Real Estate Forum - July 2008

International Beat
By Dorothy L. Alpert
As Business Becomes More Global,
Firms Should Prepare to Adopt IFRS

REAL ESTATE HAS LONG BEEN A GLOBAL BUSINESS with a steady, international flow of capital despite the bumps and friction caused by different currencies, languages and accounting standards. However, one of those tensions may soon be eased as the world moves rapidly toward a single set of generally accepted accounting principles, known as the International Financial Reporting Standards, or IFRS.

IFRS represents a new way of thinking about financial reporting, with a focus on the transparency of financial information using extensive disclosure rather than uniformity of practices across many different types of entities and industries. IFRS is more principles-based than the heavily rules-based US GAAP. This means there is less guidance on accounting for matters under IFRS, allowing more judg-

Potential international investors are
beginning to see IFRS as the preferable
financial reporting standard.

ment and choices in the application of accounting principles, but also requiring more disclosure to make the accounting clear and transparent to investors and others.

Today, IFRS is used in over 100 countries. Since 2005, it has been required across all European Union countries. Brazil, Canada and India have all announced future mandated use. About 40% of the Global Fortune 500 companies currently use IFRS and that number is expected to grow as Canada and Brazil adopt it over the next few years. In November 2007, the Securities and Exchange Commission announced that foreign entities who file their financial reports with the SEC will no longer be required to reconcile those statements to US GAAP. The SEC is currently evaluating whether to allow, and perhaps even mandate, US firms to file their financial statements with the SEC under IFRS, possibly as soon as 2010 or 2011.

Global real estate companies are showing a fair amount of interest in IFRS given the potential and existing regulatory requirements around financial reporting, the fact that competitors in Europe and other countries are adopting IFRS and the continued globalization of the capital markets. Companies are also seeing IFRS as an

opportunity to streamline a disjointed reporting process, reduce the cost of statutory reporting by having all units worldwide on a single set of accounting standards as well as improve internal controls. Given the current credit crunch, US real estate companies are looking overseas for debt and capital, and potential international investors are beginning to see IFRS, rather than US GAAP, as the preferable financial reporting standard.

Adoption of IFRS will have a variety of effects on real estate companies. Most significantly, IFRS offers an option to report investment property at fair value, with changes in value recognized in earnings each period.

Real estate companies and investors are also affected by the difference in accounting principles for leases under IFRS and US GAAP. Under IFRS, some leases, currently treated as operating leases under US GAAP, may be treated as financing contracts because the bright-line tests required under US GAAP are replaced with the judgmental evaluations required under IFRS. Additionally, IFRS currently permits proportionate consolidation of partially owned entities, which impacts key metrics such as total assets, total debt, total revenues and total expenses. However, the International Accounting Standards Board has issued an exposure draft of a proposed new standard to eliminate proportionate consolidation.

The adoption of IFRS may have some very positive long-term benefits for real estate: better access to global capital, improved worldwide financial reporting processes and controls and a better means of comparing company performance to international peers. It requires some investment however, and companies should begin thinking about the process now. Adoption in the European Union and elsewhere took at least two to three years from start to finish. US real estate companies should monitor IFRS developments and start planning their own conversion. ◆

The views expressed in this column are those of the author and not Real Estate Media or its publications.

Dorothy L. Alpert is a principal and the US real estate leader for Deloitte LLP in New York City. She may be contacted at dalpert@deloitte.com. Bob O’Brien, a partner with Deloitte & Touche LLP in Chicago, contributed to this article. He may be contacted at robrien@deloitte.com.