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
email@example.com. Bob O’Brien, a partner with Deloitte &
Touche LLP in Chicago, contributed to this article. He may be
contacted at firstname.lastname@example.org.
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