GLOBAL - The two main global accounting standards bodies have heeded calls to exclude all investment property companies from proposed changes affecting the way in which lease transactions are accounted.

The move by the International Accountancy Standards Board (IASB) and the Financial Accounting Standards Board (FASB) is likely to benefit real estate companies in the US and Asia, where reporting real estate holdings 'at cost' is commonplace.

Investment companies that report real estate holdings at fair value - the norm among European property companies - were already exempt from the proposed overhaul of lease accounting standards.

Under the proposed rules, an affected company would have to treat a lease as though it were selling a portion of the property and recognise amounts due under the lease as a financial receivable.

This would lead to the company no longer showing rental income, but rather interest and profit on the lease transaction.

The European Public Real Estate Association (EPRA) heralded the decision on the part of UK-based IASB and US-based FASB as a "vindication of the representations made by EPRA and our global partners within the Real Estate Securitisation Alliance [REESA]".

The extension of the exemption to include companies that report at cost would not have implications for the majority of EPRA's members, 95% of which report at fair value.

But Gareth Lewis, director of finance at EPRA, said the organisation was involved in the lobbying efforts because of a concern over their being such a divergence globally between investment companies that reported fair value and those reporting at cost.

"A major concern with the previous proposal was that it failed to recognise the unique characteristics of owning and leasing investment property - where the asset is viewed in its entirety, rather than as the in-place lease and a residual asset," Lewis said.

"The passage of the original proposals could have been very damaging to the listed real estate industry globally."

He added: "We at EPRA are very supportive of the fair value option because it is more transparent and provides investors with better information. But sometimes it's not necessarily appropriate for all [companies]."

EPRA and REESA have been communicating to the accounting standards bodies for some time that the proposals are inconsistent with the way in which investment property lessors view their holdings and would have presented significant operational challenges.

Owners of shopping centres, for example, which manage hundreds of individual leases, would have difficulty in determining a value-cost of the leased portion of their assets.

EPRA said the accounting standards bodies' preliminary decision was expected to be reflected in the revised exposure draft on lease accounting, due to be published before the end of 2011.

Topics