December 2011

Financial reporting briefsReal estate

What you need to know about this quarter’s accounting, financial reporting and other developments

Accounting update ...............2IFRS ....................................8Regulatory developments...10Other considerations .........15Effective date highlights .....16Reference library ...............18

22 Financial reporting briefs Real estate December 2011

A chance to comment on the major projects affecting real estate companiesThe FASB and the IASB (collectively, the Boards) moved one step closer to the finish line on their major joint projects, with new exposure drafts either issued during the fourth quarter of 2011 or expected during the first half of 2012. We summarize significant developments on the revenue, leases and financial instruments joint projects below.

In addition, the FASB issued three separate exposure drafts that are likely to affect real estate entities — proposals on investment property entities, investment companies and consolidation accounting. We encourage you to evaluate these developments closely. Over the next several months, you will have an opportunity to comment on these important projects.

A few surprises lurk in the revenue recognition exposure draftThe Boards re-exposed their revenue recognition proposal, which would converge revenue recognition guidance under US GAAP and IFRS into a single model and replace essentially all existing revenue recognition guidance. The proposal could significantly affect the accounting for sales of real estate by eliminating much of the prescriptive guidance in ASC 360-20. Companies might recognize gains on sales of real estate sooner under the proposed guidance than they would under current guidance.

The Boards are proposing extensive new disclosure requirements for both year-end and interim financial statements. However, the Boards are proposing fewer revenue disclosures for interim financial statements than in annual financial statements. The FASB tentatively decided that the effective date for nonpublic companies would be at least one year after the effective date for public companies (i.e., at the earliest, annual periods beginning on or after 1 January 2016). Comments are due by 13 March 2012.

Look for our upcoming Technical Line publication, which will highlight issues for real estate companies to consider in evaluating the exposure draft and expected changes from current practice.

The leases joint project continues to evolveIn a recent move likely to affect many real estate companies, the Boards tentatively decided that lessors would not apply the proposed approach to lessor accounting (the receivable and residual approach) to leases of investment property. The Boards have not provided a similar exclusion to lessees of investment property. The Boards still have some work to do in defining exactly what the term “investment property” would include for purposes of this exclusion. However, the term appears to capture leases of real estate property, including any property improvements or integral equipment. Certain lessors of investment property would qualify as investment property entities as defined by a separate proposal and would apply specialized accounting (discussed below), and all other lessors would account for their leases of investment property as operating leases.

Accounting update

Welcome to the December 2011 Financial reporting briefs — Real estate. This quarter, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) moved another step closer to finishing their major joint projects and the FASB also issued exposure drafts related to their investment company, investment property entity and consolidation accounting projects.

This edition gives you the latest on standard-setting developments affecting financial reporting for real estate companies, along with important reminders for calendar year-end financial reporting.

The regulatory developments section includes highlights from the December 2011 AICPA National Conference on Current SEC and PCAOB Developments.

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Excluding leases of investment property from the receivable and residual approach for lessors is a big change. It has led some to request that the Boards expand the exception beyond investment property and reconsider some of their previous decisions on lessor and lessee accounting.

The Boards also tentatively decided that both lessees and lessors could follow either a full retrospective approach or a modified retrospective approach in transition. The modified retrospective approach would provide specific relief from some of the more difficult aspects of the full retrospective transition approach and is designed to reduce transition costs. Either of the transition approaches agreed to by the Boards would avoid the recognition of a disproportionate amount of lease expense in the periods immediately following transition that would have been recognized under the Boards’ original proposal.

The Boards had previously decided to re-expose the proposal and expect to issue the second exposure draft in the first half of 2012.

Real estate investment properties could be moving to fair valueThe FASB issued an exposure draft that would require real estate entities that meet the definition of an investment property entity (a new term) to measure investment properties at fair value, with changes in fair value recognized in net income. These entities would be required to present investment properties (at fair value) and related debt on their balance sheets and to recognize rental revenue in their income statements when lease payments are received or become receivable.

The proposal would be a significant change for entities that currently follow a historical cost accounting model (e.g. certain real estate investment trusts), as well as real estate funds that follow a variety of fair value accounting models. The proposal does not include an effective date. Comments are due by 15 February 2012.

What’s in a name? … defining that which we call an investment companyIn a separate but related project, the FASB proposed clarifying the definition of and accounting for investment companies. Real estate companies should consider the effects of both of the investment property entity and investment company proposals together. The FASB’s proposed definition of and accounting for an investment company are similar in many respects to current US GAAP but differ in some important areas that could change current practice.

For an entity to qualify as an investment company, it must meet each of the criteria outlined in the exposure draft (although entities registered under the Investment Company Act of 1940 would automatically qualify). In a change from current practice, investment companies would be required to consolidate controlled investment companies and investment property entities, including those that the parent does not wholly own.

Accounting update

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The specialized accounting for both investment companies and investment property entities would be preserved in consolidation. For example, a non-investment company parent that consolidates an investment company would retain the investment company subsidiary’s fair value accounting in consolidation.

In another important change, the proposal would eliminate the current scope exception for real estate investment trusts (REITs). An entity that invests in real estate (e.g. a REIT or real estate investment fund) would first have to evaluate whether it qualifies as an investment property entity. If it meets the definition of an investment property entity, it would be in the scope of that guidance and would not be in the scope of the investment company guidance. If the entity does not meet the definition of an investment property entity, it would then be evaluated as a potential investment company. The proposal requires new disclosures, including changes to the presentation of financial highlights. The proposal does not include an effective date. Comments are due by 15 February 2012.

Convergence closer on principal and agent relationshipsThe FASB issued an exposure draft defining principal and agent relationships for both variable interest entities and voting interest partnerships (and similar entities). The proposed amendments would require a decision maker in an entity (e.g. a general partner or an asset manager) to evaluate three qualitative factors to determine whether it is using its power over the entity as a principal or as an agent. If the decision maker is using its power as a principal, it would control the entity and therefore consolidate it. The proposal would lift the current deferral of FAS 167 for certain investment funds. The proposal also aligns the consideration of kick-out and participating rights between the Voting and Variable Interest models and brings consolidation requirements in US GAAP closer to IFRS. These changes to existing guidance could result in different consolidation determinations for real estate companies. The FASB is waiting to hear feedback from constituents before deciding on an effective date. Comments are due by 15 February 2012.

FASB moving forward on financial instrumentsClassification and measurementIn a reversal of a previous decision, the FASB tentatively decided to provide a conditional fair value option (FVO) for hybrid financial assets, similar to hybrid financial liabilities, to avoid bifurcation of an embedded derivative. The FASB also tentatively decided there would be a conditional FVO for groups of financial assets and financial liabilities if an entity (1) manages the net exposure relating to those financial assets and financial liabilities (which may be derivative instruments) and (2) provides information on that basis to the entity’s management.

Accounting update

55Financial reporting briefs Real estate December 2011

ImpairmentThe FASB and the IASB continue to jointly deliberate a new approach for recognizing and measuring credit impairment. The Boards tentatively decided that the three-bucket impairment model they have been developing should be based on a set of general principles and not be overly prescriptive. Under the model, loans and other financial assets that are debt instruments (collectively referred to as loans) would be classified into three buckets, based on their credit quality. The Boards tentatively agreed that the model should focus on the notion of credit deterioration, which would result in newly originated and acquired loans being classified in Bucket 1. Loans would then migrate to Buckets 2 and 3 if their quality deteriorates, resulting in greater impairment losses.

The Boards still need to (1) develop general principles that clarify the measurement objective of the model (particularly as it relates to Bucket 1), (2) propose a threshold at which the recognition of lifetime expected losses would be appropriate (including indicators to help determine when such a threshold has been met) and (3) develop disclosures that would promote transparency and comparability. The Boards expect to reconvene on these issues in their December meeting.

HedgingThe IASB completed redeliberations on its general hedging project and expects to release a review draft of the standard in early 2012, with a final standard expected later in 2012. US preparers have generally expressed support for many aspects of the IASB’s proposal (e.g., expanding and aligning hedge accounting with an entity’s risk management activities, allowing nonfinancial component risks to be hedged). However, there have been concerns expressed over the operability of the assessment of effectiveness principles and strong concerns over the IASB moving forward without including macro hedging in the standard. The IASB plans to address macro hedging in a separate proposal.

As for the FASB, it has not begun to redeliberate the hedging model it exposed in May 2010. The FASB has been primarily focused on revising its classification and measurement model and working with the IASB on the joint impairment proposal. The FASB wants to complete those efforts before returning to the hedging project. The FASB staff is conducting outreach to certain constituents in preparation for the Board’s redeliberations of the hedging project.

Boards agree on offsetting disclosuresWhile the Boards were not able to achieve convergence in their joint offsetting project, they did agree on common disclosure requirements for offsetting. This would allow investors and other users of financial statements to reconcile certain significant quantitative differences between balance sheets prepared under US GAAP and IFRS. Both Boards plan to issue final guidance soon. The disclosures under US GAAP would be required retrospectively for periods beginning on or after 1 January 2013. Apart from these new disclosure requirements, no other changes were made to the offsetting guidance under US GAAP.

Accounting update

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FASB dials back presentation requirements for OCIIn response to preparer concerns, the FASB deferred the requirement in ASU 2011-05, Presentation of Comprehensive Income, that companies present reclassification adjustments for each component of accumulated other comprehensive income (AOCI) in both net income and other comprehensive income (OCI) on the face of the financial statements. During the deferral period, the FASB plans to re-evaluate the requirement, with a final decision expected in 2012. In the meantime, companies are required to either present amounts reclassified out of AOCI on the face of the financial statements or disclose those amounts in the notes to the financial statements. During the deferral period, there is no requirement to separately present or disclose the reclassification adjustments in net income. The effective date of the deferral will be consistent with the effective date of ASU 2011-05. The deferral does not change the ASU’s main requirement that companies present components of net income, components of OCI and total comprehensive income in either one continuous statement or two separate consecutive statements.

In a related matter, the SEC staff recognized that adopting ASU 2011-05 could be a burden for companies that file a new registration statement after they have adopted ASU 2011-05 in an interim filing. In this situation, SEC rules otherwise would require the recasting of previously issued annual financial statements for the adoption of ASU 2011-05 before they could be incorporated by reference in the new registration statement. To provide relief, the SEC staff indicated it would not object if a registrant does not retrospectively revise previously issued annual financial statements as long as the registration statement provides prominent transparent disclosure of the change.

Qualitative impairment screen on goodwill is finalCompanies could get some relief in their annual goodwill impairment testing. The FASB issued ASU 2011-08, Testing Goodwill for Impairment, which gives companies the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Companies can skip the two-step impairment test if they determine it is not more likely than not that the fair value is less than the carrying value. The ASU is effective for fiscal years beginning after 15 December 2011, with early adoption permitted.

More disclosures required for multiemployer pension plansYou will be making additional disclosures this calendar year-end if you participate in a multiemployer pension plan. The FASB issued ASU 2011-09, Disclosures about an Employer’s Participation in a Multiemployer Plan, requiring companies to provide quantitative and qualitative disclosures about the financial health of the plans and their current and future commitments. The standard is effective this year for calendar year-end public companies, and the disclosures are required for all years presented. There is a one-year deferral for nonpublic entities, with early adoption permitted.

Accounting update

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FASB proposes some tweaks to the CodificationThe FASB issued an exposure draft with technical corrections and clarifications to a variety of topics based on stakeholder feedback. The FASB does not expect the technical corrections to significantly affect current accounting practice. The proposal includes amendments to make sure the use of the term “fair value” throughout the Codification conforms to the requirements of ASC 820. The conforming amendments are generally not substantive and are not expected to result in a change in practice for real estate companies. The proposal includes transition guidance specific to these conforming amendments. The FASB will provide an effective date in connection with issuing the final guidance in 2012.

Deconsolidation is top of mind for the EITFThe FASB ratified the EITF’s final consensus on Issue 10-E, Derecognition of In-Substance Real Estate. The EITF concluded that if a reporting entity ceases to have a controlling financial interest in a subsidiary that is “in-substance real estate” as a result of a default by the subsidiary on its nonrecourse debt, the entity must apply the accounting guidance for sales of real estate to determine whether it should derecognize the real estate. That guidance places a higher hurdle on the derecognition of the real estate, usually deferring recognition of a gain. The standard is effective for calendar year-end public and nonpublic companies in 2013 and is to be applied on a prospective basis, with early adoption permitted.

The FASB Chairman subsequently announced the addition of a research project to the Board’s agenda to address the question of whether a nonfinancial asset that has been placed in a legal entity should be subject to recognition and derecognition rules applicable to the asset or the consolidation literature. She also clarified that the accounting described in the final consensus is not required for lenders.

Separately, the EITF reached a consensus-for-exposure on Issue 11-A, Parent’s Accounting for the Cumulative Translation Adjustment (CTA) upon the Sale or Transfer of a Group of Assets within a Consolidated Foreign Entity That Meets the Definition of a Business. The EITF concluded that if a parent sells or transfers a group of assets within a consolidated foreign entity that meets the definition of a business (other than a sale of in-substance real estate or a conveyance of oil and gas mineral rights), it should recognize a portion of the CTA associated with the foreign entity in earnings. The EITF concluded that the proposed guidance should be applied on a prospective basis. No decisions were made on the potential effective date.

7Financial reporting briefs Real estate December 2011

Accounting update

88 Financial reporting briefs Real estate December 2011

General hedge accounting completedAs previously mentioned, the IASB completed redeliberations on a proposal that would significantly change IFRS general hedge accounting and open it up to more types of hedge relationships. A final standard is expected later in 2012 and will be incorporated into IFRS 9, Financial Instruments. The new standard would be applied prospectively. An effective date has not been finalized. The IASB is addressing macro hedging in a separate project.

IASB considering limited changes to IFRS 9The IASB is considering making limited changes to IFRS 9. In particular, the IASB will consider the interaction of IFRS 9 with conclusions reached in its separate project on insurance. The IASB will also consider the FASB’s classification and measurement model, which is currently under development. It is anticipated that any changes to IFRS 9 would be very limited to minimize the potential disruption to those entities that have early adopted or are close to adopting IFRS 9.

IASB defines investment entitiesThe IASB has published its exposure draft on investment entities, which proposes the same criteria for an entity to qualify as an investment entity as the recent FASB exposure draft discussed earlier (although the IASB would not allow entities registered under the Investment Company Act of 1940 to automatically qualify). Consistent with current US GAAP, the proposal would require an investment entity to measure its investments at fair value through profit or loss. In a point of contrast to the FASB’s proposal, the IASB would require a parent company to retain the fair value accounting by an investment entity subsidiary in consolidation only if the parent itself is an investment entity. Otherwise, the parent would consolidate the assets and liabilities of the underlying controlled investments. The IASB has not announced the proposed effective date. The comment period closes on 5 January 2012.

IASB to issue disclosure guidance on offsettingThe IASB completed joint deliberations with the FASB on offsetting disclosures that would enable users to reconcile certain significant quantitative differences between balance sheets prepared under US GAAP and IFRS. The new guidance would amend IFRS 7, Financial Instruments: Disclosures, and address inconsistencies in the application of the offsetting criteria in IAS 32, Financial Instruments: Presentation. Final guidance is expected soon. The proposed changes to IFRS 7 will be effective for periods beginning on or after 1 January 2013. The proposed amendments to IAS 32 will be effective for annual and interim periods beginning on or after 1 January 2014.

IFRS

The IASB remained active this quarter, re-exposing the revenue standard and completing redeliberations on general hedge accounting.

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IFRIC addresses definition of a business for investment propertyThe IFRS Interpretations Committee (IFRIC) decided to recommend that the IASB perform an Annual Improvement to clarify IAS 40, Investment Property, to indicate that the acquisition of an investment property may also constitute a business combination. The IFRIC recommended this improvement in response to constituent concerns about an apparent conflict between IAS 40 and IFRS 3, Business Combinations, concerning whether certain investment property meets the definition of a business. Any clarifications to IAS 40 have the potential to change current practice, so real estate companies that follow IFRS should monitor developments. The IFRIC decided not to address other constituent concerns around IFRS 3’s definition of a business. Instead, IFRIC referred these issues to the IASB for consideration as part of the IFRS 3 post-implementation project that is expected to begin in 2012.

IFRS

1010 Financial reporting briefs Real estate December 2011

2011 AICPA National Conference on Current SEC and PCAOB DevelopmentsRepresentatives of the SEC addressed accounting and reporting matters at the AICPA National Conference on Current SEC and PCAOB Developments (the Conference) in December 2011 in Washington, D.C. Representatives of the Public Company Accounting Oversight Board (PCAOB), the FASB and the IASB also shared their views on a variety of matters.

Senior SEC officials, as well as the chairmen of the FASB and the IASB discussed incorporating IFRS into the US financial reporting system. Highlights of their comments included:

• The SEC, the FASB and the IASB remain committed to the goal of a single set of high-quality global accounting standards and believe timing is not as important as establishing a strong framework for high-quality global standards.

• The SEC staff is working to complete its IFRS Work Plan in the coming months and is concurrently developing a recommendation for the Commission on whether, and if so, how IFRS should be incorporated into the US financial reporting system.

• The FASB and the IASB agree that the current approach of joint deliberations to achieve convergence on a project-by-project basis is not sustainable.

• After the release of the May 2011 SEC Staff Paper on IFRS, the SEC staff received strong support for retaining US GAAP as the statutory basis for US financial reporting and for a gradual transition incorporating international accounting standards into US GAAP.

Other key matters affecting preparers included:

• Disclosure considerations given the challenging economic environment

• Management’s responsibility to understand and be able to support valuation assertions for investments that are not exchange traded and for which companies use third-party pricing sources to obtain pricing information

• SEC staff focus areas during its filing reviews, including loss contingency disclosures, segment disclosures and adjustments in pro forma financial information

Our publications, 2011 AICPA National Conference on Current SEC and PCAOB Developments, and To the Point, Support grows for keeping US GAAP but basing future standards on IFRS, discuss the Conference in detail.

Regulatory developments

In this section, we provide key highlights from the December 2011 AICPA National Conference on Current SEC and PCAOB Developments as well as other updates on significant SEC and PCAOB initiatives.

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SEC issues two Staff Papers on IFRS adoption by US issuersAs part of its Work Plan to consider whether, and if so, when and how IFRS should be incorporated into the US financial reporting system, the SEC staff released two papers on the topic. In the first paper, the staff reported the results of its review of the financial statements of 183 companies that currently report under IFRS. The SEC staff observed that the financial statements ”generally appeared to comply with IFRS requirements.” However, the staff also noted that transparency and clarity could be enhanced and observed that diversity in application of IFRS” presented challenges to the comparability of financial statements.” The second paper summarized the results of the staff’s analysis of IFRS compared with US GAAP. This paper included an inventory and analysis of areas in which IFRS does not provide guidance or provides less guidance than US GAAP.

SEC and PCAOB zeroing in on third-party pricing servicesThe SEC and the PCAOB are increasing their focus on the valuation of investments, especially related to information obtained from third-party pricing sources. The SEC staff has made a number of public comments that management needs to have a sufficient understanding of the valuation models, assumptions and inputs used by third-party pricing sources to determine the fair value of securities. The SEC believes this understanding is fundamental to management’s responsibilities to maintain accurate books and records, to comply with GAAP (including related disclosure requirements), to maintain appropriate internal controls to prevent or detect material misstatements related to fair value measurements (and disclosures) and to assess the effectiveness of its internal control over financial reporting. The SEC staff has also begun requesting further information as part of its filing review process to understand a company’s use of valuation information from third-party pricing sources and to assess its understanding of such information.

The PCAOB has also focused on this area in both its standard setting and inspections. The PCAOB formed a Pricing Sources Task Force (Task Force) earlier this year to gain insight into current issues related to auditing the fair value of financial instruments. The Task Force gathered information about the processes third-party pricing sources use to determine valuations of securities that are not based on active markets and how information from these sources is used by preparers and auditors. The PCAOB expects to issue new proposed guidance in the area of fair value measurements of financial instruments during the first quarter of 2012.

Executive compensation rules coming soonThe SEC expects that rules regarding executive compensation matters to be disclosed in proxy statements will be proposed and adopted during the first half of 2012. They will not be effective for the upcoming proxy season. The disclosures covered by the rules include executive pay-to-performance relationships, pay ratios of chief executive officers to other employees and executive compensation clawbacks.

Regulatory developments

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SEC expects full disclosure of exposure to European sovereign debtGiven the uncertainty surrounding European sovereign debt, the SEC staff stated at the Conference that it expects registrants to make investors aware of any exposure they have to European sovereign debt. Currently, banking registrants are required to disclose exposure to foreign debt when the exposure exceeds 1% of the registrant’s total assets. However, the SEC staff believes registrants should provide these disclosures for European sovereign debt regardless of the 1% threshold. The staff specifically mentioned exposure to the debt of Greece, Ireland, Italy, Portugal and Spain. The disclosures should reflect gross and net exposure by country (i.e., net of any credit protection such as, for example, through credit default swaps), whether on a direct or indirect basis. The SEC staff made these comments in the context of discussing banking disclosures, but it is clear the staff expects all registrants to disclose their exposure to European sovereign debt.

Cybersecurity becoming a greater risk to companiesThe SEC staff provided a framework for registrants to consider in evaluating whether to disclose information about risks and incidents involving cybersecurity in their registration statements and periodic reports. The staff issued this guidance in response to an increase in the frequency and severity of cyber attacks and breaches. The framework addresses a number of the SEC’s existing disclosure requirements within management’s discussion and analysis, risk factors, description of a business, legal proceedings, financial statements and management‘s assessment of the effectiveness of disclosure controls and procedures. Registrants should evaluate whether their exposure to cyber incidents is material for disclosure under the various SEC requirements.

SEC forms Advisory Committee on Small and Emerging CompaniesIn an effort to reduce regulatory burdens affecting the raising of capital while still ensuring investor protection, the SEC formed a committee to focus on the priorities and interests of small businesses and smaller public companies (i.e., those with less than $250 million in capitalization). The committee held its first meeting in October. The SEC will seek input from the committee about SEC rules that trigger public company reporting and corporate governance requirements as well as rules that restrict general solicitation in private securities offerings.

SEC performing retrospective review of regulationsThe SEC solicited feedback to help it conduct retrospective reviews of existing regulations to comply with a July 2011 executive order from President Obama. The executive order recommended that federal regulatory agencies consider (1) modifying or repealing rules that may be outdated, ineffective, insufficient or excessively burdensome and (2) strengthening or modernizing other rules. We strongly support the SEC’s initiatives and sent a comment letter to the SEC detailing that support. We believe the SEC should develop post-implementation analyses and monitor and analyze the types of interpretive, waiver and no-action requests submitted to the SEC staff. We also believe the SEC should enhance transparency in the retrospective rule review process to provide greater opportunity for public input and create a framework to validate existing and new rules.

Regulatory developments

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SEC hosts roundtable on measurement uncertainty in financial reportingIn November, the SEC kicked off its first Financial Reporting Series roundtable on measurement uncertainty in financial reporting (i.e., financial statement measurements and disclosures when the outcome depends on future events). Panelists (investors, preparers, academics, auditors) discussed the need for more transparent, objective and comparative disclosures in financial statements. Panelists also discussed the existing framework for communicating uncertainty in financial reporting. Although no conclusions were drawn, it was clear that investors did not feel they were being provided with enough insight into the quality and variability affecting the more subjective amounts recognized in the financial statements. It remains to be seen what the outcome of these roundtables will be, but we expect the SEC to continue to move forward with this initiative with the goal of improving financial reporting.

PCAOB’s concept release on auditor rotation and independenceThe comment period related to the PCAOB’s concept release on auditor rotation and independence recently ended. The concept release sought comments on possible ways to enhance auditor independence, objectivity and professional skepticism, including mandatory audit firm rotation.

We submitted a comment letter that affirmed our view that auditor independence, objectivity and professional skepticism are of paramount importance, but that we do not believe mandatory audit firm rotation would improve audit quality or auditor skepticism. In fact, we believe it would harm corporate governance, investor interests and the objective of maintaining a robust, highly skilled independent accounting profession performing high-quality audits.

In addition, we outlined our ideas on measures that should be considered by the PCAOB to achieve its objective of enhancing auditor independence, objectivity and professional skepticism and our views on other ideas presented in the concept release. Among the ideas we outlined for the PCAOB to consider were: (1) further analysis of the root causes of the PCAOB’s inspection findings, since the preliminary analysis performed by the PCAOB to date has not tied an auditor’s tenure to audit quality, (2) greater interaction between the PCAOB and audit committees on issues related to standard setting and other aspects of audit policy, including specific inspection findings (when warranted), (3) increased audit committee transparency related to its oversight of the independent auditor and evaluation of the independent auditor’s performance and (4) continued improvements to audit standards and assessment of their effects on the auditor’s independence, objectivity and professional skepticism. The PCAOB will hold a roundtable on this concept release in March 2012.

Regulatory developments

Financial reporting briefs Real estate December 201114

PCAOB receives feedback on improving the auditor’s reportThe PCAOB hosted a roundtable in September on its concept release on improving the auditor’s reporting model. The comment period ended in September. The PCAOB is currently processing the feedback, which includes more than 150 comment letters. In the roundtable and comment letters, auditors, preparers and audit committee members generally agreed the auditor should not be the original source of information about a company. They also generally disagreed with proposals requiring the auditor to provide more subjective views of a company’s financial reporting. However, investors generally supported these aspects of the concept release. The PCAOB expects to expose a proposal for public comment in the first half of 2012.

PCAOB standard on communications with audit committees coming in 2012The PCAOB expects to re-expose for public comment a proposal on communications between the auditor and the audit committee by the end of December. The PCAOB intends the proposal to enhance the relevance and effectiveness of the communications between the auditor and the audit committee, and emphasize the importance of effective two-way communication. The original proposal, which the PCAOB exposed for comment in March 2010, expanded on certain existing categories of required communications and added new requirements to others. Commenters on the original proposal, particularly auditors and audit committee members, generally supported the efforts to improve the quality of communications, but expressed a number of concerns. For example, commenters were concerned that the number of new requirements may not allow sufficient opportunity to focus on those matters that audit committees believe are most important to their oversight responsibilities. In addition, commenters were concerned that the proposal did not adequately recognize management’s role in providing information to the audit committee. Given the effect this proposal could have on the information auditors provide to audit committees about a public company’s financial reporting and audit, public companies and their audit committees should carefully analyze the re-exposed proposal and consider providing comments to the PCAOB.

Regulatory developments

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Calendar year-end pension accounting remindersIf you are a calendar year-end company, you are probably working closely with your actuaries to complete the annual measurement of your pension and other postretirement benefit costs and obligations. As you complete this process, we want to provide a few helpful observations and reminders about determining discount rates and expected rates of return.

Given the current economic environment, including the performance of global stock markets, low long-term interest rates and the downgrade of US government debt, we generally expect to see a downward trend in discount rates for many plans. We have also noticed that many entities are considering lowering their expected rates of return due to significant volatility in the marketplace and less optimism about future growth. Some companies have even implemented new investment strategies that favor investments with lower risks and returns and are adjusting their assumptions accordingly. As a reminder, you will need to consider the effects of the current economic environment on pension and other postemployment benefit plan disclosures within management’s discussion and analysis.

As you complete your annual measurement process, remember that the determination of the discount rate depends on the facts and circumstances of a particular plan. For example, the expected timing of benefit payments can vary from plan to plan, which will affect the determination of the discount rate. Also remember to base your “best estimate” of expected rates of return on actual asset allocations rather than targeted plan asset allocations, as this has been an SEC item of inquiry. If you assume higher rates of return on plan asset portfolios that are actively managed, you must have specific verifiable evidence of the effect of “active management” on asset returns. If evidence does not exist, you should consider excluding “active management” from the return assumptions. Lastly, remember to adjust expected rates of return for administrative expenses that are paid from trust assets.

A qualitative screen for indefinite-lived intangible assets?The FASB is pursuing a proposal that would give companies the option to perform a qualitative screen for testing indefinite-lived intangible assets for impairment, which will be similar to the recently issued standard for goodwill. The FASB expects to issue an exposure draft in December, with a comment period of 120 days. The FASB currently anticipates an effective date of fiscal years beginning after 15 June 2012, with early adoption permitted.

FAF proposes a new private company reporting councilIf your company is privately held, the Financial Accounting Foundation (FAF) Board of Trustees is listening to your concerns. The FAF announced it is seeking comment on a proposal to establish a council with the authority to identify and vote on specific improvements to US accounting standards for private companies, which would be subject to ratification by the FASB.

In finalizing its proposal, the FAF considered the recommendation of the Blue-Ribbon Panel on Standard Setting for Private Companies (BRP) to create an autonomous, authoritative standard-setting board for private company issues, but concluded that the likely outcome — two separate sets of US accounting standards — was not desirable.

We haven’t completed our evaluation, but our initial reaction is the FAF’s proposal has merit. The AICPA, however, favors the recommendation of the BRP and is campaigning against the FAF’s proposal. Comments on the FAF proposal are due by 14 January 2012. The FAF also plans to hold public roundtable meetings after the end of the comment period. We expect the FAF to make a final decision on the plan following the end of the comment period and roundtables.

Other considerations

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Effective in 2011 (for calendar year-end companies)ASU 2011-09 — Disclosures about an Employer’s Participation in a Multiemployer Plan (ASC 715-80) Annual periods for fiscal years ending after

15 December 20111

ASU 2011-02 — A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (ASC 310) Periods beginning on or after 15 June 20112

ASU 2010-29 — Disclosure of Supplementary Pro Forma Information for Business Combinations (EITF Issue 10-G; ASC 805) Fiscal years beginning on or after 15 December 2010ASU 2010-28 — When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (EITF Issue 10-A; ASC 350)

Fiscal years beginning after 15 December 20103

ASU 2010-20 — Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (ASC 310) Various4

ASU 2010-16 — Accruals for Casino Jackpot Liabilities (EITF Issue 09-F; ASC 924) Fiscal years beginning on or after 15 December 2010ASU 2010-13 — Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades (EITF Issue 09-J; ASC 718)

Fiscal years beginning on or after 15 December 2010

ASU 2010-06 — Improving Disclosures about Fair Value Measurements (ASC 820) Fiscal years beginning after 15 December 2010 (certain provisions); Periods beginning after 15 December 2009 (certain provisions)

Effective after 2011 (for calendar year-end companies)Consensus — Derecognition of in Substance Real Estate — a Scope Clarification (EITF Issue 10-E; ASC 360) Fiscal years beginning on or after 15 June 20125

ASU 2011-08 — Testing Goodwill for Impairment (ASC 350) Fiscal years beginning after 15 December 20116 ASU 2011-05 — Presentation of Comprehensive Income (ASC 220) Fiscal years beginning after 15 December 20117

ASU 2011-04 — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASC 820)

Periods beginning after 15 December 20118

ASU 2011-03 — Reconsideration of Effective Control for Repurchase Agreements (ASC 860) Periods beginning on or after 15 December 2011

Effective date highlights

1 For nonpublic companies, effective for annual periods for fiscal years ending after 15 December 2012.2 For public entities, the amendments are effective for the first interim or annual period beginning on or after 15 June 2011, and should be applied retrospectively to the beginning of the annual period of adoption. For purposes of measuring

impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after 15 June 2011. The disclosures required by paragraphs 310-10-50-33 through 50-34, which were deferred by ASU 2011-01 are effective for interim and annual periods beginning on or after 15 June 2011. For nonpublic companies, the amendments are effective for annual periods ending on or after 15 December 2012, including interim periods within those annual periods.

3 For nonpublic companies, effective for fiscal years, and interim periods within those years, beginning after 15 December 2011.4 Disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after 15 December 2010. Disclosures as of the end of a reporting period were effective for interim and

annual reporting periods ending on or after 15 December 2010. For nonpublic entities, the disclosures are effective for annual reporting periods ending on or after 15 December 2011. The disclosures required by paragraphs 310-10-50-33 through 50-34, which were deferred by ASU 2011-01 are effective for interim and annual periods beginning on or after 15 June 2011.

5 For public companies, the amendments are effective for fiscal years, and interim periods within those years, beginning on or after 15 June 2012. For nonpublic companies, the amendments are effective for fiscal years ending after 15 December 2013, and interim and annual periods thereafter. Earlier application is permitted.

6 The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after 15 December 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before 15 September 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.

7 For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after 15 December 2011. For nonpublic entities, the amendments are effective for fiscal years ending after 15 December 2012, and interim and annual periods thereafter. The amendments should be applied retrospectively and early adoption is permitted. An ASU has been proposed to defer the effective date for amendments to the presentation of reclassifications of items out of accumulated other comprehensive income.

8 For nonpublic companies, the amendments are effective for annual periods beginning after 15 December 2011.

1717Financial reporting briefs Real estate December 2011

Exposure draftsConsensus-for-exposure — Parent’s Accounting for the Cumulative Translation Adjustment (CTA) upon the Sale or Transfer of a Group of Assets within a Consolidated Foreign Subsidiary That Meets the Definition of a Business (EITF Issue 11-A; ASC 810)

Not yet determined

Proposed ASU — Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASC 220)

Fiscal years beginning after 15 December 20119

Proposed ASU (Revised) — Revenue from Contracts with Customers (ASC 605) Not yet determined10

Proposed ASU — Principal versus Agent Analysis (ASC 810) Not yet determinedProposed ASU — Investment Property Entities (ASC 973) Not yet determinedProposed ASU — Investment Companies: Amendments to the Scope, Measurement, and Disclosure Requirements (ASC 946) Not yet determinedProposed ASU — Technical Corrections Not yet determinedSupplementary Document — Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities — Impairment

Not yet determined

Proposed ASU — Balance Sheet: Offsetting (ASC 210) Not yet determinedProposed ASU — Leases (ASC 840) Not yet determinedProposed ASU — Disclosure of Certain Loss Contingencies (ASC 450) Not yet determinedProposed ASU — Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities (ASC 825 and ASC 815)

Not yet determined

Proposed Statement — Going Concern Not yet determined

9 For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after 15 December 2011. For nonpublic entities, the amendments are effective for fiscal years ending after 15 December 2012, and interim and annual periods thereafter. The amendments should be applied retrospectively and early adoption is permitted.

10 Would not be effective earlier than for annual reporting periods beginning on or after 1 January 2015.

Effective date highlights

To the Points• Support grows for keeping US GAAP but basing future standards

on IFRS (8 December 2011) • SEC staff issues two papers on IFRS (21 November 2011)• A new proposal for revenue recognition (14 November 2011)• OCI requirements may be changing — again (9 November 2011)• Consolidation models may move closer together (4 November 2011)• Real estate investment properties could be moving to fair value

(21 October 2011)• Redefining investment companies and how they account for

investments (21 October 2011)• Operating lease accounting survives for some real estate lessors

(20 October 2011)• SEC staff issues guidance on cybersecurity disclosures

(20 October 2011)• Companies that participate in multiemployer plans will have to

disclose more (22 September 2011)• Optional screen for goodwill impairment (15 September 2011)

Technical Lines• Double-exposure: The revised revenue recognition proposal

(12 December 2011)• Consolidation and investment company accounting could change

(8 December 2011)• New investment property guidance may be in store for real estate

entities (8 December 2011)

• How to use the new qualitative screen to test goodwill for impairment (17 November 2011)

• More focus needed on fair value information from third-party pricing sources (17 November 2011)

• A quick guide to understanding the Variable Interest Model and eight common misconceptions (20 October 2011)

• What to consider when responding to the PCAOB about auditor independence and audit firm rotation (30 September 2011)

Financial Reporting Developments• Transfers and servicing of financial assets (November 2011)• Derivative instruments and hedging activities (November 2011)• Certain investments in debt and equity securities (October 2011)• Exit or disposal cost obligations (October 2011)• Impairment or disposal of long-lived assets (October 2011)• Lease accounting (October 2011)• Share-based payment (October 2011)• Statement of cash flows (October 2011)• Business combinations (September 2011)• Earnings per share (September 2011)

Other• 2011 AICPA National Conference on Current SEC and PCAOB

Developments (12 December 2011)• EITF Update — November 2011 meeting highlights (November 2011)• Master limited partnership accounting and reporting guide

(3 November 2011)• Practical matters for the c-suite — Financial instruments convergence

project moves forward in fits and starts (3 November 2011)• 2012 proxy statements — An overview of the requirements

(November 2011)

• 2011 SEC annual reports — Form 10-K (November 2011)

• 2012 SEC quarterly reports — Form 10-Q (November 2011)

• 2011 SEC Comments and Trends (October 2011)• SEC in Focus (October 2011)• Third quarter 2011 Standard Setter Update (October 2011)• IFRS Outlook (October 2011)• Dangerous world — Practical steps for global companies to

evaluate and address corruption risk (21 September 2011)• Accounting pronouncements effective for the third quarter of

2011 (15 September 2011)• Joint Project Watch: FASB/IASB joint projects from a US GAAP

perspective (August/September 2011)• BoardMatters Quarterly: Changes on the horizon (September 2011)• IFRS Outlook (August 2011)

Reference library Click on any of the Ernst & Young publications below, all of which are available free of charge on AccountingLink at http://www.ey.com/us/accountinglink and our Global IFRS website at www.ey.com/ifrs.

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SCORE no. BB2238This publication has been carefully prepared but it necessarily contains information in summary form and is therefore intended for general guidance only; it is not intended to be a substitute for detailed research or the exercise of professional judgment. The information presented in this publication should not be construed as legal, tax, accounting, or any other professional advice or service. Ernst & Young LLP can accept no responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. You should consult with Ernst & Young LLP or other professional advisors familiar with your particular factual situation for advice concerning specific audit, tax or other matters before making any decision.

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18 Financial reporting briefs Real estate December 2011