The impact of new standards and guidance
Real estate entities need to fully understand current financial accounting, regulatory and compliance reporting requirements. This level of awareness reduces the inherent risks of various transactions, as well as their overall business operations, enabling these entities to be in full compliance with the relevant standards of reporting and to provide the appropriate levels of transparency expected by their key stakeholders.
This annual report assists real estate companies and funds with their financial accounting, regulatory and compliance reporting requirements. In addition, look ahead to highlight accounting rules that will continue to change existing U.S. GAAP requirements—including the new leasing standard—as well as offer some brief insight on the current regulatory environment facing our industry.
The report provides perspectives on how to address the key issues that firms will face.
• Consolidation. New consolidation guidance reduces the number of consolidation models and changes the way entities will evaluate whether they should consolidate limited partnerships and similar entities, whether fees paid to a decision-maker or service provider are variable interests in a variable interest entity, and whether variable interests in a variable interest entity held by related parties require consolidation of the variable interest entity.
• Eliminating the concept of extraordinary items. Recent guidance eliminates the concept of extraordinary items from U.S. GAAP for income statement presentation.
• Debt issuance cost presentation. New guidance requires debt issuance costs to be presented on the balance sheet as a direct deduction from the liability. The costs will continue to be amortized to interest expense using the effective interest method.
• Going concern. A new standard clarifies the definition of substantial doubt, and requires management to determine if substantial doubt exists over an entity’s ability to meet its obligations as they become due within one year after the date the financial statements are issued or available to be issued.
• Leases. A new leasing standard has been issued that clarifies the definition of a lease, and will cause lessees to recognize most leases on-balance sheet, as well as require lessees to reassess, and potentially change aspects of their accounting for leases. The new standard will also modify the treatment of executory costs, lease origination costs, collectability considerations, and variable payments. Changes are also being made to sales-leaseback accounting and build-to-suit lease guidance.
• Revenue. A new standard on revenue replaces most of the guidance on profit recognition for real estate sales that currently exists under U.S. GAAP. The impact of the guidance will depend on the nature of an entity’s business and how they contract with their customers and buyers.
• Equity investments and financial liabilities. A new standard will change the income statement effect of certain equity investments held by an entity and the recognition of changes in fair value of financial liabilities when the fair value option is elected.
• Goodwill impairment. A proposed standard would simplify the subsequent measurement of goodwill by removing a step in the goodwill impairment test.
• Clarifying the definition of a business. New guidance would clarify the definition of a business, which could impact the number of real estate transactions that would qualify as a business acquisition.
• Executive clawback on compensation. A proposed rule would require listed companies to develop and implement a policy to recover incentive-based compensation that executive officers were awarded erroneously.
• Non-GAAP financial measures. New guidance dictates how companies are allowed to use non-GAAP financial measures and specifically lists prohibited practices.