February 8, 2013
FASB Update for Real Estate Ventures
By Alexander Narcise, Partner
In October 2011, FASB issued two proposed ASU's that affect real estate ventures for comments from the public. These comments have been received and the FASB is currently reviewing the comments.
The first proposed ASU, Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements, resulted from joint efforts with the IASB to develop consistent criteria for determining whether an entity is an investment company. Under U.S. GAAP, investment companies carry all of their investments at fair value (even if they hold a controlling interest in another company).
The primary changes in the proposed ASU relate to which entities would be considered investment companies, as well as certain disclosure and presentation requirements. The proposed amendments are intended to improve the comparability between entities that meet the criteria to be investment companies under U.S. GAAP and under the IASB's proposed amendments to IFRS.
The second proposed ASU, Real Estate—Investment Property Entities (Topic 973), is intended to develop accounting guidance for investment property entities. This would require an entity that meets certain criteria to measure its investment properties at fair value, rather than to apply lease accounting to each individual lease. The amendments also introduce additional presentation and disclosure requirements for an investment property entity.
The FASB noted that this proposed ASU is a result of its efforts to align the scope of entities that would apply the proposed accounting model under U.S. GAAP and IFRS and to address the diversity in practice about the accounting by real estate entities.
An entity that invests in real estate properties and meets the criteria to be an investment property entity under proposed ASU Real Estate—Investment Property Entities (Topic 973) would be an investment company. The following are the proposed criteria:
Nature of the business activities. Substantially all of the entity's business activities are investing in a real estate property or properties.
Express business purpose. The express business purpose of the entity is to invest in a real estate property or properties for total return including an objective to realize capital appreciation, for example, through disposal of its real estate property or properties. Real estate properties held by an entity for either of the following purposes do not meet this criterion:
- The entity's own use in the production or supply of goods or services or for administrative purposes
- Development for sale in the ordinary course of business upon completion.
Unit ownership. Ownership in the entity is represented by units of investments, in the form of equity or partnership interests, to which a portion of the net assets are attributed.
Pooling of funds. The funds of the entity's investors are pooled to avail the investors of professional investment management. The entity has investors that are not related to the parent (if there is a parent) and those investors, in aggregate, hold a significant ownership interest in the entity.
Reporting entity. The entity provides financial results about its investing activities to its investors. The entity can be but does not need to be a legal entity.
When Would the Amendments Be Effective?
The effective date will be determined after the Board considers the feedback on the amendments in this proposed Update. We will keep you posted on any new developments on the above proposed amendments.