FASB and IASB convergence: impacts on the industry

Real Estate Weekly, Feb 27, 2008 by Raymond G. Milnes, Jr., Paul H. Munter

In February 2006, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) released a memorandum of understanding renewing their commitment to the convergence of U.S. and international accounting standards and identifying current convergence projects.

The convergence efforts between the Boards have the potential to significantly impact the real estate industry on leases, financial statement presentation, revenue recognition, consolidations, discontinued operations, and investment properties.

Lease Accounting

The lease accounting project reflects the concern that neither the U.S. GAAP nor International Financial Reporting Standards (IFRSs) requirements do not result in the recognition of the rights and obligations that arise from lease transactions.

In particular, both Boards believe that a lease agreement conveys to the lessee both an asset--the right to use the leased property--and an obligation--the future lease payments.

In the initial discussions, the Boards have focused on the accounting by lessees and it appears that the project may lead to standards that require lessees to record most lease assets and liabilities on their balance sheets.

Financial-Statement Presentation

The financial-statement presentation project considers how items should be classified and displayed in the financial statements.

In the deliberations to date, the Boards have begun developing a model whereby all three basic financial statements--balance sheet, performance statement I (income statement) and cash flow statement--would be segregated into operating, investing, and financing activities.

Such an approach could have significant implications in the real estate industry where many transactions are a combination of financing and investing activities and significant judgment may be needed to classify those transactions in each financial statement.

Revenue Recognition

The Boards added the joint revenue recognition project to the agenda because, in the case of the IASB, it had only a single, high-level standard and, in the case of the FASB, it has numerous detailed standards organized by transaction and industry.

In the case of the IASB, the standard does not provide sufficient guidance for many transactions, including real estate transactions. In the case of the FASB, because the standards are developed by industry or transaction, similar arrangements can result in very different revenue recognition.

After nearly five years of effort, the Boards are hoping to issue a high-level discussion document later this year to describe and solicit input on two different approaches--the fair value approach and the customer consideration approach.

Consolidations

Currently, the IASB and FASB have very different approaches to consolidation. The IASB has a risk and rewards approach for special purpose entities (SPEs) and a "control so as to obtain economic benefits" approach for non-SPEs.

The FASB has a risk and rewards approach for variable interest entities (VIEs) and a controlling financial interest approach for non-VIEs.

The current plan is for the IASB to take the lead in this project working towards a discussion paper early in 2008. Because the IASB will be leading the effort, with the FASB likely to "jump on board" later, it will be important that constituents monitor and participate in the IASB's due process activities on consolidation.

Discontinued Operations

When the FASB last considered the issue of discontinued operations, it concluded that financial reporting Would be improved by "broadening the presentation of discontinued operations to include more disposal transactions."

In the years since then, many, particularly in the real estate industry, have questioned the usefulness of reporting discontinued operations with the concurrent reclassification of comparative periods each time an income-producing property is disposed.

Subsequently, as part of short-term convergence, the FASB and IASB concluded that discontinued operations presentation is appropriate for the disposal of a component of an entity that represents a separate major line of business or geographical operation.

Investment Properties

While U.S. GAAP has no current standard for investment properties, IFRSs contain specific guidance on the accounting for investment properties.

Although the FASB is still in the research phase on this project, it appears that once the Board activates the project, it is likely to pursue a fair value approach to accounting for investment properties.

In fact, it is possible that the focus of the project will be whether fair value should be an election or a requirement in the accounting for investment properties. As a consequence, once the FASB does move the project to a more active phase, it can be expected that the project will move forward very quickly using IAS 40 as the project's blueprint.

Conclusion

Convergence has been the driving force of the agendas for both the IASB and the FASB over the past five years. All indications are that it will continue to be a key priority for both Boards for several years to come.