Real Estate: Accounting and Financial Reporting Update

Real Estate
Accounting and
Financial Reporting Update
December 2012
Financial Services Industry
Contents
Foreword
iii
Introduction
iv
Updates to Guidance
Testing Indefinite-Lived Intangible Assets for Impairment (ASU 2012-02)
Other Comprehensive Income
Private-Company Standard-Setting Activity
Achieving Common Fair Value Measurement and Disclosure Requirements Under U.S. GAAP and IFRSs
(ASU 2011-04)
On the Horizon
Convergence Update
11
Financial Instruments Project Classification and Measurement
14
Financial Instruments Project Impairment
18
Financial Instruments Project Hedging
21
Financial Instruments Project Liquidity and Interest Rate Risk Disclosures
22
Revenue Recognition Project
23
Leases Project
25
Investment Property Entities
26
Investment Companies
27
The Liquidation Basis of Accounting Proposed ASU
29
Other Topics
SEC Comment Letter Trends
32
Appendixes
Appendix A Glossary of Standards and Other Literature
34
Appendix B Abbreviations
35
Appendix C Deloitte Specialists and Acknowledgments
36
Appendix D Other Resources
37
Foreword
December 2012
We are pleased to announce our fifth annual accounting and financial reporting update for the real estate sector.
The publication is divided into three sections: (1) Updates to Guidance, which highlights changes to accounting and
reporting standards that real estate entities need to start preparing for now; (2) On the Horizon, which discusses standardsetting topics that will affect real estate entities as they plan for the future; and (3) Other Topics that may be of interest to
entities in the real estate sector.
The following are links to the publications for each of the other financial services sectors:

Asset Management
Banking & Securities
Insurance
In addition, dont miss our December 11, 2012, Heads Up, which covers highlights from the 2012 AICPA National
Conference on Current SEC and PCAOB Developments.
As always, we encourage you to contact your Deloitte team for additional information and assistance.
Bob Contri
Vice Chairman, U.S. Financial Services Leader
Deloitte LLP
Susan L. Freshour
Financial Services Industry Professional Practice Director
Deloitte & Touche LLP
Real Estate: Accounting and Financial Reporting Update

Forewordiii
Introduction
During 2012, the financial services industry continued its recovery from the financial crisis. However, lingering economic
concerns coupled with extensive regulatory reform and accounting changes now underway have contributed to the
industrys challenges. Thorough preparations and unwavering focus will remain a necessity as financial services companies
respond and adapt to this volatile business climate.
Economic Concerns
Improvement in the U.S. economy has been slow but steady. Although trends in housing, unemployment, and consumer
spending have resulted in recent optimism, these gains have been tempered by new sources of significant uncertainty.
Domestically, the long-term implications of a resolution to the year-end fiscal cliff remain unknown. And abroad, the
weakening of the European economy and a slowdown in Chinas growth further jeopardize the recoverys momentum.
Thus, notwithstanding the general improvement in the economy, financial services companies must plan for significant
changes and the risks associated with them in the foreseeable future.
Regulatory Reform
In response to mandates under the Dodd-Frank Act,1 regulators have worked on rulemaking for over two years a
testament, in part, to the Acts magnitude and complexity. Many of the rules have yet to be finalized, and there is
continued uncertainty about the impacts of many of the Acts major provisions, such as the Volcker Rule.2 Needless to say,
implementation of the Dodd-Frank Act has proven to be a long journey that has only begun, and many financial services
companies are still navigating the long-term implications for their business.
Accounting Changes
The FASB3 and IASB continue to make progress on their development of converged standards in several major areas of
accounting, yet a decision from the SEC on incorporating IFRSs into the U.S. financial reporting system for public companies
remains to be made. Most financial services companies will be affected by the significant changes expected as a result of
projects on the accounting for revenue recognition, financial instruments, and leases. In addition, some financial services
companies will be significantly affected by other projects with a narrower focus, such as insurance contracts, investment
companies, and consolidation. Because final standards on many of these projects are expected in 2013 or early in 2014,
financial services companies will soon need to shift their adoption efforts into high gear.
For additional information about industry issues and trends, see the publications in 2013 Financial Services Sector Outlooks
on Deloittes Web site.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act or the Dodd-Frank Act).
The Volcker Rule (Section 619 of the Dodd-Frank Act) limits the amount of speculative investments that large financial firms are permitted to have on their balance sheets.
For a list of abbreviations used in this publication, see Appendix B.

Introductioniv
Updates to Guidance

Updates to Guidance: Updates to Guidance1
Testing Indefinite-Lived Intangible Assets for Impairment

(ASU 2012-02)
Overview
In July 2012, the FASB issued ASU 2012-02,1 which amends the guidance in ASC 350-30 on testing indefinite-lived
intangible assets, other than goodwill, for impairment. Before the ASU, the guidance in ASC 350-30 required entities to
test indefinite-lived intangible assets for impairment at least annually by calculating and comparing an assets fair value
with its carrying amount. An impairment loss would be recorded for an amount equal to the excess of the assets carrying
amount over its fair value. The ASU was issued in response to concerns raised over the cost and complexity of the existing
impairment guidance as well as to align impairment testing for indefinite-lived intangible assets and goodwill.
Key Provisions
Optional Qualitative Assessment
Under ASU 2012-02, both public and nonpublic entities testing an indefinite-lived intangible asset for impairment have the
option of performing a qualitative assessment before calculating the fair value of the asset. If an entity determines, on
the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is not more likely than not (i.e., a
likelihood of more than 50 percent) impaired, an entity would not need to calculate the fair value of the asset.
Because the qualitative assessment is optional, the entity may proceed directly to the quantitative impairment test and
subsequently resume performing the qualitative impairment assessment for any indefinite-lived intangible asset in any future
period. In addition, if an entity elects to bypass the qualitative assessment and quantitatively calculate the fair value of the
indefinite-lived intangible asset, the entity would not be required to consider and evaluate the qualitative factors.
Factors to Consider
ASC 350-30-35-18B (added by the ASU) provides the following examples (not all-inclusive) of events and circumstances that
an entity may consider in the qualitative assessment:
a. Cost factors . . .
b. Financial performance . . .
c. Legal, regulatory, contractual, political, business, or other factors, including asset-specific factors . . .
d. Other relevant entity-specific events . . .
e. Industry and market considerations . . .
f.
Macroeconomic conditions.
An entity should also consider:

Positive and mitigating events and circumstances that could affect the significant inputs used to determine the fair
value of the indefinite-lived intangible asset. However, positive and mitigating evidence should not be viewed as a
rebuttable presumption that an entity does not need to perform the quantitative fair value calculation.
The difference between the carrying amount and the recently calculated fair value of the indefinite-lived intangible
asset.
Whether the carrying amount of the indefinite-lived intangible asset has changed.
For the full titles of standards, topics, and regulations, see Appendix A.

Updates to Guidance: Testing Indefinite-Lived Intangible Assets for Impairment (ASU 2012-02)2
The events and circumstances that have an impact on the inputs used to determine the most recent fair value of the
indefinite-lived intangible asset should be evaluated individually and in their totality as a result of weighing the significance
of each factor to determine whether it is more likely than not that the asset is impaired.
Application Considerations
The qualitative impairment assessment for indefinite-lived intangible assets outlined in ASU 2012-02 is highly subjective and
will most likely require complex management estimates.
A thoughtful assessment and robust documentation would be necessary for an entity to assert, on the basis of qualitative
factors, that an indefinite-lived intangible asset is not more likely than not impaired. The assessment will vary from entity
to entity and asset by asset; however, an entitys assessment should focus on the specific events and circumstances that
may affect the significant inputs used to derive the fair value of the indefinite-lived intangible asset. An entitys assessment
should also document the considerations and facts used in making the assertion. For factors that an entity identified as
being most relevant to the determination of an assets fair value, a robust analysis should be performed and documented.
This assessment may consist of a quantitative analysis to support the qualitative conclusions. In addition, an entity may
look to independent sources (i.e., market royalty rates, foreign currency fluctuations, changes in regulations or laws) when
performing and supporting its assessment. The level of documentation will vary on the basis of individual entity- and assetspecific factors.
Disclosures
ASC 350-30-50-3A (added by the ASU) does not require public entities to provide new or amended disclosures regarding
their analysis of indefinite-lived intangible assets for impairment. However, it does clarify that nonpublic entities are not
required to disclose the quantitative information about significant unobservable inputs used in fair value measurements
categorized within Level 3 . . . that relate to the financial accounting and reporting for an indefinite-lived intangible asset
after its initial recognition.
Effective Date and Transition

The amendments are effective for annual and interim impairment tests performed in fiscal years beginning after September
15, 2012. Early adoption is permitted.
In addition, ASC 350-30-65-3 (added by the ASU) indicates that an entity may apply the amendments, including the
qualitative analysis, to annual or interim impairment tests performed as of a date before July 27, 2012, as long as the
financial statements have not yet been issued or made available for issuance.
Other Comprehensive Income

In June 2011, the FASB issued ASU 2011-05, which revised the manner in which entities present comprehensive income
in their financial statements. Among the ASUs new provisions was a requirement for entities to present reclassification
adjustments out of AOCI by component in both the statement in which net income is presented and the statement in
which OCI is presented. However, constituents preparing to adopt the ASU raised concerns about whether the presentation
requirements for reclassification adjustments were operational. As a result, the FASB issued ASU 2011-12, which indefinitely
deferred the presentation requirements under ASU 2011-05 for reclassification adjustments and allowed the Board to
redeliberate the matter.
Ultimately, the FASB decided not to reinstate the reclassification adjustments provisions under ASU 2011-05. Instead, the
Board decided to explore alternative options (i.e., footnote disclosures) for providing users of financial statements with
information about the effect of reclassification adjustments on an entitys financial statements. Accordingly, in August 2012,
the Board issued a proposed ASU that would require entities to disclose (rather than present on the face of the financial
statements) additional information about reclassification adjustments in two separate tables: one reflecting changes in
AOCI, and the other reflecting items reclassified out of AOCI.
Updates to Guidance: Other Comprehensive Income3
Changes in AOCI
Under the proposed ASU, entities would disaggregate the total change of each component of OCI (e.g., foreign currency
items and gains and losses on cash flow hedges) and separately present (1) current period reclassification adjustments and
(2) the remainder of OCI for the period. The disclosure would also include a subtotal for the changes in the accumulated
balances (i.e., total OCI of each component for the period). Either before-tax or net-of-tax presentation would be permitted.
Items Reclassified Out of AOCI

Under the proposed ASU, entities would disclose significant items reclassified out of each component of AOCI, along
with a subtotal for those significant items, in a separate table. Totals for each component displayed in the table would need
to be consistent with the amounts presented in the changes in AOCI disclosure discussed above. Amounts would be
presented on a before-tax or net-of-tax basis provided the presentation method is consistent with the entitys method of
presentation for the line items in the statement where net income is presented.
In addition, for significant reclassification adjustments, the proposed ASU would require entities to disclose the affected
financial statement line item in the statement in which net income is presented (i.e., the comprehensive income statement
under a single-statement approach, or the income statement under a two-statement approach). This requirement would be
limited to amounts that are reclassified into net income in their entirety.
Real estate companies may not have a separate financial statement line item that directly corresponds to the
reclassification out of AOCI. Under the proposal, they would disclose the financial statement line item in which the
amount is presented.
Project Update Current Status

After an expedited comment period, the FASB redeliberated its disclosure proposals in November 2012.
During its discussions, the Board tentatively decided to provide preparers with more flexibility in how to present the
disclosures originally included in the August 2012 proposed ASU. Specifically, the FASB noted that entities can present
the information in formats other than a table as long as it is in a single location. Specifically, the FASB tentatively decided
that entities can present the table 2 information (i.e., items reclassified out of AOCI) in either (1) a footnote or (2) a
parenthetical display on the face of the statement in which net income is presented. However, the FASB also indicated that
because many entities that will elect to present the information in a footnote may still be inclined to use a tabular format,
the final ASU should include application guidance and examples of the disclosures.
During redeliberations, the FASB also discussed the application of any new disclosures to interim periods. The proposed ASU
would require entities to provide the new disclosures for both annual and interim periods; however, many respondents were
concerned about presenting the full disclosures in condensed interim financial statements. The FASB tentatively decided that
the disclosures would still be required for interim periods but noted that public entities should continue to consult applicable
SEC interim reporting guidance2 to determine whether to include such disclosures in their quarterly filings. In turn, the Board
also tentatively decided that for interim periods, nonpublic entities would not be required to present information on the
effect that significant reclassification adjustments have on the respective line items of net income.
The FASB originally proposed an effective date for the new disclosures for periods ending after December 15, 2012 (with
a one-year deferral for nonpublic companies). However, many constituents expressed significant concerns with such an
expedited timeframe. Thus, the FASB ultimately decided that any final guidance should be effective, for public entities, for
reporting periods beginning after December 15, 2012. Nonpublic entities would still have an additional year to adopt the
new requirements (i.e., reporting periods beginning after December 15, 2013). The final standard would be applied on a
prospective basis.
SEC Regulation S-X, Article 10, provides guidance on the presentation of interim financial statements.

Updates to Guidance: Other Comprehensive Income4
Private-Company Standard-Setting Activity

Background
In recent years, the FAF, the parent organization of the FASB, and the FASB issued several reports, studies, and formal
recommendations to address the concerns of preparers and users of private-company financial statements. The most
notable of these publications is the January 2011 report issued by the Blue-Ribbon Panel (BRP) on Standard Setting for
Private Companies. Two significant recommendations in the BRP report are (1) the development of a decision-making
framework to identify instances in which exceptions or modifications to U.S. GAAP would be warranted for private
companies and (2) the creation, by the FAF, of a separate private-company accounting standards board that would
complement this framework. For more information about the BRP report, see Deloittes January 31, 2011, Heads Up.
In July 2011, the FASB conducted a comprehensive assessment of (1) the different needs of private-company and publiccompany financial statement users and (2) the cost-benefit implications for private-company versus public-company
reporting. In October 2011, the FAF issued a proposal to create a council that would work toward improving the standardsetting process for private companies. For more information see Deloittes October 10, 2011, Heads Up. The result of these
efforts was the establishment of the Private Company Council (PCC)3 in May 2012 (see the FAFs report) and a proposal by
the FASB detailing the decision-making framework. For more information, see Deloittes June 5, 2012, Heads Up.
Private Company Council

Overview of the Council
As referenced above, in May 2012, the FAF approved the formation of the PCC, which is tasked with improving the
accounting standard-setting process for private companies. The two main responsibilities of the PCC are to (1) determine
whether exceptions or modifications to existing nongovernmental U.S. GAAP would benefit end users of private-company
financial statements and (2) advise the FASB on how private companies should treat items on the Boards technical agenda.
PCC Membership and Term Limits

The PCC consists of 10 members and is chaired by Billy Atkinson, former chair of the National Association of State Boards
of Accountancy. The other nine council members have significant private-company experience and represent various
groups, including users, preparers, and practitioners. Each council member will initially serve a three-year term but can be
reappointed for an additional two years.
FASB Liaison and FASB Staff Support

To help support the council and as mandated by the FAF, the FASB assigned member Daryl Buck to work as a PCC liaison.
Individuals from the Boards technical and administrative staff will be assigned to work directly with the new council. When
necessary, the FASB will supplement the PCC staff and offer its expertise on particular issues.
Process for Voting for Exceptions/Modifications and FASB Endorsement

The PCC and the FASB will work together to identify suitable criteria through the creation of a private-company decisionmaking framework that will assist in determining whether and, if so, when exceptions or modifications to U.S. GAAP are
warranted for private companies. On the basis of these criteria, the PCC will determine aspects of existing U.S. GAAP for
which exceptions or modifications may be necessary. This decision will be made by a two-thirds majority vote after the PCC
consults with FASB members and analyzes input from other affected stakeholders.
Separate from the FAF establishment of the PCC, the AICPA issued an ED on November 1, 2012, Proposed Financial Reporting Framework for Small- and Medium-Sized
Entities, and is seeking public comment on its proposal for a special purpose framework intended for use by SMEs that are not required to prepare financial statements in
accordance with U.S. GAAP. Comments are due by January 30, 2013. See Deloittes November 27, 2012, Heads Up for more information.

Updates to Guidance: Private-Company Standard-Setting Activity5
Any proposed exceptions or modifications are subject to FASB endorsement (a simple majority vote of FASB members),
after which they will be exposed for public comment. After the comment period, the PCC will redeliberate the proposed
exceptions or modifications and submit them to the FASB for final endorsement, which will generally be within 60 days. If
endorsed, the modification or exception will be incorporated into existing U.S. GAAP. When the FASB does not endorse the
proposed exception or modification, the FASB chairman must submit a written explanation to the PCC detailing possible
revisions that could result in a FASB endorsement.
Next Steps
The PCC held its inaugural meeting on December 6, 2012, at which time it discussed (1) the transition of responsibilities
from the Private Company Financial Reporting Committee, (2) the feedback received on the private company decisionmaking framework request for comment, and (3) the status of the FASBs project on the definition of a nonpublic entity, and
(4) the FASBs project on going concern. Further, the PCC discussed four accounting areas4 for which constituents expressed
concerns, instructing the FASB staff to develop a research memorandum to evaluate these areas. The PCC will continue
working with the FASB to improve standard setting for private companies going forward.
Discussion Paper on Private-Company Decision-Making Framework

About the Private-Company Decision-Making Framework
In July 2012, the FASB released a DP requesting comments on a proposed framework that the FASB and the PCC would use
to determine whether modifications or exceptions to existing and proposed U.S. GAAP are warranted for private companies.
The draft framework addresses five areas in which exceptions or modifications might be considered: (1) recognition and
measurement, (2) disclosure, (3) presentation, (4) effective date, and (5) transition guidance.
Within each area covered by the framework, there is a proposed decision tree that considers various factors when
determining whether exceptions or modifications would be warranted for private companies. The more significant
factors include (1) relevance of the guidance when considering the needs of the financial statement users, (2) costs of
implementing the guidance compared with the benefits achieved by the financial statement users, (3) experience level and
resource constraints of the preparers, and (4) knowledge that users have about the reporting entity and their ability to
obtain information from management on an as-needed basis. The DP also recommends that the FASB and the PCC require
private companies to provide the same industry-specific disclosures that is required for public companies since the industryspecific disclosures are generally relevant to financial statement users of both public and private companies operating in
those industries.
Definition of a Private Company

The DP includes an appendix that presents the FASBs tentative decisions on the definition of private company, which would
help identify companies to be considered under the private-company decision-making framework. One of the key tentative
decisions is the identification of entities with certain characteristics that would preclude them from being classified as a
private companies, including (1) entities filing or furnishing financial statements with a regulatory agency when issuing
securities in a public market or issuing securities that trade in a public market, (2) entities that are for-profit conduit bond
obligors for conduit debt securities that are traded in a public market, and (3) employee benefit plans.
Another tentative decision discussed in the DPs appendix is to exclude from the definition of private company entities that
(1) are financial institutions, (2) are consolidated subsidiaries of entities that are public companies, or (3) have controlled and
consolidated subsidiaries that are public companies.
As of the date of this publication, the FASB has not completed its deliberations on all the topics to be addressed before it
can finalize the definition of a private company.
The four accounting areas that are of most interest of private company constituents include (1) ASC 810 (formerly Interpretation 46(R) and Statement 167), (2) accounting for
plain vanilla interest rate swaps, (3) ASC 740, and (4) recognizing and measuring various intangible assets (other than goodwill). See the FAFs December 6, 2012, news release
for more information.

Updates to Guidance: Private-Company Standard-Setting Activity6
Many real estate companies prepare U.S. GAAP financial statements in connection with debt covenants, tenant
agreements, significant investors, or for other special purposes and therefore may fall within the definition of a private
company.
Next Steps
The comment period on the DP ended on October 31, 2012. The FASB and the PCC will continue to deliberate and consider
the feedback received on the DP, with the most recent discussions held at the December 6, 2012, PCC meeting. The final
private-company decision-making framework is expected to be issued in early 2013.
Achieving Common Fair Value Measurement and Disclosure

Requirements Under U.S. GAAP and IFRSs (ASU 2011-04)
Overview
In May 2011, the FASB issued ASU 2011-04 to conform (1) the definition of fair value and (2) common requirements for
measurement and disclosure of fair value under U.S. GAAP and IFRSs. The ASU also clarifies the Boards intent regarding
certain underlying fair value measurement principles, including (1) the definition of a principal market, (2) the use of
premiums and discounts, and (3) the applicability of the highest-and-best-use and valuation-premise concepts to financial
instruments.
While the ASU largely retains the fair value measurement principles under ASC 820, it significantly expands current
disclosure requirements for fair value measurement, particularly those classified in Level 3 of the fair value hierarchy. The
ASU affects all entities measuring or disclosing assets, liabilities, or equity instruments measured at fair value.
Effective Date and Transition

The ASUs measurement and disclosure requirements were effective for public entities for reporting periods (including
interim periods) beginning after December 15, 2011, and for nonpublic entities for annual periods beginning after
December 15, 2011.
The amendments in the ASU should be applied prospectively (i.e., no cumulative adjustment to opening retained earnings).
Entities should disclose the change, if any, in valuation techniques and related inputs resulting from application of the
amendments and should quantify and disclose the total effect of the change, if practicable.
Implementation Considerations
Defining of a Public Entity
When implementing ASU 2011-04, it will be important for entities to understand the definition of a public entity as
described in ASC 820, as certain disclosure requirements differ for public entities and nonpublic entities. ASC 820 defines a
nonpublic entity as:
Any entity that does not meet any of the following conditions:
a. Its debt or equity securities trade in a public market either on a stock exchange (domestic or foreign) or in an overthe-counter market, including securities quoted only locally or regionally.
b. It is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign
stock exchange or an over-the-counter market, including local or regional markets).
c. It files with a regulatory agency in preparation for the sale of any class of debt or equity securities in a public
market.

Updates to Guidance: Achieving Common Fair Value Measurement and Disclosure Requirements Under U.S. GAAP and IFRSs (ASU 2011-04)7
d. It is required to file or furnish financial statements with the Securities and Exchange Commission.
e. It is controlled by an entity covered by criteria (a) through (d). [Emphasis added]
The ASC master glossary defines control as the direct or indirect ability to determine the direction of management and
policies through ownership, contract, or otherwise. This could include nonregistered investments companies that are
controlled by a public company (for example, when a public company adviser that is a public entity consolidates a private
fund it owns under ASC 810, that private funds stand-alone financial statements would be treated as those of a public
entity under the current ASC 820 definition of a nonpublic entity).
The FASB staff is working on a separate project to define public and nonpublic entities, which may affect the application of
the requirements in the ASU (i.e., ASC 820) for such entities. An ED has been released for comment (comments were due
November 9, 2012). Under the ED, certain entities, including a consolidated subsidiary of an entity that is a public company,
would not be excluded from the definition of a private company. Readers are encouraged to follow developments regarding
this matter on the FASBs Web site and the Expert Panel meeting minutes.
Financial Services Industry Implementation Analysis

As a result of the new disclosure requirements for fair value measurements, many entities made substantial changes to their
financial statement footnotes. To understand how companies interpreted and applied the requirements of ASU 2011-04,
the first-quarter Form 10-Q filings of 30 FSI entities from the banking and securities, insurance, real estate, and asset
management sectors were examined. Most companies from the sample disclosed that the adoption of the ASU did not
materially affect their financial position or results of operations, indicating that the ASU had little effect on measurement
practices. However, the ASUs amendments to the fair value disclosure requirements in U.S. GAAP were more significant.
Although some entities applied the new disclosure requirements similarly, there was diversity in practice. See Deloittes July
2012 Financial Services Industry Spotlight for the full analysis.
The SEC staff has also frequently requested registrants to provide additional disclosures about valuation methods and
assumptions associated with fair value measurements, particularly those that rely on other observable inputs (Level 2) or
unobservable data (Level 3). On the basis of the analysis in the July Spotlight, as well as a review of recent SEC comments,
it is recommended that companies focus on the following aspects of their fair value disclosure requirements prescribed by
ASU 2011-04:

Quantitative disclosures about significant unobservable inputs (see ASC 820-10-50-2(bbb)), which requires that
reporting entities disclose quantitative information about the significant unobservable inputs used in arriving at
Level 3 fair value measurements (both recurring and nonrecurring). Previously, entities were required to disclose
only qualitative information about valuation technique(s) and inputs used.
Narrative descriptions of sensitivity to changes in unobservable inputs (see ASC 820-10-50-2(g)), as well as a
discussion of the interrelationship between those unobservable inputs. The ASU requires registrants to provide a
narrative description of the sensitivity of [recurring Level 3 fair value measurements] to changes in unobservable
inputs if a change in those inputs to a different amount might result in a significantly higher or lower fair value
measurement.
Valuation processes for Level 3 fair value measurements (see ASC 820-10-50-2(f)), which requires that registrants
provide a description of the valuation processes they used for both recurring and nonrecurring Level 3 fair
value measurements. Valuation process disclosures may be affected by a companys use of third party valuation
specialists.
Disclosure of the level for each class of assets and liabilities not measured at fair value in the statement of financial
position but for which fair value is disclosed (e.g., loans measured at amortized cost or an entitys own-debt
measured at amortized cost) (see ASC 820-10-5-2(b) and ASC 820-10-50-2E).

Thinking Ahead
The ASU has led to a noticeable increase in the amount and type of information that financial services companies have
disclosed about fair value measurements. Real estate companies will most likely refine their disclosures to reduce the
diversity in practice as well as to bring their disclosures further in line with the letter and intent of the new disclosure
requirements.
See Deloittes December 2011 Financial Services Industry Real Estate: Accounting and Financial Reporting Update for
further details on the new provisions and changes from previous guidance.

On the Horizon

On the Horizon: Achieving Common Fair Value Measurement and Disclosure Requirements Under U.S. GAAP and IFRSs (ASU 2011-04)10
Convergence Update
SECs Consideration of IFRSs in the United States
February 2010 Work Plan
In February 2010, after a period of relative inactivity following its 2008 proposed roadmap for the adoption of IFRSs in the
United States, the SEC published a work plan for considering the implications of incorporating IFRSs into the U.S. financial
reporting system. The SEC confirmed its continued support for a single set of high-quality, globally accepted accounting
standards and affirmed that IFRSs are best positioned to be that set of standards for the U.S. markets. The 2010 work plan
identified six areas of focus in determining whether, when, and how to incorporate IFRSs into the U.S. financial reporting
system. Each area is discussed under 2012 Developments below.
The SEC estimated that by June 2011 it could complete its work plan and determine whether to incorporate IFRSs into the
U.S. domestic financial reporting system, coinciding with the anticipated completion date of several convergence projects
of the FASB and the IASB, including revenue, leases, and financial instruments (all of which are presently still in progress
see The Road Ahead for the SEC, FASB, and IASB below). For more information about the SECs work plan, see Deloittes
February 26, 2010, Heads Up.
2011 SEC Staff Papers

In May 2011, the SEC issued a staff paper that outlined an approach for U.S. incorporation of IFRSs that combines elements
of convergence and endorsement (dubbed condorsement by a member of the SEC staff at the 2010 AICPA National
Conference on Current SEC and PCAOB Developments). Under this approach, the FASB would endorse and incorporate
newly issued IFRSs into U.S. GAAP and follow a convergence approach over a period of transition (possibly five to seven
years) for all existing standards. During the transition period, differences between the two sets of standards would be
evaluated and any necessary changes would be incorporated into existing U.S. GAAP (thereby retaining the term U.S.
GAAP) as opposed to a wholesale adoption of IFRSs. Comments received from constituents were varied on the timing
and method of transition, although many respondents urged the SEC to reach a decision and put in place a comprehensive
transition plan so that adequate preparations could be made. For more information about the staff paper, see Deloittes
June 1, 2011, Heads Up.
In November 2011, under requirements of its work plan to assess the sufficient development and application of IFRSs, the
SEC staff published two papers. The first paper, A Comparison of U.S. GAAP and IFRS, focuses on the significant differences
between the two sets of standards and highlights the staffs concerns related to the convergence process and the ability of
the FASB and IASB to reach a consensus on a number of issues. The second paper, Analysis of IFRS in Practice, analyzes a
selection of annual IFRS consolidated financial statements of both SEC registrants and nonregistrants and discusses frequent
comments by the staff on financial statements prepared by FPIs in accordance with IFRSs. For more information on the two
staff papers, see Deloittes December 2, 2011, Heads Up.
2012 Developments
In July 2012, the SEC issued its final staff report on the 2010 work plan, summarizing the staffs findings in relation to each
component of the work plan. The report stressed that the SEC has not made any policy decision as to whether [IFRSs]
should be incorporated into the financial reporting system for U.S. issuers, or how any such incorporation, if it were to
occur, should be implemented. Before such a decision can be made, the SEC would need to further analyze and consider
the fundamental question of whether transitioning to IFRS is in the best interests of the U.S. securities market generally and
U.S. investors specifically. In performing its analysis, the staff identified several significant themes:

Development of IFRSs The IASB has made significant progress in developing a comprehensive high-quality set
of accounting standards; however, many areas including industry specific guidance remain undeveloped, and
although U.S. GAAP also contains areas which require improvement the perception among U.S. constituents is
that the gap in IFRS is greater.

On the Horizon: Convergence Update11
Interpretive Process The IFRS Interpretations Committee, whose role is to consider widespread accounting issues
and develop interpretive guidance on those issues (much like the EITF in the United States), should do more to
address application issues on a timely basis.
IASBs Use of National Standard Setters The IASB should rely more on assistance from national standard
setters for their areas of expertise, outreach activities, identifying diversity in practice, and assisting with postimplementation reviews.
Global Application and Enforcement Differences in the application of IFRSs globally may potentially lead to
diversity in practice and a lack of comparability. Regulators in various jurisdictions need to work cooperatively to
foster consistent application and enforcement of IFRSs.
Governance of the IASB The governance structure of the IFRS Foundation (the body that oversees the IASB)
appears to be in good standing; however, since the IASB generates standards for a global market and does not
cater for jurisdictional differences, mechanisms may need to be put in place to protect U.S. interests and capital
markets (e.g., by having the FASB endorse IFRSs in the United States).
Status of Funding The IFRS Foundation has no ability to require or compel funding for its operations, which is
of particular concern to the SEC. Consequently, the IFRS Foundation is currently funded by a small percentage of
constituents and has no independent funding mechanism, potentially creating the perception of an influence on its
ability to remain neutral.
Investor Understanding Investors do not have a uniform education on accounting issues. Regardless of
whether IFRSs are adopted in the United States, the staff plans to further explore how investor engagement and
education can be improved.
The table below outlines the specific areas of the work plan as well as the SEC staffs efforts and observations outlined in
the final report. For more information about the SECs final report, see Deloittes July 19, 2012, Heads Up.
Work Plan Step
Observations
Sufficient development
and application of
IFRSs for the U.S.
domestic reporting
system
IFRSs are generally not comprehensive with respect to certain industries or types of common transactions (e.g.,
utilities, extractive industries).
Independence of the
global standard-setting
process for the benefit
of investors
The overall design of the governance structure of the IFRS Foundation provides a reasonable balance between
oversight of the IASB and recognizing and supporting its independence.
There are concerns about certain fundamental differences between U.S. GAAP and IFRSs as well as differences
that remain between standards that are considered substantially converged.
Notwithstanding the staffs acknowledgment of the significant progress toward convergence, it expressed
reservations about whether the FASB and IASB can achieve convergence on certain issues.
Concerns remain over the low percentage of constituents that provide funding to the IFRS Foundation,
including the significant proportion of those funds that are provided by large accounting firms.
The IASB has acted in the public interest; however, it needs to continue to develop methods for engaging
constituents and improve its ability to issue timely interpretive guidance.
Investor understanding
and education of IFRSs
Investors generally support the objective of a single set of high-quality, globally accepted accounting
standards; however, many investors do not believe quality should be sacrificed to achieve this.
Investor knowledge varies widely.
Regardless of the approach to incorporation of IFRSs into the U.S. financial reporting system, sufficient time
should be allowed for a successful transition.
Most investors favor a retrospective approach to adoption and oppose an option to early adopt in order to
ensure comparability of financial statements.

Work Plan Step

Regulatory
environment
Observations
Incorporation of IFRSs into U.S. GAAP as opposed to its wholesale adoption may eliminate the need to amend
all laws, contracts, and other regulatory requirements that currently reference U.S. GAAP.
U.S. regulators support the FASBs continued substantive role in the standard setting process, particularly since
some U.S. regulators believe their views on new projects may be diminished on a global scale.
Regulators believe the removal of industry-specific guidance may negatively impact them and potentially
provide less meaningful information to stakeholders.
The introduction of IFRSs may have significant tax implications and potentially increase the number of bookto-tax differences that exist. Accounting policies currently acceptable under U.S. tax laws may no longer be
permitted (e.g., IFRSs preclude the use of LIFO for inventory measurement).
The SECs ultimate decision on IFRSs only covers public entities and questions remain on how this will impact
privately held entities, many of which currently report under U.S. GAAP.
Impact on issuers
Issuers generally support the ultimate objective of a global set of accounting standards, with larger issuers
more supportive than smaller issuers that have fewer resources to handle a major transition.
The impact to accounting systems, controls, and procedures may be significant in certain cases but is largely
dictated by the pervasiveness of differences identified and each entitys own circumstances.
Concerns have been raised over the ability of financial reporting systems to absorb such a change coupled
with all the existing convergence projects currently in progress.
Issuers generally prefer a managed transition over time as opposed to full adoption at one point in time (big
bang approach).
Human capital
readiness
The level of IFRS education and training varies widely and the need to improve these levels will depend on the
method of transition (i.e., big bang vs. transition over time).
The capacity of audit firms to transition to IFRSs depends on the level to which IFRSs have been incorporated
into their existing practices; however, there is concern that smaller audit firms may have challenges in
adequately equipping themselves given their existing resources.
The Road Ahead for the SEC, FASB, and IASB

Following the release of the final staff report, no further statements or actions have been undertaken by the SEC and it has
not provided a timetable for an eventual decision. Irrespective of the SECs potential decisions on whether, when, and how
IFRSs might be incorporated into the U.S. financial reporting system, the FASB and IASB have continued their work on the
convergence of U.S. GAAP and IFRSs in high-priority accounting areas, including revenue recognition, leases, insurance
contracts, and financial instruments. The current timetable for key joint projects is presented in the table below:1
Topic
2012 Q4
2013 H1
MoU
Joint
Classification and measurement
ED (IASB)
ED (FASB)
Impairment
ED (FASB)
Financial instruments
ED (IASB)
Final (IASB)
DP (IASB)
ED
Revenue recognition
Final
Insurance contracts
ED
Hedge accounting2
Accounting for macro hedging3
Leases
See the FASBs and the IASBs Web sites for project updates.
The estimated timetable for the FASBs hedging project was unpublished as of the date of this publication.
See footnote 2.

Financial Instruments Project Classification and

Measurement
In May 2010, the FASB issued a proposed ASU on the accounting for financial instruments, which addresses (1) C&M,
(2) impairment, and (3) hedge accounting. Since that time, the FASB has redeliberated and significantly changed its
proposed C&M and impairment models. However, the FASB has not started redeliberating its proposals on hedge
accounting.
To address constituents concerns about the FASBs original proposals related to C&M and the plan to converge its guidance
with the IASBs, the FASB has redeliberated nearly every aspect of the C&M model in its 2010 proposed ASU. The Boards
tentative decisions to date achieve more limited changes to U.S. GAAP compared with its original proposals. The more
significant changes that the FASBs tentative model (a mixed-attribute model) would make to U.S. GAAP include the
following:

The classification of debt-instrument financial assets (e.g., loans, receivables, and investments in debt securities)
is based on an entitys assessment of the cash flow characteristics of the instrument and its business model for
managing instruments rather than managements intentions with a specific instrument (e.g., to trade or to hold an
individual instrument until its maturity).
FV-OCI is no longer the default category. Instead, FV-NI is a residual category, applicable to investments in debtinstrument financial assets that do not pass the cash flow characteristics assessment or are not held within a
business model consistent with either the amortized cost or FV-OCI classifications.
Loans that are held for sale cannot be measured at the lower of cost or market but will generally be accounted for
at FV-NI.
Hybrid financial assets would not be bifurcated and would generally be accounted for at FV-NI.
Foreign-currency gains and losses on debt instruments classified as FV-OCI are recognized in net income.
Reclassifications between categories occur only when there has been a change in the business model and are
expected to be rare.
The FVO is available only when specific eligibility criteria are met.
Investments in equity securities must be accounted for at FV-NI unless (1) the entitys investment qualifies for
the equity method of accounting or (2) the entity elects, at initial recognition, to use a practicability exception.
Investments in equity securities cannot be accounted for at FV-OCI.
Equity investments that otherwise qualify for the equity method of accounting must be accounted for at FV-NI if
they are held for sale.
Entities are permitted to measure investments in nonmarketable equity securities by using a new measurement
approach under which the cost basis is adjusted for observable price changes.
Equity method investments that are not accounted for at FV-NI are evaluated for impairment under a single-step
approach, eliminating the other-than-temporary impairment recognition threshold.
During 2012, the FASB and the IASB worked to converge key aspects of their respective models, and the FASB redeliberated
other components of its model, leaving only the effective date open. A revised exposure draft is expected in the first quarter
of 2013.

On the Horizon: Financial Instruments Project Classification and Measurement14
Recent Tentative Decisions by the FASB

Key aspects of the FASBs model for classifying and measuring debt-instrument financial assets are substantially converged
with the IASBs model in IFRS 9. Both models require an entity to consider the cash flow characteristics of a debt-instrument
financial asset and the business models in which assets are managed. However, application guidance is expected to differ,
such that the practical application of the respective models could differ. In addition, the boards models for classifying and
measuring investments in equity instruments are not converged. These and other key components of the FASBs model are
discussed below.
Classification and Measurement of Debt-Instrument Financial Assets

Cash Flow Characteristics Assessment
Under the FASBs tentative model, an entity evaluates the cash flow characteristics of individual financial assets at initial
recognition. Those assets that pass the cash flow characteristics test may qualify for a category other than FV-NI (depending
on the business model within which the asset is held), and assets that do not pass must be accounted for at FV-NI. To
qualify for a category other than FV-NI, the contractual terms of the financial asset [must] give rise on specified dates
to cash flows that are solely payments of principal and interest [SPPI] on the principal amount outstanding.4 Under this
assessment, (1) interest is consideration for the time value of money and for the credit risk associated with the principal
amount outstanding and (2) principal is the amount transferred by the holder upon initial recognition. Further, prepayment
provisions, extension options, and features that could lead to variable cash flows (as a result of a contingent event or
otherwise) do not necessarily cause an instrument to fail the assessment. Instead, an entity evaluates the related cash flows
to determine whether they are SPPI.
Some real estate companies hold financial assets with variable cash flows that may be triggered by contingent events,
prepayment, term extension, or other contract features. These entities would need to evaluate the related cash flows to
determine whether they are SPPI. Under the FASBs tentative model, if it is determined that they are not SPPI, the entity
would be required to classify them as FV-NI.
Business Model Assessment

An entity would assess its business models for managing financial assets at an aggregated level that is, not for each
individual instrument. An entity would not be prevented from classifying identical or similar financial assets differently if
those assets are managed within different business models. The assessment criteria can be summarized as follows:

To classify debt instruments that pass the contractual cash flow characteristics test as amortized cost, an entity
must manage the instrument within a business model whose objective is to hold the assets in order to collect
contractual cash flows.
To classify debt instruments that pass the cash flow characteristics test as FV-OCI, an entity must manage the
instruments within a business model whose objective is both to hold the financial assets to collect contractual
cash flows and to sell the financial assets.5
Debt-instrument financial assets that fail to meet the amortized cost or FV-OCI business model assessments are accounted
for at FV-NI. Changes in fair value attributable to changes in exchange rates for FX-denominated debt-instrument financial
assets accounted for at FV-OCI would be recognized in earnings.
The FASB has tentatively decided to provide application guidance for both the amortized cost and FV-OCI business model
assessments, and to provide examples of activities that would be consistent with the amortized-cost, FV-OCI, and FV-NI
categories. For more information about this tentative decision and the application guidance included in the Boards
summary of decisions reached, along with other tentative decisions to date, see Deloittes September 24, 2012, Heads Up.
FASBs October 31, 2012, Summary of Decisions Reached to Date During Redeliberations.
See footnote 1.

Fair Value Option

Under the FASBs tentative model, an entity may make an irrevocable election at initial recognition to account for the
following at FV-NI:

Groups of financial assets and financial liabilities (which may include derivative instruments) if the entity
(1) manages the net exposure for the group on a fair value basis and (2) provides information on that basis to the
reporting entitys management.
A hybrid financial liability unless (1) the embedded derivative or derivatives do not significantly modify the cash
flows of the contract or (2) after the entity performs little to no analysis, it is clear that separate accounting for the
derivative(s) is(are) prohibited.
However, changes in fair value attributable to changes in an entitys own credit risk for financial liabilities accounted for at
FV-NI under the option described above will be recognized in OCI.
The FASB has tentatively decided to eliminate the unconditional fair value option in ASC 825 and to provide only
the conditional fair value option described above. Real estate companies that currently account for their real estate
mortgages at FV-NI by using the unconditional option in ASC 825 may have to assess whether their mortgages would
be accounted for at FV-NI under the new model. Financial liabilities are accounted for at FV-NI under the new model
only if the liability is (1) a derivative, (2) a short sale, or (3) one that the entity intends to subsequently transacts at fair
value. Otherwise, the liability would have to qualify for the conditional fair value option. Real estate companies carrying
mortgages that do not meet these conditions would account for them at amortized cost, which would be a significant
change for companies that have historically elected to account for such debt at FV-NI.
Tainting and Reclassifications

The FASBs tentative model eliminates the tainting notion, whereby an entity would be required to reclassify all financial
assets accounted for at amortized cost to FV-NI (or FV-OCI) when it makes sales that are inconsistent with the amortizedcost criteria. Instead, reclassifications are required when there is a change in business model that is (1) determined by
an entitys senior management as a result of external or internal changes, (2) significant to an entitys operations, and
(3) demonstrable to external parties.6 Reclassifications are expected to be infrequent. Although the tainting notion is not
part of the FASBs tentative model, sales inconsistent with the amortized-cost business model may be accompanied by, or
result from, a change in business model that would require a reclassification.
Classification and Measurement of Investments in Equity Securities

Under the FASBs tentative model, investments in both marketable and nonmarketable equity securities would be accounted
for at FV-NI with two exceptions: (1) equity method investments not held for sale at the moment significant influence is
established and (2) nonmarketable equity securities for which entities may elect a modified-cost measurement.7
For investments in equity securities measured under the equity method of accounting or modified cost practicability
exception, an entity is not required to determine whether an impairment is other than temporary. Instead, the entity
assesses qualitative factors to determine whether (1) the investment is impaired if it is an equity method investment or
(2) the investment is more likely than not impaired if it is measured at modified cost. In practical terms, the assessments
may be the same or similar, and in both cases would trigger the recognition of an impairment loss equal to the difference
between the carrying amount and fair value, if less.
See footnote 4.
If an entity makes an irrevocable election at initial recognition to apply the practicability exception, an investment in nonmarketable equity securities is measured at cost
adjusted for any impairment losses or for observable price changes (upward or downward) in orderly transactions involving identical or similar equity securities of the
same issuer.

Many real estate companies invest in real estate joint ventures or in equity securities issued by privately held real estate
companies. Under the FASBs tentative model, these investments would be accounted for at FV-NI, at cost, or by
applying the equity method of accounting. For equity investments accounted for under the equity method or at cost
under current U.S. GAAP, companies must evaluate whether an impairment is other than temporary before recording an
impairment. The FASBs tentative model, which requires only an assessment of qualitative factors, may be easier to apply
but could result in more impairments of investments.
Classification and Measurement of Financial Liabilities

The FASBs model does not require that financial liabilities pass a cash flows test to qualify for amortized cost. Instead, a
financial liability is accounted for at amortized cost unless it is (1) a derivative, (2) a short sale, or (3) a financial liability for
which the entitys business strategy is to subsequently transact at fair value. However, nonrecourse financial liabilities that
will be settled using contractually-linked financial assets will be accounted for on the same basis as the related financial
assets.
The scope of this project is limited to financial assets and financial liabilities. How a real estate company accounts for
and measures real estate would not be affected by the tentative decisions made as part of this project.
Presentation
The FASB has tentatively decided to expand the presentation and disclosure requirements for financial instruments.
Notably, an entity would be required to separately present financial assets and financial liabilities on the balance sheet
by classification and measurement category (i.e., FV-NI, FV-OCI, and amortized cost). In addition, public entities would
be required to parenthetically present fair value measurements on the face of the balance sheet for financial instruments
accounted for at amortized cost and to disclose related information about those fair value measurements. Nonpublic
entities would not be required to present or disclose fair value measurements for financial instruments accounted for at
amortized cost. However, all entities would be required to provide information related to the sales of assets accounted for
at amortized cost or FV-OCI. For other tentative decisions related to presentation and disclosure, see Deloittes September
24, 2012, Heads Up and the FASBs October 31, 2012, Summary of Board Decisions.
Entities that apply ASC 946 account for all investments in debt and equity securities at FV-NI. The FASB has tentatively
decided that investment companies would continue to apply the specialized industry guidance in ASC 946 and not the
tentative model for the C&M of financial instruments. Currently, REITs are excluded from the scope of ASC 946. As a part
of the FASBs redeliberations on the investment company guidance, the Board has decided to retain the ASC 946 scope
exception for all REITs. The FASB has decided to proceed with its investment company project in two phases. During the
first phase, the FASB will finalize the revised definition of an investment company. In the second phase, the Board will
address issues related to the accounting for real estate investments. The FASB intends to revisit the accounting for REITs
as part of the second phase of the project.
The Road Ahead

The FASBs redeliberations on the classification and measurement of financial instruments are nearly complete. The Board
is expected to issue an ED in the first quarter of 2013. In November 2012, the IASB proposed limited amendments to
IFRS 9 that include reducing key differences between the C&M requirements in IFRS 9 and the FASBs tentative model.
See Deloittes December 2012 IFRS in Focus newsletter for more information. The FASB is also expected to issue an ED
containing its proposals for the current expected credit loss impairment model toward the end of 2012.

Financial Instruments Project Impairment

Through June 2012, the FASB and the IASB deliberated on the development of a common impairment model for financial
assets. However, at the boards July 18, 2012, joint meeting, the FASB commented on its constituents concerns that the
joint model was difficult to understand, operationalize, and audit. As a result, the FASB decided to develop an alternative
impairment model. Conversely, the IASB did not receive similar feedback from its constituents and decided to continue with
the jointly developed model, although it made some revisions.
The FASBs Alternative Model The Current Expected Credit Loss Model
The FASBs alternative impairment model referred to by the FASB as the current expected credit loss (CECL) model
would apply to all financial assets measured at amortized cost or FV-OCI. Under the CECL model, a reporting entity would
recognize an impairment allowance equal to the estimate of expected credit losses (i.e., all contractual cash flows that the
entity does not expect to collect) for such assets as of the end of the reporting period. The estimate of current expected
credit losses would be required to:

Represent an expected value (i.e., a probability-weighted amount that considers at least two possible outcomes).
In contrast, the estimate would not represent a best- or worst-case scenario or the entitys best point estimate of
expected losses.
Reflect all supportable internally and externally available information considered relevant in making the forwardlooking estimate, including information about past events, current conditions, and reasonable and supportable
forecasts and their implications for expected credit losses.8
Incorporate the time value of money.
All changes in a reporting entitys estimate of expected credit losses would be reflected as impairment expense in the period
the change occurred.
As a practical expedient for financial assets measured at FV-OCI, the FASB decided that an entity would not be required to
recognize an impairment allowance for such assets if both of the following conditions are met:

The fair value of the financial asset is greater than its amortized cost basis.
The amount of expected credit loss is insignificant.
The FASB decided to provide this practical expedient for financial assets measured at FV-OCI because of some board
members concerns that the CECL model would result in the recognition of an allowance for assets that (1) are of high
credit quality and (2) could be sold at a gain (e.g., certain debt securities).
PCI financial assets9 would also follow the CECL model. Accordingly, upon acquisition, an entity would recognize an
allowance for credit impairment equal to the estimate of expected credit losses. In subsequent periods, any changes in
the impairment allowance (whether favorable or unfavorable) would be recognized immediately through earnings. The
recognition of interest income for PCI assets that is, the calculation of the effective interest rate would be based on
the purchase price plus the initial allowance accreting to contractual cash flows.
Other tentative decisions reached by the FASB on its CECL model include the following:

A reporting entity would apply nonaccrual accounting when it is not probable that the entity will receive full
payment of principal or interest (that is, when the entity can no longer assert that the likelihood of collection is
probable).10
See the FASBs August 22, 2012, Summary of Board Decisions.
The FASB defines PCI financial assets as acquired individual [financial] assets (or acquired groups of financial assets with shared risk characteristics . . . that have experienced a
significant deterioration in credit quality since origination, based on the assessment of the buyer. See footnote 8.
See the FASBs September 7, 2012, Summary of Board Decisions.
10

On the Horizon: Financial Instruments Project Impairment18
The CECL model would apply to trade and lease receivables, loan commitments not measured at FV-NI, and
financial guarantees not measured at FV-NI and not accounted for as insurance.
The CECL model would not prescribe a unit of account (e.g., an individual asset or a group of financial assets) to be
used in the measurement of credit impairment.
Credit impairment should be recognized as an allowance or contra-asset rather than as a direct write down
of the amortized cost basis of a financial asset. A reporting entity would, however, write off the carrying amount of
a financial asset if the entity [ultimately] has no reasonable expectation of recovery.11
The IASBs Impairment Model

Deloittes December 2011 Banking & Securities Accounting and Financial Reporting Update includes a discussion of the
boards then-current thinking of the joint approach to impairment. While the IASBs current thinking retains some of the
concepts of the earlier model (e.g., to reflect the general pattern of credit deterioration of financial assets), the IASB has
revised its approach to impairment, as discussed below.
The IASBs model would apply to all financial assets measured at amortized cost of FV-OCI and, for impairment purposes,
would require all applicable assets to be placed into one of two categories at the end of each reporting period. Note that
there are no longer three buckets under the current impairment model (see the July 2012 IASB meeting minutes for a
discussion of the presentation of interest revenue). For impairment purposes, for assets in the first category, an allowance
equal to 12 months of expected credit losses would be recognized (i.e., the expected present value of all cash shortfalls over
the life of the financial asset that are associated with the probability of a loss in the 12 months after the reporting date).
For assets in the second category, an allowance equal to lifetime expected credit losses would be recognized. Changes in
estimates of expected credit losses would be recognized as an impairment expense in the period of the change.
Similar to the FASB model, the expected credit losses are measured taking into consideration:

All reasonable and supportable information (including forward-looking data).
A probability-weighted estimate of a range of possible outcomes.
The time value of money.
Upon initial recognition, assets would be recognized in the first category, except for PCI financial assets and assets that
apply a simplified approach (described below). An asset would subsequently transfer to the second category if there has
been significant deterioration in credit quality since initial recognition. An entity would consider the term of the asset and
the original credit quality of the asset. For example, for higher credit quality assets, an entity would recognize lifetime
expected credit losses if the asset deteriorates to below investment grade.
The nature of the IASBs general model is symmetrical such that assets can transfer between the first category (i.e.,
12-month expected credit losses) and the second category (lifetime expected credit losses) in both directions. In other
words, if the transfer criteria is no longer satisfied, the asset would transfer back into the first category (i.e., 12-month
expected credit losses).
However, the IASB recognized that there may be situations in which a simplified approach may be appropriate. As a result,
the IASB decided that the impairment allowance for PCI financial assets would always be lifetime expected credit losses
(i.e., PCI financial assets do not begin in the 12-month expected-credit-loss category). In addition, for trade receivables with
a significant financing component and lease receivables, an entity could choose to apply either the general approach or a
simplified approach whereby lifetime credit losses are always recognized. Following the simplified approach would eliminate
the need to monitor credit quality for transferring between categories.
See the FASBs February 17, 2011, joint board meeting minutes.
11

The following table highlights some of the key similarities and differences between the FASBs alternative model and the
IASBs current thinking:
Subject
FASBs Alternative Model
IASBs Current Thinking
Scope
The alternative model applies to:
Same as the FASB.
Recognition threshold
Measurement
Financial assets measured at either amortized

cost or FV-OCI.
Trade and lease receivables.
Financial guarantees not measured at FV-NI

and not accounted for as insurance.
Loan commitments not measured at FV-NI.
None. Impairment is based on expected (rather than

incurred) credit losses.
None. Impairment is based on expected (rather than

incurred) credit losses.
However, the FASB does not require entities to record an

impairment allowance for a FV-OCI financial asset if:
The IASB does not provide an exception for FV-OCI

financial assets.
Its fair value exceeds its carrying amount.
The expected credit losses are deemed

insignificant.
Current expected credit losses (i.e., all contractual cash

flows that the entity does not expect to collect).
For assets in the first category, 12-month expected losses

(see further description above).
For assets in the second category, lifetime expected credit
losses.
Transfer criteria
between categories
Not applicable in CECL model. Only one measurement

objective.
Transfer to lifetime expected credit losses when there has

been significant deterioration in credit quality since initial
recognition. An entity would consider the term of the asset
and the original credit quality of the asset.
Transfer back to 12-month expected credit losses when
transfer criteria no longer satisfied.
Presentation of
impairment allowance
Valuation allowance (i.e., contra asset).
Same as the FASB.
PCI financial assets
Follows CECL model. Impairment allowance represents

current expected credit losses. Interest income recognition
is based on purchase price plus the initial allowance
accreting to contractual cash flows.
The impairment allowance for PCI financial assets is always

based on the change (from the original expectation at
acquisition) in lifetime expected credit losses. Interest
income recognition is based on expected (rather than
contractual) cash flows.
Nonaccrual
accounting
An entity would be required to place a financial asset

on nonaccrual status if it is not probable that the entity
will receive full payment of principal or interest (that is,
when the entity can no longer assert that the likelihood of
collection is probable).
IFRSs do not currently contain a nonaccrual principle nor

would the IASBs proposed approach introduce one.
However, for assets that have deteriorated to being credit
impaired, interest income is based on the net carrying
amount of the asset.
Because real estate assets are not financial assets, the proposed impairment models would not significantly affect real
estate companies that invest directly in real estate. However, there may be implications for real estate companies that
invest in real estate by writing loans collateralized by real estate assets. In such cases, the loan receivable would be
considered a financial asset, and the proposed impairment models would apply if the loan receivable is measured at
either amortized cost or FV-OCI.

Financial Instruments Project Hedging

Although the FASB and the IASB continue with a joint project on improving their hedge accounting models and achieving a
converged standard, the boards have taken different approaches and are separately developing proposals to simplify hedge
accounting.
In September 2012, the IASB issued a draft of its revised hedge accounting requirements (the Staff Draft) that will be
incorporated into IFRS 9, ultimately replacing the hedging requirements in IAS 39. Like the IASBs December 2010 ED on
this topic, the Staff Draft covers only what the IASB describes as a general hedge accounting model; it does not address
the macro hedging issues that the Board is currently discussing. However, the hedging model set forth in the Staff Draft
significantly differs from the current hedging model in IAS 39 on a number of topics, including:

Eligibility of hedging instruments.
Accounting for the time value component of options and forward contracts.
Eligibility of hedged items.
Designation of components of nonfinancial items as hedged items.
Qualifying criteria for applying hedge accounting.
Modification and discontinuation of hedging relationships.
Extension of the fair value option.
Additional disclosures.
Once finalized, the IASBs hedge accounting requirements will be effective for annual periods beginning on or after January
1, 2015. Earlier adoption will be permitted if an entity also adopts all other amendments to IFRS 9. For more information on
the IASBs draft hedging model, see Deloittes October 16, 2012, Heads Up.
The proposed IASB guidance in the Staff Draft advocates less stringent effectiveness assessment requirements for hedge
accounting. For example, (1) there is no specific requirement for a quantitative assessment, (2) qualitative assessment
may be sufficient in some cases, and (3) retrospective assessment is not required. However, the proposed IASB guidance
does not allow an entity to voluntarily remove a hedge designation after it has been established. Therefore, real estate
companies may need to adjust their hedging strategies if they currently dedesignate the hedging relationship voluntarily
before the termination date of the hedging instrument.
The FASB is also revisiting its existing hedge accounting model as part of its joint project with the IASB on accounting for
financial instruments and proposed a number of changes to that model in its May 2010 ED. Those proposed changes
differ significantly from the IASBs hedge accounting model described in the Staff Draft. The FASB has not yet begun
redeliberating its hedge accounting model, and it is unclear to what extent the Staff Draft will affect the FASBs discussions.

On the Horizon: Financial Instruments Project Hedging21
Financial Instruments Project Liquidity and Interest Rate

Risk Disclosures
In June 2012, the FASB issued a proposed ASU that would amend ASC 825 and require all reporting entities to provide
new qualitative and quantitative disclosures about liquidity and interest rate risk for interim and annual periods. Under
the proposal, the level of disclosure an entity or reporting segment must provide is determined by whether the entity
is a financial institution.12 Financial institutions (including reportable segments that meet the definition of a financial
institution) must provide significantly more disclosure than nonfinancial institutions. However, entities that measure
substantially all of their assets at fair value with changes in FV-NI would provide only those disclosures required for entities
that are not financial institutions.
It is unclear whether certain leasing entities would qualify as financial institutions under the proposed ASUs definition,
which states that financial institutions include entities that earn, as a primary source of income, the difference between
interest income generated by earning assets and interest paid on borrowed funds.
The proposed ASU attempts to address stakeholder concerns that (1) certain inherent risks of financial instruments and their
effect on an entitys broader risk exposures would not be fully reflected in the measurement model for such instruments
and (2) the breadth of such risks could only be communicated through supplemental disclosure. For more information, see
Deloittes July 3, 2012, Heads Up.
Disclosures About Liquidity Risk

Under the proposed ASU, a financial institution would provide a tabular liquidity gap maturity analysis that discloses carrying
amounts of the various classes of financial assets and financial liabilities, including off-balance-sheet commitments and
obligations (e.g., loan commitments, operating lease commitments, and lines of credit). The amounts would be categorized
into specified time intervals by the expected maturities13 of these instruments, although instruments carried at FV-NI
(excluding derivatives) and equity instruments classified as FV-OCI would not need to be allocated.
Reporting entities that are not financial institutions would not have to include a liquidity gap maturity analysis. However,
such entities would need to disclose, in tabular format, all undiscounted expected financial cash flow obligations, including
off-balance-sheet arrangements, for specified time intervals. The table also should include a column that reconciles amounts
shown in the table to the carrying amounts presented in the statement of financial position. Further, entities would be
required to disclose (1) any significant changes related to the timing and amounts of cash flow obligations and available
liquid funds in the tabular disclosures from the last reporting period to the current reporting period, including the reasons
for the changes and actions taken, if any, during the current period to manage the exposure related to those changes;
and (2) significant assumptions underlying the entitys estimates of the expected timing of its cash flow obligations if the
expected timing differs significantly from the contractual maturities of those obligations.
All reporting entities would also disclose, in a tabular format by asset class, their available liquid funds, which include
unencumbered cash and liquid assets (i.e., assets that are of high quality, free from restrictions, and readily convertible to
cash) and additional borrowing capability, such as available lines of credit and the amount below the borrowing cap.
Disclosures About Interest Rate Risk

Under the proposed ASU, only financial institutions would be required to provide disclosure about interest rate risk. Those
requirements include a repricing gap analysis in a tabular format that would show how the carrying amounts of different
classes of their financial assets and financial liabilities reprice over specified time intervals. The tabular disclosure also would
include (1) the weighted-average contractual yield of each class for each time interval and a total yield for each class and
ASC 825-10-50-23A, which would be added by the proposed ASU, defines financial institutions as entities or reportable segments for which the primary business activity is to
do either of the following: (a) Earn, as a primary source of income, the difference between interest income generated by earning assets and interest paid on borrowed funds
[or] (b) Provide insurance.
12
ASC 825-10-50-23E, which would be added by the proposed ASU, states, in part, The term expected maturity relates to the expected settlement of the instrument resulting
from contractual terms (for example, call dates, put dates, maturity dates, and prepayment expectations), rather than the entitys expected timing of the sale or transfer of the
instrument.
13

On the Horizon: Financial Instruments Project Liquidity and Interest Rate Risk Disclosures22
(2) the total duration of each class of financial assets and financial liabilities. The tabular disclosure should reconcile to the
statement of financial position and should be supplemented with a discussion of how instrument durations were estimated.
A financial institution would also provide certain interest rate sensitivity disclosures about the effects on the entitys net
income (for the 12 months after the reporting date) and shareholders equity of hypothetical, instantaneous interest rate
shifts on the entitys interest-sensitive financial assets and financial liabilities. The sensitivity analysis would incorporate
multiple yield curve shift scenarios (i.e., parallel shifts, and flattening and steepening yield curves) as prescribed by the
proposed ASU. Entities would compute changes in net income and shareholders equity by using the same measurement
attributes (e.g., FV-NI, amortized cost) they used in the statement of financial position. The scenarios would not take into
account growth rates, changes in asset mix, or other shifts in business strategy that would otherwise result from these
interest rate changes.
Supplemental Disclosures
In addition to establishing quantitative disclosure requirements (i.e., tabular disclosures), the proposed ASU emphasizes the
importance of discussions that supplement the tabular disclosures. The proposed ASU notes that for each of the broad risk
areas (i.e., liquidity risk and interest rate risk), the reporting entity must provide any additional quantitative and narrative
disclosures necessary to provide users of financial statements with an understanding of its exposure to the various risks
included in the proposals scope.
Comment Letter Feedback Summary

Almost 200 comment letters were submitted by the September 25, 2012, deadline. Respondents expressed a number of
concerns, including whether (1) the disclosures would be meaningful and provide a faithful representation of an entitys
risk exposures, (2) the forward-looking nature of some of the disclosures made them more appropriately suited for MD&A
versus audited financial statements, and (3) the proposed disclosures would be redundant and overlap existing SEC
disclosure requirements.
Next Steps
The proposed ASU does not include an effective date and specifically asks respondents (1) how much time they thought
stakeholders would need to prepare for and implement the proposed amendments and (2) whether the effective date
should be delayed for nonpublic entities. The FASB is currently assessing the feedback received during the comment letter
process, and has not yet published a timeline for its redeliberations.
Revenue Recognition Project

Background
In November 2011, the FASB and the IASB jointly issued a revised ED on revenue recognition, with a 120-day comment
period that ended on March 13, 2012. The revised ED outlines a single comprehensive model for accounting for revenue
arising from contracts with customers and would supersede substantially all current revenue recognition guidance.
The core principle of the revised ED stipulates that an entity shall recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. In applying the revised EDs provisions to contracts within its scope, an entity would:

Identify the contract with a customer.
Identify the separate performance obligations in the contract.
Determine the transaction price.

On the Horizon: Revenue Recognition Project 23
Allocate the transaction price to the separate performance obligations in the contract.
Recognize revenue when (or as) the entity satisfies a performance obligation.
The new revenue recognition standard would entirely supersede ASC 360-20 and could result in some significant
changes in the accounting for sales of real estate currently accounted for under ASC 360-20. ASC 360-20 is a rulesbased standard with many bright-line tests that entities must consider when evaluating whether and, if so, how to
recognize and measure the sale of real estate, including required amounts of initial and continuing investments from
the buyer. Because the proposed revenue recognition standard would be more principles-based than current guidance,
real estate companies would be required to exercise more professional judgment when evaluating (1) whether they
have transferred control of the real estate to the buyer (including the risks and rewards of ownership), (2) expected
collectability of sales proceeds, and (3) other indicators yet to be specified when determining whether to recognize
a sale of real estate and, if so, to what extent. In some instances, the timing of revenue recognition may be different
under the proposed model than it is under ASC 360-20.
The new revenue recognition standard would also entirely supersede ASC 605-35 and potentially significantly change
the accounting for long-term construction contracts currently accounted for under ASC 605-35. Under the revised ED,
entities would need to evaluate bundled arrangements (e.g., engineering, procurement, and construction services) to
determine whether distinct performance obligations exist and account for those performance obligations separately.
Entities would also need to consider the effect of contract modifications on these determinations. Engineering and
construction companies would be required to exercise more professional judgment when evaluating contracts with
customers in determining the timing and extent of revenue recognized.
See Deloittes November 15, 2011, Heads Up for a summary of the key provisions of the revised ED.
In addition, see Deloittes October 2012 Real Estate Spotlight for a summary of certain requirements of the proposed
revenue recognition model that are likely to significantly affect engineering and construction entities.

The boards received approximately 350 comment letters on the proposal significantly fewer than the nearly 1,000 they
received on the original ED issued in June 2010. Although the feedback from most industries was similar and generally
indicated support for the boards efforts to develop a single comprehensive revenue recognition standard, respondents
expressed concerns about several aspects of the revised ED.
Real estate developers that currently follow percentage-of-completion accounting during the construction phase
expressed concerns about the difficulty of assessing the criteria for a performance obligation to be considered satisfied
over time (and thus for revenue to be recognized over time) in certain circumstances. These respondents noted that,
depending on the payment terms, recognition of revenue over time could be inappropriately precluded. They cited
examples, including (1) payments made by the customer that are for principal and interest for an outstanding note and
not for progress payments during the construction period, (2) contractual eligibility criteria for the buyer that must be
met in a future period, and (3) the right to a refund for a developers nonperformance. These respondents requested
that the boards provide additional guidance on how the criteria for a performance obligation would be satisfied over
time in such situations.
See Deloittes April 13, 2012, Heads Up for a summary of the responses and general themes of the comment letters.
Redeliberations
After significant outreach to constituents, including preparers, users, and others, the boards began redeliberating their
revised ED in July 2012. To date, the boards have made a number of important decisions to change the revised ED.

On the Horizon: Revenue Recognition Project 24
Regarding concerns identified by real estate developers, the boards tentatively decided to rearrange the revised EDs
criteria for when a performance obligation is satisfied over time. The FASBs November 19, 2012, Summary of Board
Decisions notes that revisions to the criteria include:

Retaining the criterion in paragraph 35(a) of the ED that a performance obligation would be satisfied over time
if the entitys performance creates or enhances an asset [for example, work in process] that the customer
controls as the asset is created or enhanced.
For pure services contracts, creating a single criterion for determining whether a performance obligation
is satisfied over time that takes into account whether the customer receives and consumes the benefits of
the entitys performance as the entity performs and whether another entity would not need to substantially
re-perform the work the entity has completed to date.
Creating a closer link between whether an asset has an alternative use and whether an entity has a right to
payment for performance completed to date.
The boards also tentatively agreed to clarify and improve the guidance on when an asset has an alternative use and when
an entity has a right to payment for performance completed to date. Respondents concerns focused on (1) the impact
of contractual restrictions and practical limitations on whether an asset has an alternative use, (2) the period to consider in
assessing whether an asset has an alternative use, and (3) the conditions to be evaluated when determining whether an
entity has a sufficient right to payment for performance completed to date.
Next Steps
The boards are expected to complete their deliberations in early 2013 and issue a final standard in the first half of 2013. The
revised ED proposes that a final standard would be adopted retrospectively (with certain optional practical expedients) and
would not be effective before annual periods beginning on or after January 1, 2015, for public companies, with a minimum
of a one-year deferral for nonpublic companies. The final effective date will be set by the boards during redeliberations of
the revised ED.
Leases Project
In August 2010, the FASB and the IASB issued an ED that would fundamentally change the accounting for lease
arrangements under both U.S. GAAP and IFRSs. On the basis of the feedback received through comment letters on the
ED, roundtables, and outreach sessions, the boards have tentatively agreed to make significant changes to their original
proposals. The boards substantially concluded redeliberating the proposed guidance in September 2012 and are expected
to expose for public comment a revised ED, with a 120-day comment period, in the first quarter of 2013. On the basis
of this timeline, a final standard is likely to be issued in late 2013, with an effective date no earlier than annual reporting
periods beginning January 1, 2016.
Proposed Accounting Lessee

The proposed accounting model for lessees is based on an ROU approach, which would be applied to all leases within the
scope of the proposal. Under this approach, a lessee would recognize (1) an asset for the right to use the underlying asset
(ROU asset) and (2) a liability to make lease payments. Both would be initially measured at the present value of the lease
payments.
The lessee would use the effective-interest method to subsequently measure the liability to make lease payments.
Respondents to the ED indicated that entities would more appropriately account for certain types of leases (e.g., leases of
real estate) by using a straight-line expense recognition pattern. Accordingly, the boards agreed to provide two different
approaches for lessees to subsequently account for the ROU asset the straight-line-expense approach and the interest
and amortization approach. A lessee would determine which method to apply on the basis of whether it acquires and
consumes a more-than-insignificant portion of the underlying asset.
On the Horizon: Leases Project25
In addition, the boards decided that entities could use the nature of the underlying asset as a practical expedient to
determine whether the lessee acquires and consumes a more-than-insignificant portion of the underlying asset. Specifically,
under the practical expedient, provided certain criteria are met, a lessee can assume that it does not acquire and consume
a more-than-insignificant portion of the underlying asset if the underlying asset is property, which is defined as land or a
building or part of a building or both.14
For leases accounted for under the straight-line-expense approach, the amortization of the ROU asset would be calculated
as the difference between the total straight-line lease expense (total undiscounted lease payments divided by the lease
term) and the interest expense related to the lease liability for the period. The amortization of the ROU asset and interest
expense would be combined and presented as a single amount within the income statement. For leases accounted for
under the interest and amortization approach, the asset would be amortized in the same manner as other nonfinancial
assets. Entities would present the interest and amortization expenses separately in the income statement.
Real estate companies have expressed concerns about how to apply the proposed practical expedient. For example, they
have questioned whether leases of real estate that include both land and buildings should be assessed as one unit of
account or evaluated separately. Entities have also inquired about how leases that include integral equipment would be
evaluated under the proposed practical expedient. If such leases are considered leases of assets other than property,
the resulting accounting may be significantly different from that for a property lease. In addition, they have indicated
their concerns about leases that fall within the grey area as described by the boards staffs in a discussion during their
July 19, 2012, webcast about the evaluation criteria for the practical expedient.
Proposed Accounting Lessor

The FASB and the IASB also decided that the appropriate accounting model to be applied by lessors should depend on
whether the lessee consumes a more-than-insignificant portion of the underlying asset over the lease term. If the lessee
consumes a more-than-insignificant portion of the leased asset over the lease term, the lessor would account for the lease
under the R&R approach. But if the lessee consumes only an insignificant portion of the leased asset over the lease term, the
lessor would account for the lease contract by using a model similar to current operating lease accounting for lessors.
As a result of the FASBs tentative decision to postpone the development of investment property guidance, the outcome
of the deliberations on lease accounting will apply to many lessors of real estate, and the operating lease accounting
model will continue to apply as long as the criteria discussed above have been met.
See Deloittes September 27, 2012, Heads Up for further information.
Investment Property Entities

Background
In October 2011, the FASB issued a proposed ASU that would require IPEs to measure their investments in real estate
properties at fair value, with changes in fair value reflected in net income. The concept of an IPE would be a newly defined
type of entity under U.S. GAAP. In order to qualify as an IPE, a reporting entity would have to meet the six criteria outlined
in the proposed ASU. See Deloittes October 21, 2011, Heads Up for more information on the proposal.

Comments on the proposal were due on February 15, 2012, and the Board received 80 comment letters from real estate
investors, financial institutions, industry organizations, and others. Most respondents expressed concerns about the
proposals overall approach and did not believe the proposal should be finalized in its current form. Concerns were raised
on the proposed criteria that an entity would have to meet in order to qualify as an IPE. In addition, many respondents
See the boards project update on the FASBs Web site.
14

On the Horizon: Investment Property Entities26
noted that creating a new type of entity (i.e., an IPE) under U.S. GAAP, with its own specialized accounting guidance, would
be overly complex and unnecessary. In addition, some constituents suggested that instead of creating an IPE concept, the
proposed investment company guidance should be clarified to help entities that invest in real estate evaluate whether they
qualify as an investment company.
To qualify as an IPE under the proposal, the entity must perform activities that relate only to the IPEs investment
activities. An entity that invests in a real estate property or properties but does not meet the proposed IPE criteria may be
within the scope of the proposed ASU on investment companies (also issued in October 2011), in which case it would
be required to measure all of its investments at fair value, including investments in real estate properties. However, the
stipulations in the investment company proposal are similar and must be met for an entity to qualify as an investment
company. Therefore, entities involved in substantive activities in addition to their investment activities may be outside the
scope of both proposals.
Business activities related to investing in real estate property generally include buying, selling, and managing such
property. Examples of activities that may call into question whether a real estate entity is within the scope of the
guidance include (1) holding significant assets or liabilities other than those related to its direct investment(s) in real
estate property, (2) managing properties not owned directly or indirectly through an agent, (3) having significant
construction or development activities, and (4) warehousing. Entities would need to use judgment to determine whether
such other activities are related to investing in real estate property.
Views were also mixed on whether entities that do not qualify as IPEs or investment companies should be required, or given
the option, to measure their investment properties at fair value. For more information about comment letter feedback on
the proposal, see Deloittes April 2012 Real Estate Spotlight.
Redeliberations and Next Steps

Given the concerns expressed by respondents regarding the overall approach in the proposed ASU, the FASB has tentatively
decided to discontinue the development of the IPE concept. Rather, the Board may decide to pursue an asset-based
approach for measuring investment properties that would be similar to the approach in IAS 40. If the Board pursues such an
approach, it would decide whether fair value measurement should be an option or a requirement.
Investment Companies
Background
In October 2011, the FASB issued a proposed ASU that would amend the definition of an investment company in ASC 946.
The proposed ASU includes six criteria for an entity to qualify as an investment company. A reporting entity that qualifies
as an investment company would measure its investments at fair value and provide the current and proposed investment
company disclosures. The proposal also requires that in a fund-of-funds structure, an investment company parent would
consolidate its controlling interest in another investment company. Finally, the proposal reaffirms the current requirement
that a noninvestment company parent would retain the specialized accounting of its investment company subsidiary in its
consolidated financial statements. The proposed ASU is the result of a joint project with the IASB to develop converged
requirements in determining whether an entity qualifies as an investment company; in October 2012, the IASB issued its
final guidance on this topic. See Deloittes October 21, 2011, Heads Up for more information on the FASBs proposal.

Comments on the FASBs proposal were due on February 15, 2012. The FASB received 90 comment letters from various
respondents, including asset managers, banks, insurance companies, accounting firms, industry associations, and
academics. Although many respondents agreed that the proposed criteria to qualify an entity as an investment company
were generally appropriate, they expressed concerns that it would be onerous for entities to meet all six criteria. These
On the Horizon: Investment Companies27
respondents believed that certain entities that should qualify as investment companies, or that currently apply investment
company accounting, could be precluded from qualifying. Further, some respondents suggested that the proposed criteria
are too rules-based and recommended a more principles-based model. Respondents also shared their views on each of the
proposed qualifying criterion.
Most respondents also did not support the FASBs proposed requirement that an investment company consolidate its
controlling interest in another investment company. They indicated that consolidated information would not be meaningful
for financial statement users and would add unnecessary complexity to the financial statements. Instead, these respondents
believe that controlling financial interests in other investment companies should be measured at fair value with additional
disclosures being required related to the investment. Some respondents suggested that consolidation may be appropriate
only in certain situations, such as when controlling interests in other investment companies are specifically formed for tax,
legal, or other regulatory purposes (e.g., a blocker fund).
Most respondents agreed with the FASBs proposed requirement that a noninvestment company parent should retain, in its
consolidated financial statements, the specialized accounting applied by its investment company subsidiaries.
For more information about feedback on the proposal, see Deloittes April 2012, Asset Management Spotlight.
Redeliberations and Next Steps

The FASB has substantially completed its redeliberations on this project. In response to feedback received from the
respondents, the Board has agreed to modify the requirements to qualify an entity as an investment company. Specifically,
rather than requiring an entity to meet all six criteria in the proposal, the definition of investment company would
incorporate only some of these criteria. The FASB has decided that for those entities that are not regulated under the
Investment Company Act of 1940 (which would automatically qualify them as investment companies), a reporting entity
would need to meet the following revised definition to qualify as an investment company:
1. An investment company is an entity that does both of the following:
a. Obtains funds from an investor or investors and provides the investor(s) with professional investment management services
b. Commits to its investor(s) that its business purpose and only substantive activities are investing the funds for
returns from capital appreciation, investment income, or both.
2. An investment company and its affiliates do not obtain, or have the objective of obtaining, returns or benefits from
their investments that are either of the following:
a. Other than capital appreciation or investment income
b. Not available to other noninvestors or are not normally attributable to ownership interests.[15]
The remaining criteria from the proposal would serve as indicators or characteristics typical of an investment company. An
entity would need to consider these characteristics in determining whether it meets the revised definition. The FASB decided
that an entity would need to consider if it (1) has multiple investments, (2) has multiple and unrelated investors, (3) issues
ownership units in the form of equity or partnership interests, and (4) manages its investments on a fair value basis.
Although the concept of an investment company is not new to U.S. GAAP, it is a new concept for IFRS. The IASBs definition
and characteristics of an investment company, included in its final guidance, differ slightly from those agreed to by the
FASB.
The FASB has tentatively decided that all REITs should be excluded from the scope of the proposed investment company
guidance. The Board has decided to proceed with the investment company project in two phases. During the first phase,
the FASB will finalize the revised definition of an investment company. In the second phase, the Board will address issues
related to the accounting for real estate investments. The FASB intends to revisit the accounting for REITs as part of the
second phase of the project.
15
See the FASBs May 21, 2012, joint board meeting minutes.

On the Horizon: Investment Companies28
The FASB also reversed its decision in the proposed ASU on how an investment company accounts for its controlling
financial interests in another investment company. The Board decided against providing any guidance on this topic and will
allow current industry practice to continue. The Board also reaffirmed that a noninvestment company parent should retain
the specialized accounting of its investment company subsidiary in its consolidated financial statements.
The FASB expects to issue final guidance in the first half of 2013. The Board has not yet decided on an effective date or
whether early adoption will be permitted.
The Liquidation Basis of Accounting Proposed ASU

Overview
In July 2012, the FASB issued a proposed ASU that would provide guidance on when and how to apply the liquidation basis
of accounting. The proposed guidance would be effective for both public and nonpublic entities. Under the proposed ASU,
an entity would be required to use the liquidation basis of accounting to present its financial statements when it determines
that liquidation is imminent. According to ASC 205-30-25-2 (added by the proposed ASU), liquidation would be considered
imminent in either of the following situations:
a. A plan for liquidation has been approved by the person or persons with the authority to make such a plan effective
and the likelihood is remote that the execution of the plan will be blocked by other parties (for example, those with
protective rights).
b. A plan for liquidation is imposed by other forces (for example, involuntary bankruptcy) and the likelihood is remote
that the entity will return from liquidation.
Liquidation would also be considered imminent when significant management decisions about furthering the ongoing
operations of the entity have ceased or they are substantially limited to those necessary to carry out a plan for liquidation
that is different from a liquidation plan specified in an entitys governing documents. The proposed ASU provides indicators
for determining whether the liquidation plan changed from what was specified in the governing documents. These
indicators include, but are not limited to, the following:

The expected liquidation date differs from the date specified in the governing documents.
Assets are disposed of for a value other than fair value or the disposal of the assets is not orderly.
The entitys governing documents were amended after their initial creation.
An entitys financial statements should contain relevant information about the entitys resources and obligations upon
liquidation. When applying the liquidation basis of accounting, the entity would need to initially measure and present the
values of its assets and liabilities to reflect the amount the entity expects to receive or to pay in cash or other consideration.
The entity would present separately from the measurement of the assets and liabilities the expected aggregate
liquidation and disposal costs to be incurred during the liquidation process. In addition, the entity would estimate and
accrue the expected future costs and income to be incurred or realized during the course of liquidation, such as payroll
expense and interest income. These estimates would be remeasured as of each subsequent reporting period.
A limited-life entity (like a real estate fund) should not use the liquidation basis of accounting when its liquidation plans
are consistent with those contemplated in the entitys governing documents.

On the Horizon: The Liquidation Basis of Accounting Proposed ASU29
Presentation and Disclosures

At a minimum, the proposed ASU would require entities to present a statement of net assets in liquidation and a statement
of changes in net assets in liquidation. An entity would also be required to include expanded disclosures in its financial
statements for the reporting period in which the entity determines that liquidation is imminent. ASC 205-30-50-1 (added by
the proposed ASU) states that an entity would have to disclose the following:
a. That the financial statements are prepared using the liquidation basis of accounting, including the facts and circumstances surrounding the adoption of the liquidation basis of accounting.
b. A description of the entitys plan for liquidation, including, at a minimum, a description of the manner by which the
entity expects to dispose of its assets and liabilities and the expected duration of the liquidation.
c. The methods and significant assumptions used to measure assets and liabilities, including subsequent changes to
those methods and assumptions. Significant methods and assumptions might include, for example, the nature and
source of expected future cash flows and discount rates used.
d. The type and amount of costs and income accrued in the statement of changes in net assets in liquidation.
Effective Date
The Board will decide on an effective date after further deliberation. The guidance would be adopted as of the beginning of
an entitys first annual reporting period that begins after the effective date and applied prospectively to its interim or annual
reporting period after the effective date. Early application would be permitted.
Next Steps
The comment period ended October 1, 2012, and the Board will likely begin redeliberations on the proposed ASU in
the coming months. In addition, the Board will also revisit its previously tentative decisions regarding the going concern
objective of the project.

On the Horizon: The Liquidation Basis of Accounting Proposed ASU30
Other Topics

Other Topics: The Liquidation Basis of Accounting Proposed ASU31
SEC Comment Letter Trends

The SEC continues to focus on enforcing federal legislation and expanding its reviews of company filings. During 2012, the
SEC concentrated on the regulatory challenges presented by implementing legislation such as the Dodd-Frank Act and the
JOBS Act. For example, in addition to finalizing rules related to the clearing of swaps and derivatives mandated under the
Dodd-Frank Act, the SEC proposed a rule to implement the Volcker Rule, which is intended to restrict financial institutions
from proprietary trading or trading securities on their own account.
In addition, the SEC staff continued to expand its review of issuers. During each of the last two years, the staff reviewed
slightly less than half of all issuers, which is well in excess of the SECs mandate to review each issuer at least once every
three years. Furthermore, the SEC group responsible for reviewing the largest financial services registrants currently performs
continuous reviews of these registrants and has been actively issuing comments to them.
Comments resulting from the SEC staffs reviews of financial services registrants filings have largely centered on MD&A,
particularly regarding disclosures of specific material risks such as those associated with operating in foreign countries, state
sponsors of terrorism, and early-warning disclosures about potential charges resulting from items such as impairments or
contingencies. Other broad comment letter themes have included questions about the qualitative test for goodwill and
long-lived asset impairment testing, the determination of reportable segments, and various liquidity-related disclosures. The
staff has also asked financial services registrants about their loss contingency disclosures, fair value measurements, valuation
of investments (i.e., whether such investments are other-than-temporarily impaired), credit risks, income taxes, revenue
recognition, financial instruments, and disclosures about cybersecurity and cyber incidents.
SEC staff comments to real estate registrants have primarily focused on non-GAAP measures, leasing activities,
capitalization of real estate development costs, consolidation accounting, real estate acquisitions, impairments, and liquidity
considerations associated with distributions.
For a comprehensive discussion of the SEC staffs comment letter trends in 2012, see Deloittes SEC Comment Letters
Including Industry Insights: Highlighting Risks.

Other Topics: SEC Comment Letter Trends32
Appendixes

Appendixes: SEC Comment Letter Trends33
Appendix A Glossary of Standards and Other Literature

The standards and literature below were cited or linked to in this publication.
FASB ASC References

For titles of FASB Accounting Standards Codification references, see Deloittes Titles of Topics and Subtopics in the FASB
Accounting Standards Codification.
FASB Accounting Standards Updates and Other FASB Literature

See the FASBs Web site for the titles of:

Accounting Standards Updates.
Proposed Accounting Standards Updates.
Pre-Codification literature (Statements, Staff Positions, EITF Issues, and Topics).
Concepts Statements.

Appendixes: Appendix A Glossary of Standards and Other Literature34
Appendix B Abbreviations
Abbreviation Description
Abbreviation Description
AICPA
American Institute of Certified Public

Accountants
GAAP
generally accepted accounting principles
IASB
AOCI
accumulated other comprehensive

income
International Accounting Standards

Board
IFRS
International Financial Reporting

Standard
ASC
FASB Accounting Standards Codification
ASU
FASB Accounting Standards Update
IPE
investment property entity
BRP
Blue-Ribbon Panel
JOBS Act
Jumpstart Our Business Startups Act
CECL
current expected credit loss
LIFO
last in, first out
C&M
classification and measurement
MD&A
managements discussion and analysis
DP
discussion paper
MoU
Memorandum of Understanding
ED
exposure draft
OCI
other comprehensive income
EITF
Emerging Issues Task Force
PCAOB
FAF
Financial Accounting Foundation
Public Company Accounting Oversight

Board
FASB
Financial Accounting Standards Board
PCC
Private Company Council
FPI
foreign private issuer
PCI
purchased credit-impaired
FSI
financial services industry
R&R
receivable and residual
FVO
fair value option
REIT
real estate investment trust
FV-NI
fair value through net income
ROU
right of use
FV-OCI
fair value through other comprehensive

income
SEC
Securities and Exchange Commission
SME
small and medium-sized entity
FX
foreign currency
SPPI
solely payments of principal and interest

Appendixes: Appendix B Abbreviations 35
Appendix C Deloitte Specialists and Acknowledgments

Specialists and Contacts
Bob Contri
Vice Chairman, U.S. Financial Services Leader
+1 212 436 2043
bcontri@deloitte.com
Susan L. Freshour
Financial Services Industry Professional Practice Director
+1 212 436 4814
sfreshour@deloitte.com
Chris Dubrowski
Real Estate Industry Professional Practice Director
+1 203 708 4718
cdubrowski@deloitte.com
Wyn Smith
Real Estate Industry Deputy Professional Practice Director
+1 713 982 2680
gesmith@deloitte.com
Acknowledgments
In addition, we would like to thank the following Deloitte professionals for contributing to this document:
Nicole Axt
Trevor Farber
Clif Mathews
Yvonne Rudek
Bryan Benjamin
Bill Fellows
Lyndsey McAlister
Sherif Sakr
Mark Bolton
Jenny Gilmore
Adrian Mills
Wyn Smith
Keith Bown
Sara Glen
Stuart Moss
Sean St. Germain
Lynne Campbell
Allison Gomes
Jason Nye
Heidi Suzuki
Bernard Cheng
Chris Harris
Magnus Orrell
Justin Truscott
Mark Crowley
Paul Josenhans
Jeanine Pagliaro
Beth Young
Joe DiLeo
Tim Kolber
Ken Pressler
Ana Zelic
Geri Driscoll
Michael Lorenzo
Elsye Putri
Amy Zimmerman
Chris Dubrowski
Kristen Mascis
Joseph Renouf

Appendixes: Appendix C Deloitte Specialists and Acknowledgments36
Appendix D Other Resources

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Appendixes: Appendix D Other Resources 37
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Financial Services Industry

Other Comprehensive Income

Private-Company Standard-Setting Activity

Financial Instruments Project Classification and Measurement 

Financial Instruments Project Impairment

Financial Instruments Project Hedging

Financial Instruments Project Liquidity and Interest Rate Risk Disclosures

Revenue Recognition Project

Investment Property Entities

The Liquidation Basis of Accounting Proposed ASU

Appendix C Deloitte Specialists and Acknowledgments

Appendix D Other Resources

Banking & Securities