Appraisal Institute Calls for Development of Investment Property Accounting Standard
Financial Reporting of Leases Should Recognize Market Value or Provide Alternatives, Says
Nation’s Largest Professional Association of Real Estate Appraisers
CHICAGO (Dec. 15, 2010) – The nation’s largest professional association of real estate appraisers today recommended revisions to proposed lease accounting standards, urging the Financial Accounting Standards Board to prepare a separate investment property standard comparable to its international counterpart.
The Appraisal Institute made its comments in a letter to the Financial Accounting Standards Board and the International Accounting Standards Board. Co-signed by the American Society of Farm Managers & Rural Appraisers, the letter came in response to proposed lease accounting standards put forth by FASB and IASB in August that would require the reporting of a company’s lease liabilities using a discounted cost model, rather than fair (or market) value. Today is the final day for comments.
"As the largest professional organizations of real estate appraisers (valuers) in the United States, our organizations are strongly committed to improving the relevance and usefulness of financial reporting, particularly in the area of real estate. We commend and support the FASB and IASB’s effort to continue to develop high-quality accounting standards that improve the transparency, usefulness, and credibility of financial reporting," the organizations stated.
However, the organizations stated, "The proposed lease accounting standard attempts to apply a discounted cost model (i.e., an accounting approach) to real estate leasehold interests, when fair value measurements (i.e., a valuation approach) will provide a more accurate and transparent representation of real estate interests." For several years the appraisal organizations have strongly urged FASB and IASB to require companies to report the value of their real estate holdings at current market value.
The organizations urged consistency between the IASB and FASB exposure drafts in the area of investment properties and fair valuation. Currently, the IASB exposure draft exempts firms from the lease accounting arrangement if they adopt fair value rules under the investment property standard known as IAS 40. No similar exemption from the new cost based lease accounting standards is contained in the FASB Exposure Draft, because no comparable FASB fair value reporting standard for investment property currently exists.
"As such, we urge FASB to complete the Investment Property project as soon as possible," the organizations said. "Further, we support adoption of an exemption from the lease accounting standard for firms that adopt a fair value accounting model pursuant to an Investment Property standard, like the IASB has proposed."
The FASB and IASB proposals are partly in response to a report issued by the U.S. Securities and Exchange Commission that called for greater exposure of firms’ lease obligations on their balance sheets. FASB and IASB will hold public roundtable meetings to discuss their August 2010 exposure draft on leases Jan. 5 in Chicago and Jan. 6 in Norwalk, Conn. Preparers, auditors, investors and other users of financial statements are among those expected to participate. FASB and IASB are expected to adopt the new standards sometime in 2011.
Based in Norwalk, Conn., FASB is the private sector’s designated organization for establishing financial accounting standards that govern the preparation of financial reports by nongovernmental entities. Its website says that although the Securities and Exchange Commission has statutory authority to establish financial accounting and reporting standards for publicly held companies, the Commission’s policy has been to rely on the private sector for this function.
London-based IASB is an independent, privately-funded accounting standard setter with members from nine countries with a variety of backgrounds. According to its website, "the Board is committed to developing, in the public interest, a single set of high quality, understandable and enforceable global accounting standards."
To read the full text of the Appraisal Institute’s letter, go to http://www.appraisalinstitute.org/newsadvocacy/downloads/ltrs_tstmny/2010/AI-ASFRMAonProposedLeaseAccountingStandardFINAL.pdf
To learn more about FASB, go to http://www.fasb.org/. To learn more about IASB, go to http://www.valuebasedmanagement.net/organizations_iasb.html.
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The Appraisal Institute is a global membership association of professional real estate appraisers, with more than 25,000 members and 91 chapters throughout the world. Its mission is to advance professionalism and ethics, global standards, methodologies, and practices through the professional development of property economics worldwide. Organized in 1932, the Appraisal Institute advocates equal opportunity and nondiscrimination in the appraisal profession and conducts its activities in accordance with applicable federal, state and local laws. Members of the Appraisal Institute benefit from an array of professional education and advocacy programs, and may hold the prestigious MAI, SRPA and SRA designations. For more information regarding the Appraisal Institute, please visit www.appraisalinstitute.org.