Unfinished Work: Accounting Guidance for Investment Properties
In October 2011 the Financial Accounting Standards Board (FASB) issued proposed guidance on how to value investment properties. But instead of providing guidance on how to measure investment properties held by any entity, the FASB created a new type of entity — the so-called “investment property entity” (IPE). An entity would qualify as an IPE based upon contrived qualification criteria, and only these entities would be required to measure their investment properties at fair value.
The FASB received 80 comment letters on its proposed guidance and has summarized the feedback as follows:
“Most constituents commented on the form of accounting guidance for investment properties. The majority of those constituents did not support the Exposure Draft in its current form. Those constituents stated that a separate investment property entity concept should not be developed. Many constituents … stated that the determination of whether investment property is measured at fair value should not be based on the nature of the entity investing in the property.”
As we stated in our comment letter, the economic value of assets, including investment property assets, does not differ depending upon what enterprise owns them. Accordingly, the notion that investment properties should be valued at fair value only if “housed” within an investment property entity is not grounded in economic logic. As such, we fundamentally disagreed with the entity-based approach to investment properties. The general principle of allowing entity-specific guidance is detrimental to investor interests, as it does not allow for comparable financial reporting and economic decision making across entities.
We also have argued that the FASB proposal does not meet its stated objective of aligning U.S. Generally Accepted Accounting Principles (GAAP) with International Financial Reporting Standards (IFRS). In fact, the FASB’s entity-based guidance does not converge with International Accounting Standards — IAS 40, Investment Property — in the most fundamental manner. The International Accounting Standards Board’s (IASB) “asset-based” guidance applies to investment properties irrespective of its owner.
Where we disagree with the IASB guidance is that it includes an option to measure investment properties at either fair value or at cost. CFA Institute believes that the value of an asset increases or decreases based upon market conditions and hence should be measured at fair value. This view is supported by the CFA Institute membership. In a survey of our membership earlier this year, 80% of respondents said fair value is a relevant measurement basis for real estate held for investment purposes.
FASB Ceases Development of Entity-Based Guidance
Having received feedback on its proposed guidance, the FASB at its meeting in August decided to forego the investment property entity concept. We here at CFA Institute were certainly glad to hear that.
FASB Stalls on Development of Guidance for Investment Properties
Unfortunately, the FASB has decided that further research is required before it decides whether to develop asset-based guidance for investment properties, or to remove the project on investment properties altogether from the board’s technical agenda. So while the topic of investment properties remains on the FASB’s technical agenda, no work is actually underway to develop an asset-based approach. Hence, for all practical purposes the project has disappeared from the technical agenda.
Need for Development of Fair Value Asset-Based Approach
The majority of respondents in the FASB’s own outreach process have spoken in favor of an asset-based approach. To give their constituents what they want should be an easy win for the FASB. As we have continually urged, the FASB should require all investment properties to be measured at fair value so that investors receive the most relevant and comparable information necessary for their decision-making purposes. This is what some have described as “low hanging fruit.”