By George Yungmann and Gaurav Agarwal

Global businesses and international investors are increasingly demanding accounting information that they can understand when running businesses and making investment decisions on a worldwide basis. Despite the different histories and cultural backgrounds that have led to the many local Generally Accepted Accounting Principles (GAAP) found today, there is an overwhelming need for accounting principles to be harmonized worldwide. This desire for a uniform set of accounting principles was given a boost by the June 2002 European Commission Regulation that required, effective Jan. 1, 2005, all EU-listed companies to begin preparing their consolidated financial statements using EU-adopted International Financial Reporting Standards (IFRS), rather than local GAAP. The IFRS are promulgated by the International Accounting Standards Board (IASB).

In addition, the U.S. Financial Accounting Standards Board (FASB) and the U.S. Securities and Exchange Commission (SEC) are clearly committed to the global harmonization of accounting standards to facilitate cross-border capital flows. In an April 2005 statement, Donald Nicolaisen, chief accountant of the SEC, said, “Converging with or embracing a common set of high-quality accounting standards contributes immensely to investor understanding and confidence.”

Currently, foreign issuers wishing to register with the SEC are required to reconcile their consolidated financial statements prepared under IFRS to U.S. GAAP. In order for the SEC to allow foreign issuers to only use IFRS and to not reconcile to U.S. GAAP, the FASB and the IASB have undertaken an ambitious, multi-year project to converge their respective standards with the ultimate goal of aligning the accounting standards to one stable platform without any significant reconciling items. The SEC staff also has put forth a possible roadmap to eliminate this reconciliation requirement and speculates that it could decide as early as 2009 to eliminate IFRS to U.S. GAAP reconciliation.

The FASB has issued a number of standards that move toward convergence with IFRS. One such standard is Statement No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions. The amendments made by this statement are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The FASB has said that this statement is the result of a broader effort by the FASB to improve the comparability of cross-border financial reporting by working with the IASB toward the development of a single set of high-quality accounting standards.

The FASB also issued Statement No. 123 (revised 2004), Share-Based Payment. Among other guidance, this statement requires that the fair value of stock options granted to employees be recognized as compensation expense in financial statements. When effective for 2005 year-end financial statements, this provision will result in greater international comparability in the accounting for share-based payment transactions as it converges with IFRS No. 2, Share-based Payment, which was issued by the IASB in February 2004. IFRS No. 2 requires that all entities recognize an expense for all employee services received in share-based payment transactions, using a fair-value-based method.

NAREIT's Voice on International Standards The globalization of the listed real estate industry and growing investor demand are driving the need for a single set of high-quality international accounting standards. For the past few years, NAREIT's Accounting Committee, Best Financial Practices Council and staff have focused on the following projects with regards to the convergence between the U.S. and international accounting standards (IAS): reporting investment property; financial performance reporting; definition of discontinued operations; cost capitalization; share-based payment; and accounting for non monetary exchanges of productive assets. Here is a brief summary of some of the key work in progress. • At its November 2004 meeting, the executive committee of NAREIT's Board of Governors adopted a position with respect to the potential requirement of reporting investment property at fair value similar to the reporting required in IAS 40. This standard requires that investment property be reported at fair value either in the balance sheet or in notes to the financial statements. NAREIT will base its advocacy efforts with respect to the FASB's convergence process on this position, which sets forth goals to achieve certain modifications to IAS 40. • The FASB and the IASB have established a joint project, Financial Performance Reporting by Business Enterprises. This project would establish standards for the content and form of each of the financial statements that form the required set of basic financial statements. This international convergence project, which began with a “blank slate,” presents an opportunity for NAREIT to advocate the content and format of financial statements that effectively report the economics of the businesses of developing, acquiring, financing and operating real estate. A NAREIT task force representing a broad cross section of NAREIT's membership is working to develop a recommended model of financial statements that most effectively communicates the economics of REITs. This model, after approval of NAREIT's leadership, will form the basis of NAREIT's input to the FASB/IASB on this international project. • On March 31, 2004, the IASB issued its final International Financial Reporting Standard #5, Non-Current Assets Held for Sale and Discontinued Operations (IFRS 5). In the final rule, the IASB chose not to accept the FASB's narrow definition of a discontinued operation, which requires that virtually all sales of investment properties be reported as discontinued operations. More simply stated, the IASB agreed with the comments expressed by NAREIT in its comment letter dated Oct. 20, 2003 and with NAREIT's arguments in its petition to the FASB in 2001. NAREIT will advocate its position as the IASB and FASB work to achieve a converged definition of a discontinued operation.

The FASB and the IASB also have established a joint project, Financial Performance Reporting by Business Enterprises. This project aims to establish standards for the content and form of each of the financial statements that comprise the required set of basic financial statements: including statements of net income and comprehensive income, changes in shareholders' equity, cash flow and financial position. This international convergence project presents an opportunity for the real estate industry to advocate the content and format of financial statements that effectively report the economics of the business of developing, acquiring and operating income-producing real estate, classified for these purposes as investment property.

Another standard that could have a significant impact on the U.S. publicly traded real estate industry and its shareholders is International Accounting Standard No. 40, Investment Property (IAS 40) that allows reporting investment property at fair value. Current U.S GAAP has no such requirement or a standard governing the accounting for investment property and instead requires real estate companies to use a historic cost model. Other potential projects of interest include the accounting for leases, business combinations and minority interests.

The convergence of accounting standards is a challenging task and in the words of Donald Nicolaisen, “there is a lot of work to do for everyone—companies, auditors, investors, educators, standard setters and regulators—if we are to put into practice a financial reporting environment that is consistent with a single set of globally accepted accounting standards.”