At its August 31 2010 board meeting, FASB announced its tentative decision to issue a proposed Accounting Standard Update that would require investment property be carried at fair value, as defined in IAS 40. We called Al King (Marshall & Stevens) for his comments:

It looks like we will be able to kiss goodbye to the ‘convergence’ of GAAP with IFRS.  FASB recently announced its proposals for the determination of the Fair Value (“FV”) of Investment Property and they differ markedly from existing IFRS rules. Both IFRS and GAAP define Investment Property as Real Estate that is owned passively to obtain a financial return, and is not used in a business for office space, storage or production.

IFRS first took the initiative on Investment Property several years ago, and provided an option to owners to report such assets at either historical cost or current Fair Value.  The option, of course, once chosen, must be continued.  You could not re-value a hotel, for example, (as long as you did not run it) when values were up and then switch back to historical cost if values went south.  The initial choice was yours.

FASB recently added investment property to its agenda, with the initial idea of developing new accounting that would be the same as that in effect in IFRS.  Under the current FASB proposal, however, all investment property would have to be reported at FV, with no option.  In short, FV will be mandatory.

IFRS says that if it is impractical to develop FV then it can continue to be reported at historical cost.  FASB says no exception for practicability would be permitted under GAAP. Under IFRS an owner of property who plans to develop it has to transfer such property to inventory but FASB says one would have to continue to use FV.

It appears as though FASB is dead set against giving companies any choices; one size has to fit all.  So even though we will not be converging with IFRS, U.S. companies will now have to start determining the Fair Value of all Investment Property.

King believes the decision will result in significantly more work for valuation consultants who actively perform investment real estate valuations.

Look for an article in a future issue of BVUpdate by King on the longer-run implications for this mandatory use of Fair Value in U. S. financial reports.  “For the first time, once adopted, FV will have to be used for hard assets, other than financial assets such as derivatives and financial instruments.  The implications are far-reaching,” says King.