Investment property a likely target for valuation change

The banking world is buzzing with the possibility that investor balance sheets are about to be vastly reshaped. American rule makers in the accounting industry are looking to change the way land and investments are valued.

According to Generally Accepted Accounting Principles (GAAP), such properties are currently held at historical cost, and depreciated yearly. Soon, investors may be required to hold them instead at fair-value.
 
The Financial Accounting Standards Board (FASB) has tentatively voted to expand fair-value accounting to land and buildings held for investment. No implementation date has been set at this time, but a ruling is expected in 2011.
 
If fair value becomes the rule, it will mean that hundreds of billions of dollars of commercial property will be accounted for in a way that will completely shuffle the balance sheets of real estate companies – which is a change that will be reflected in net income.
 
The National Association of Real Estate Investment Trusts (NAREIT), a trade association, told Reuters that the companies most affected will be real estate investment trusts (REITs), which own approximately $500 billion of commercial property.
 
"I have heard people say if we report fair value, the information is more timely and transparent," said George Yungmann of NAREIT. He added that NAREIT is not advocating for fair value, but is simply providing input for FASB.
 
Currently, REITs value buildings at historic cost. They are subject to depreciation charges every year, which critics say is not realistic because even in a real estate slump, these properties generally appreciate.
 
How much this would affect balance sheets depends on the age of the properties. Those that have been depreciated for decades will see a major step up in value.
 
"Other assets that were bought at the peak of the market, maybe in 2006 or 2007, might have significant declines in value that haven't been recorded because they are not considered impaired,” Tom Wilkin, a real estate partner at PricewaterhouseCoopers (pwc), told Reuters.
 
FASB hopes to move U.S. accounting closer to International Financial Reporting Standards set by the London-based International Accounting Standards Board. This rule would coordinate with the fair-value option allowed in International Accounting Standard 40. However, the difference between the international rule and the FASB rule is that in the U.S., fair-value would be required rather than optional.
 
The use of fair-value accounting could create “a more timely picture of commercial real estate values,” in the U.S., according to an article in Bankerandtradesman.com. The article went on to say that the UK has been reporting real estate at fair value for years, and, as a result, prices of commercial property corrected much sooner than they did here during the recent downturn.
 
A pwc spokesperson told Reuters that while FASB hasn’t yet determined which companies would be required to use fair-value accounting, REITs, real estate operating companies, and those that hold property for capital appreciation or rent are likely to be affected. Analysts say it’s too soon to tell how fair-value accounting will affect the share prices of REITs.
 
Wilkins said companies involved in real estate feel “guarded” about the possible change.
 
"I think they're comfortable to a large degree with where they are," Wilkin said. "There are certain aspects of accounting today that they don't like. This would fix it, but [whether] its is worth the change is, I guess, the concern."
 

Related blogs:

You may like these other stories...

IRS must take oath on Lerner emails: judgeMackenzie Weinger of Politico reported on Thursday that a federal judge ordered the IRS to explain under oath how it lost emails connected to Lois Lerner, the ex-IRS official at the...
Credit Suisse says pension assets at risk unless court delays sentencingJohn Letzing of the Wall Street Journal reported on Wednesday that Credit Suisse Group AG says its management of billions of dollars in assets for...
The prospect of International Financial Reporting Standards (IFRS) being fully adopted in the United States in the near future are growing less likely, as the Financial Accounting Standards Board (FASB) and the International...

Upcoming CPE Webinars

Jul 16
Hand off work to others with finesse and success. Kristen Rampe, CPA will share how to ensure delegated work is properly handled from start to finish in this content-rich one hour webinar.
Jul 17
This webcast will cover the preparation of the statement of cash flows and focus on accounting and disclosure policies for other important issues described below.
Jul 23
We can’t deny a great divide exists between the expectations and workplace needs of Baby Boomers and Millennials. To create thriving organizational performance, we need to shift the way in which we groom future leaders.
Jul 24
In this presentation Excel expert David Ringstrom, CPA revisits the Excel feature you should be using, but probably aren't. The Table feature offers the ability to both boost the integrity of your spreadsheets, but reduce maintenance as well.