Recent Developments For Financial Accounting Standards

A review of the latest developments in the world of financial accounting standards for REIT was recently done. NAREIT Senior Vice- President for financial standards, George Yungmann, sat with REIT.com to review such standards.

Yungmann has pointed out that process has been slowed by changes at the top of both the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB). By saying process, he pertains to the project being carried out by the IASB and FASB regarding the global convergence of financial accounting reporting standards.

Yungmann said, “We’re going to be well into 2012 before these standards get issued.”

A major impact on REIT may be felt due to some of the proposed changes to accounting for leases, Yungmann noted.

“The new proposal would essentially require that lessors report the sale of the right to use the property. There would be a gain or a loss recognized at lease inception or lease commencement, and there would be no rental income reported over the term of the lease. That’s a very dramatic change not only in the proposal, but in the way lessors report, and we do not believe that accounting will produce useful financial statements,” said Yungmann.

According to Yungmann, exposure drafts will be reviewed by NAREIT and comments will be issued regarding its partners in the Real Estate Equity Securitization Alliance (REESA).

Some screen shots from REIT's interview with George Yungmann. Watch the video here »

Global Accounting Rules on Leasing and Insurance Delayed by FASB and IASB

The June target for reaching global accounting standards on leasing, revenue recognition, financial instruments, and insurance has been pushed back by US and international accounting groups.

FASB Chairman, Leslie Seidman, and IASB Chairman, David Tweedie, said that the The Financial Accounting Standards Board or FASB and the International Accounting Standards Board or IASB are still responding to issues regarding the proposal making them need a delay of “a few more months.” This statement was released on a podcast summarizing the meeting of the two groups.

Seidman added that June “was always intended to be a target, not a deadline, and we always said that achieving the target was subject to the nature and extent of the feedback that we got on each of the exposure documents”. She also added that, “at this point on each of the exposure documents we have received significant and very constructive feedback and we are in the process of working through those issues. The quality of the standards remains of the utmost importance.”

FASB, based in Norwalk, Connecticut, and IASB, based in London, are working together to reconcile each group’s global accounting standards to help investors and regulators to better compare the financial statements of companies all over the world.

PricewaterhouseCooper released the results of its survey that showed that more than half of its respondents expect at least a moderate impact from the leasing, revenue recognition, and financial instrument projects. The recent standard-setting pace is thought to be too fast by the 43 per cent of the 1,400 professional-respondents.

“In the next few days”, the FASB and the IASB expect to publish its convergence report that will give plans for the completion work on the projects.

News Source: Bloomberg »

Changes To Accounting For Employee Benefits Proposed

It cannot be denied that the area where companies spend most on is its employee benefits. Among these benefits is the pension plan. In the Philippines, this particular benefit exposes the company to both actuarial and investment risks. An example of an actuarial risk is when the benefits of an employee are seen to be greater than expected by the time the employee retires. An example of an investment risk is when a company funds a pension plan. And when the fund does not perform well, the company is still obliged to pay the said plan.

Accounting for defined benefit plans such as the pension plans is complex and entails costs for companies. That is why these companies hire the services of an actuary.

Based on rules, actuarial gains or losses or changes to pension obligation can be accounted for in three ways namely: charge the entire change to profit or loss, charge the entire charge to other comprehensive forms, and charge a portion of the change to profit or loss using the “corridor system”.

It was proposed on April 29 last year by the International Accounting Standards Board (IASB) the changes to the accounting of employee benefits. These include removal of the “corridor mechanism” in accounting for long-term employee benefits, new rules to distinguish long-term and short-term benefits, and additional disclosure requirements.

Among these changes, the removal of the “corridor mechanism” is the most significant. Without it, the changes in fund values will be recognized over the average remaining service lives of the employees.

Also, all changes that occur in the value of long-term employee benefit plans will already be recognized as they happen in profit and loss and in comprehensive income.

The difference between long-term and short-term benefits is based on the time the employee is expected to receive the benefit. Therefore, under the current rule, if an employee is able to use a benefit at any time, the obligation is considered a short term benefit for the employee. But under the proposal, this benefit will be considered a long-term liability.

Additional disclosure requirements have also been proposed. These include characteristics of the employee benefit plan and the risks that may arise from the said benefit plan which may include sensitivity analyses and multi –employer plans.

The IASB is expected to publish the final amendments to this proposal by the end of March 2011.

News Source: BWorldOnline.com »