluated.
• Historical Cost: Straight-line incentives to revenue over lease life.
• Fair Value: Asset is valued with other real estate.
• IFRS
• IAS 17:IN11 – Commissions are capitalised and amortised over lease life
• IAS 17:IN12 – Does not permit the expensing of lessor direct costs
• SIC 15:3 – Lessor shall recognise aggregate costs of incentives as a reduction of revenue of the lease life.
• Less room for interpretation – more incentives.
• Performance measurement
• US GAAP fair value funds: This is not contemplated on the Fair Value basis of accounting
• IFRS: Component of revenue – likely same as straight-line rent
• Which approach is correct?
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REVENUE – ESCALATIONS/SERVICE
CHARGES/RECOVERIES
• US GAAP - ASC 605-10-25 Revenue Recognition
• 3 types of leases: Gross, Net, & Direct net
• Tenants’ share of expenses varies within each type
• Geography: Revenue component only
• IFRS - IAS 18: 8 & 20
• Service charge income is the recovery of service charge expense
• Entity acting as principal versus agent
• Geography: Service charge income and expense both in the revenue section
• Performance Measurement:
• Net income… no difference
• When examining components of net income, differences will arise (e.g. expense ratio)
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REVENUE – LEASE ACCOUNTING
• Current world
• Operating and Capital lease treatment is relatively similar between US GAAP and IFRS
• IFRS – lease contract scope is wider – right to use asset
• Proposed revisions to ASC 840 / IAS 17
• Project is being jointly discussed – Lessee treatment only?????
• Timeline: Exposure draft 2Q10, Standard 2Q11
• Lessee
• Asset for right to use and liability for obligation to pay. Valued at lessee discount rate.
• Lessor
• Many industries wanted this piece addressed prior to lessee issuance
• Diverging opinions on which model to proceed with
• No operating leases
• IASB has tentatively decided that a lessor of investment properties carries assets at fair value per IAS 40, that
the new lessor accounting requirements would not apply.
• Performance measurement
• Still more to come here since the geography of revenue and expense are based on the model/theory chosen
• Likelihood that if not exempted there will be adjustments for returns
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FAIR VALUE – IFRS BACKGROUND
• IASB addressing fair value
• IASB seeking to create a new standard to establish a single source for all FV guidance
• Starting point in developing the FV measurement exposure draft was ASC 820 (FAS 157)
• Exposure draft published in May 2009 – comment period is closed
• IASB in the process of analyzing the responses to the request for input on the application of FV measurement
principles in emerging and transition economies
• Final standard expected in Q3 2010
• IAS 39 replacement project (IFRS 9)
• IFRS important literature
• IFRS 7 – Financial Instruments: Disclosures
• IFRS 9 – Financial Instruments
• IAS 28 – Investments In Associates (or IAS 31 – Interests In Joint Ventures)
• IAS 39 – Financial Instruments: Recognition And Measurement
• IAS 40 – Investment Property
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FAIR VALUE – DEBT
• US GAAP
• FV is the price that would be received to sell an asset or paid to transfer a liability
• The FVO permits entities to choose to measure financial liabilities at FV at specified election dates
• Unrealized G/L on items for which the FV option has been elected reported in earnings, or another performance
indicator if the business entity does not report earnings (ASC 825-10)
• REIS requires that the FVO be elected for each note payable instrument (REIS FV Manual 4.04)
• IFRS
• Currently, FV is defined as the amount for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s length transaction
• Definition of FV in the FV ED is the same as the US GAAP definition
• IAS 39 states that a financial liability designated as at Fair Value Through Profit and Loss (FVTPL) must meet
either of these conditions:
a) It is classified as held for trading, or
b) Upon initial recognition, it is designated by the entity as at FVTPL (IAS 39.9)
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FAIR VALUE – DEBT (cont.)
• Disclosure
• Both standards require similar information regarding valuation techniques, inputs used to develop the fair value
measurements, and disclosure by class of assets and liabilities
• IFRS 7 requires additional disclosure regarding the nature and extent of exposure to risks (credit risks, liquidity
risks, and market risks) arising from financial instruments and how these risks are managed
• IFRS requires a sensitivity analysis of market risks
• Amendment to IFRS 7 issued in March 2009 added disclosure requirements similar to the US GAAP FV
hierarchy
• Transaction costs – the issue
• US GAAP:
• ASC 825-10-25-3 - If FVO has been adopted, upfront costs and fees are recognized in earnings
• REIS FV Manual 4.05 - Transaction costs related to loans payable are recorded as a reduction in
earnings incurred in the statement of ops
• IFRS:
• IAS 39.43 - If FVO has been adopted, the financial liability is initially measured at FV and
transaction/finance costs are expensed
• No similar REIS requirement to value
• Impact on performance measurement
• Similar treatment unless FV option is not elected – can cause material numerator issues if not identified
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FAIR VALUE –
IFRS: SUBSIDIARIES, ASSOCIATES & JOINT VENTURES
INVESTMENT
Level of control
determines how to
account for
investment
control investment in
subsidiary
signif. influence investment in
associate
joint control interest in joint
venture
(not typical for RE)
Guidance:
IAS 27
Consolid. & Separ.
Financial Stmts
Guidance:
IAS 28
Investments in
Associates
(however, exemption
points to IAS 39)
Guidance:
IAS 31
Interests in Joint
Ventures
Accounting:
Equity method
unless governed by
IAS 39
Accounting:
Proportionate
consolidation or
equity method
Accounting:
consolidation
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FAIR VALUE –
IFRS: SUBSIDIARIES, ASSOCIATES & JOINT VENTURES
• Accounting treatment for joint ventures / associates
• US GAAP: generally accounted for using the equity method of accounting however ASC 825 gives entities the
option to account for equity method investments at FV (and REIS requires investment to be measured at FV)
• IFRS: accounted for using the equity method UNLESS the investment is held by a venture capital org or mutual
funds, unit trusts and similar entities and the investment is designated as at FVTPL upon initial recognition in
accordance with IAS 39 (IAS 28.1)
• Differences between IAS 28 Investments in Associates and IAS 31 Interests in Joint Ventures
• Use IAS 31 for joint ventures that have a contractual agreement whereby two or more parties undertake an
economic activity that is subject to joint control
• IAS 31 permits but does not encourage the use of equity accounting for interests in jointly controlled entities;
proportionate consolidation is currently the preferred accounting method (IAS 31.40)
• However in 2007 the IASB issued an ED that would amend IAS 31 to eliminate proportionate consolidation of
jointly controlled entities (final standard expected in Q1 2010)
• Impact on performance measurement
• Similar accounting treatment under US GAAP and IFRS
• REIS requires FV to be elected in accounting for investments in joint ventures
• Investments in associates that are accounted for under IAS 39 are designated as at FVTPL
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FAIR VALUE –
ACQUISITIONS & DAY ONE GAINS/LOSSES
•Accounting treatment
• US GAAP: FV required for REIS-compliant funds
• IFRS investment in investment properties: FV or cost (IAS 40)
• IFRS investment in JV (no joint control): Equity method unless the investment is designated as at FVTPL on
initial recognition in accordance with IAS 39 (IAS 28.1)
•Transaction/acquisition costs
Accounting Basis
US GAAP - Cost
US GAAP - Fair Value
IFRS Investment Properties
IFRS Associate
Accounting Basis
US GAAP - Cost
US GAAP - Fair Value
IFRS Investment Properties
IFRS Associate
INITIAL RECOGNITION
Literature
ASC 805
ASC 820/825 (REIS 4.03)
IAS 40.20
IAS 39.43
Treatment
Expense
Capitalize
Capitalize
Expense
SUBSEQUENT RECOGNITION
Treatment
Expense
Day One Unrealized Gain/Loss
Unrealized Gain/Loss (not day one IAS 40.30)
Day one Unrealized Gain/Loss (based on Market Value Definition)
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FAIR VALUE –
ACQUISITIONS & DAY ONE GAINS/LOSSES (cont.)
• Updates
• In Jan 2010, the IASB tentatively decided not to address recognition of day one gains or losses as part of the
FV measurement project
• Impact on performance measurement
• US GAAP fair value funds: day one gains/losses hit income statement
• IFRS: currently, no day one gains/losses however they will be captured at subsequent measurement; will have
day one gains/losses when FV ED issued
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Subcommittee Members
• Neal Armstrong – RREEF
• Jeff Carter – Kensington Advisors
• Susan Dooley – LaSalle Investment Management
• Bruce Frank – Ernst & Young
• Lee Phegley – Invesco
• Julie Rafter – Hancock Resource Timber Group
• Brian Ruben – Deloitte & Touche
• Matt Smith – Alliance Investment Advisors
• James Strezewski – LaSalle Investment Management
• Serena Wolfe – Ernst & Young