NCREIF Accounting Update Dan Clemmens

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NCREIF Accounting UpdateDan Clemmens

• October 12, 2006

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Agenda

• FASB Update
• FASB Statement No. 157 - Fair Value Measurement
• FIN 48 Accounting for Income Taxes-Uncertain
  Tax Positions
• FASB Statement No. 158 Employers Accounting
  for Defined Benefit Pension and Other
  Postretirement Plans
• EITF Update
• Issue 06-6 (Debt modifications or exchanges)
• Issue 06-7 (Conversion options in convertible
  debt)
• Issue 06-8 (Sales of condominiums)
• Issue 06-9 (Fiscal year-end differences of parent
  and subsidiary)
• SEC Update
• SAB No. 108 (Considering the effects of prior
  year misstatements)
• Comment Letter Trends

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FASB UPDATE
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FASB Update
FASB Statement 157 - Fair Value Measurement

• Addresses how to measure fair value, not the
  when
• Applies to financial/nonfinancial assets and
  liabilities

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FASB Update
FASB Statement 157 - Fair Value Measurement
(Contd)

• Fair Value Definition
• Price that could be received for an asset or paid
  to transfer a liability in a current transaction
  between marketplace participants at measurement
  date-exit price from sellers viewpoint
• FV measurement should reflect assumptions that
  market participants would use and exclude factors
  specific to reporting entity

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FASB Update
FASB Statement 157 - Fair Value Measurement
(Contd)

• Fair Value Hierarchy
• Level 1 Quoted prices (unadjusted) in active
  markets for identical assets or liabilities that
  the reporting entity has access to at the
  measurement date.
• Level 2 Other than quoted market prices
  included within Level 1 that are observable for
  the asset or liability, either directly or
  indirectly through corroboration with observable
  market data.
• Level 3 Inputs that reflect the reporting
  entities own assumptions about the assumptions
  market participants would use in pricing the
  asset or liability.

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FASB Update
FASB Statement 157 - Fair Value Measurement
(Contd)

• Expanded Disclosures
• Both quantitative (both interim and annual
  financial statements) and qualitative (annual
  financial statements only)
• For items remeasured at fair value, examples of
  required quantitative disclosures include
• the category into which items fall within the
  fair value hierarchy
• details about total gains or losses during a
  period (regardless of whether the items are still
  held at the reporting date)
• unrealized gains or losses for certain items held
  at period end

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FASB Update
FASB Statement 157 - Fair Value Measurement
(Contd)

• Effective for financial statements issued for
  fiscal years beginning after November 15, 2007,
  and interim periods within those fiscal years.
• Earlier application is encouraged if the
  reporting entity has not yet issued financial
  statements (annual or interim) for the fiscal
  year in which the Statement is initially applied.

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FASB Update
FIN 48 Accounting for Income Taxes Uncertain
Tax Positions

• The Board adopted a benefit recognition model
  with a two-step approach
• Step One Recognition threshold
• Step Two Measurement of the benefit
• Recognition - A tax benefit is recognized when it
  is more-likely-than-not of being sustained
  based on the technical merits of the position
• Measurement largest amount of benefit that is
  more-likely-than-not to be realized

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FASB Update
FIN 48 Accounting for Income Taxes Uncertain
Tax Positions

• Measurement Scenario 1

60 is the largest amount of tax benefit that is
greater than 50 likely of being realized
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FASB Update
FIN 48 Accounting for Income Taxes Uncertain
Tax Positions

• Measurement Scenario 2

75 is the largest amount of tax benefit that is
greater than 50 likely of being realized
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FASB Update
FIN 48 Accounting for Income Taxes Uncertain
Tax Positions (Contd)

• Example One
• Uncertain tax position of 100 has 40 likelihood
  of being sustained
• The best estimate of what is more likely than not
  to be ultimately payable and above the tax return
  position is 45
• FAS 5 analysis net asset of 55
• 100 benefit based upon the filing position, less
• (45) contingent liability under FAS 5
• 55 net tax asset
• FIN 48 Analysis asset of 0
• Step 1 - Recognition
• Is the asset more likely than not to be realized
  (gt50)?
• No - 0 asset to be recorded

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FASB Update
FIN 48 Accounting for Income Taxes Uncertain
Tax Positions (Contd)

• Example Two
• Uncertain tax position of 100 is 60 likely of
  being sustained
• The best estimate of what is more likely than not
  to be ultimately payable and above the tax return
  position is 45
• The likelihoods of possible outcomes are as
  follows
• 10 likelihood of realizing 100
• 30 likelihood of realizing 60
• 40 likelihood of realizing 30
• 20 likelihood of realizing 0

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FASB Update
FIN 48 Accounting for Income Taxes Uncertain
Tax Positions (Contd)

• Example Two (contd)
• FAS 5 analysis net asset of 55
• 100 benefit based upon the filing position, less
• (45) contingent liability under FAS 5
• 55 net tax asset
• FIN 48 Analysis asset of 30
• Step 1 - Recognition
• Is the asset more likely than not to be realized
  (gt50)?
• Yes go onto measurement
• Step 2 - Measurement
• Cumulative likelihood of 80 relates to an asset
  of 30

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FASB Update
FIN 48 Accounting for Income Taxes Uncertain
Tax Positions (Contd)

• Subsequent Recognition/Derecognition
• Subsequent recognition is required in the interim
  period in which one of the following events
  occurs
• The more-likely-than-not recognition threshold
  is subsequently met
• The tax matter is ultimately resolved favorably
• The applicable statute of limitations has expired
• Derecognition occurs when it is more likely than
  not that the position will not be sustained
• Use of a valuation allowance is not permitted

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FASB Update
FIN 48 Accounting for Income Taxes Uncertain
Tax Positions (Contd)

• Change in Judgment
• A change in judgment that relates to a position
  taken in a prior annual period is treated as a
  discrete item in the period in which the change
  occurs.
• A change in judgment that relates to a position
  taken in a prior interim period within the same
  fiscal year is taken into account over the
  remaining periods in the fiscal year pursuant to
  APB 28 and FIN 18.

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FASB Update
FIN 48 Accounting for Income Taxes Uncertain
Tax Positions (Contd)

• Classification
• The difference between the benefit of the tax
  position as reflected in the tax return and the
  amount recorded in the financial statements
  should be classified as either
• A reduction of deferred tax assets resulting from
  a deductible temporary difference or tax NOL or
  tax credit carryforward, or
• A current or noncurrent liability, based on the
  expected timing of cash flows (not a deferred tax
  liability)

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FASB Update
FIN 48 Accounting for Income Taxes Uncertain
Tax Positions (Contd)

• Interest and Penalties
• Interest is a period cost.
• Accrue statutory penalties when a tax position
  does not exceed the minimum statutory threshold
  required to avoid penalties.
• Classification of interest and penalties is an
  accounting election.

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FASB Update
FIN 48 Accounting for Income Taxes Uncertain
Tax Positions (Contd)

• Disclosures
• At the end of each annual reporting period,
  disclose
• A tabular rollforward of the total amounts of
  unrecognized tax benefits at the beginning and
  end of the period
• The amount of unrecognized tax benefits that, if
  recognized, would impact the effective tax rate
• The total amount of interest and penalties
  recognized currently (in the Statement of
  Operations) and in the aggregate (in the Balance
  Sheet)
• Positions where it is reasonably possible the
  total amount of unrecognized tax benefit will
  significantly increase or decrease within 12
  months of the reporting date
• Interim disclosures may be required

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FASB Update
FIN 48 Accounting for Income Taxes Uncertain
Tax Positions (Contd)

• Effective as of the beginning of the first annual
  period beginning after December 15, 2006.
• Disclosure required in the year of adoption
• the nature of the change in accounting principle.
• the cumulative effect of the change on retained
  earnings as of the date of adoption.
• SAB 74

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FASB Update
Statement No. 158 Employers Accounting for
Defined Benefit Pension and Other Postretirement
Plans

• Represents the completion of the first phase in
  the FASBs postretirement benefits accounting
  project
• Does not change the amount of net periodic
  benefit cost included in net income or address
  the various measurement issues
• Primary Requirements of Statement 158
• Recognition of the funded status
• No longer a requirement to recognize a minimum
  pension liability
• Recognition of accumulated amounts (actuarial
  gains/losses, prior service costs, etc.)
• Recognize as a component of accumulated other
  comprehensive income
• Adjust as they are subsequently recognized as
  components of net periodic benefit cost
• Elimination of early measurement date option

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FASB Update
Statement No. 158 Employers Accounting for
Defined Benefit Pension and Other Postretirement
Plans (Contd)

• Significant Changes Between the Exposure Draft
  and Statement 158
• Method of recognition of the funded status
• Retrospective application not permitted
  recognition of the funded status to be accounted
  for prospectively
• Elimination of transition amounts
• Originally proposed as an adjustment to opening
  retained earnings with no further amortization of
  these amounts
• Final Statement requires recognition in equity as
  a component of other comprehensive income
• Statement 158 allows for these amounts to
  continue to be amortized

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FASB Update
Statement No. 158 Employers Accounting for
Defined Benefit Pension and Other Postretirement
Plans (Contd)

• Effective Date
• The requirement to recognize the funded status of
  a defined benefit postretirement plan and the
  disclosure requirements are effective for fiscal
  years ending after December 15, 2006, for public
  entities, and at the end of the fiscal year
  ending after June 15, 2007, for all other
  entities.
• The requirement to measure plan assets and
  benefit obligations as of the date of the
  employers fiscal year-end statement of financial
  position is effective for fiscal years ending
  after December 15, 2008.
• Earlier application of the recognition or
  measurement date provisions is encouraged
  however, early application must be for all of an
  employers benefit plans.

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EITF UPDATE
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EITF Update
Tentative Conclusions September 2006

• Issue 06-6 Debtors Accounting for Modification
  (or Exchange) of Convertible Debt Instruments
• Issue 05-07 provides guidance to determine
  whether a debt instrument has been extinguished
  in accordance with Issue 96-19
• Supersede Issue 05-07 when ratified by the FASB
• Issue 1
• Change in fair value of an embedded conversion
  option upon the modification or exchange should
  not be included in the analysis of cash flows
  performed under Issue 96-19.
• A change in fair value of an embedded conversion
  option that is at least 10 percent of the
  carrying value of the debt instrument immediately
  prior to the modification, would be deemed a
  substantial modification or exchange.
• Modification or exchange that either adds or
  eliminates a substantive conversion option would
  always be considered substantial and
  extinguishment. In this case, the assessment of
  whether a conversion option is substantive, based
  on the guidance in EITF Issue No. 05-1,
  Accounting for the Conversion of an Instrument
  That Became Convertible upon the Issuer's
  Exercise of a Call Option, should be made as of
  the modification date.

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EITF Update
Tentative Conclusions September 2006

• Issue 06-6 Debtors Accounting for Modification
  (or Exchange) of Convertible Debt Instruments
  (Contd)
• Issue 2
• When a debt instrument is modified (or exchanged)
  in a transaction that is not accounted for as an
  extinguishment, an increase in the fair value of
  an embedded conversion option resulting from the
  modification should reduce the carrying amount of
  the debt instrument (i.e., increasing a debt
  discount or reducing a debt premium) with a
  corresponding increase in additional paid-in
  capital.
• Decrease in the fair value of an embedded
  conversion option resulting from a modification
  (or exchange) should not be recognized.
• The guidance in this consensus (if ratified)
  should be applied prospectively to future
  modifications or exchanges of debt instruments
  that occur in the first interim or annual
  reporting period beginning after the Boards
  ratification of the consensus.
• Early application of this guidance is permitted
  for modifications or exchanges of debt
  instruments in periods for which financial
  statements have not yet been issued.
• Retrospective application to previously issued
  financial statements is not permitted.

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EITF Update
Tentative Conclusions September 2006

• Issue No. 06-7 Issuers Accounting for a
  Previously Bifurcated Conversion Option in a
  Convertible Debt Instrument When the Conversion
  Option No Longer Meets the Bifurcation Criteria
  in FASB Statement No. 133, Accounting for
  Derivative Instruments and Hedging Activities
• Reassessment of whether an embedded conversion
  option must be bifurcated under Statement 133 is
  conducted at each balance sheet date.
• The carrying value of the liability for a
  previously bifurcated conversion option should be
  reclassified to shareholders equity with no
  impact on the accounting for the convertible debt
  instrument.
• The debt discount recorded at issuance as a
  result of the bifurcation of the conversion
  option should continue to be amortized over the
  remaining term of the instrument.

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EITF Update
Tentative Conclusions September 2006

• Issue No. 06-7 Issuers Accounting for a
  Previously Bifurcated Conversion Option in a
  Convertible Debt Instrument When the Conversion
  Option No Longer Meets the Bifurcation Criteria
  in FASB Statement No. 133, Accounting for
  Derivative Instruments and Hedging Activities
  (Contd)
• Conclusion reached (if ratified) would be
  effective for interim or annual periods beginning
  after December 15, 2006.
• The consensus should be applied prospectively to
  all previously bifurcated conversion options in
  convertible debt instruments that no longer meet
  the bifurcation criteria of Statement 133.
• Early application of this guidance will be
  permitted for periods for which financial
  statements have not yet been issued.
• Elective retrospective application consistent
  with Statement 154 also will be permitted.
• The following disclosures should be made as a
  result of this consensus when an embedded
  conversion option no longer meets the bifurcation
  criteria of Statement 133
• A description of the principal changes causing
  the embedded conversion option to no longer
  require bifurcation under Statement 133.
• The amount of the liability for the conversion
  option reclassified to shareholders equity.

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EITF Update
Tentative Conclusions September 2006

• Issue 06-8 Applicability of the Assessment of
  a Buyers Continuing Investment under FASB
  Statement No. 66, Accounting for Sales of Real
  Estate, for Sales of Condominiums
• Statement 66 provides specific guidance for
  accounting for the sale of condominiums which
  allows for the percentage of completion method of
  profit recognition.
• The adequacy of the buyers continuing investment
  should be evaluated when determining whether to
  recognize profit under the percentage of
  completion method.
• If the buyer does not meet the continuing
  investment test, any proceeds received from the
  buyer must be accounted for as deposits until the
  criteria for profit recognition, including the
  continuing investment test, are met.
• The guidance in this consensus (if ratified)
  would be effective for annual periods beginning
  after March 15, 2007, with early application
  permitted as of the beginning of an entitys
  fiscal year.
• The consensus should be applied as a change in
  accounting principle recognized through a
  cumulative effect adjustment to retained
  earnings, or to other components of equity or net
  assets in the statement of financial position, at
  the beginning of the year of adoption.

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EITF Update
Tentative Conclusions September 2006

• Issue 06-9 Reporting a Change in (or the
  Elimination of) a Previously Existing Difference
  between the Fiscal Year-End of a Parent Company
  and That of a Consolidated Subsidiary or an
  Equity Method Investee
• Statement 154 requires a change in accounting
  principle to be recognized through retrospective
  application unless it is impracticable to do so.
• The parent should report the elimination of a lag
  in reporting the subsidiarys financial results
  (or in reporting the results of an equity method
  investment) in the parents consolidated
  financial statements as a change in accounting
  principle through retrospective application
  pursuant to the provisions of Statement 154,
  subject to the impracticability exception
  included in that Statement.
• The guidance in this consensus (if ratified)
  should be applied prospectively for future
  changes to, or the elimination of a previously
  existing difference between, the reporting period
  of a parent and a consolidated subsidiary or
  equity method investee, beginning in the first
  interim or annual period following Board
  ratification (expected in November 2006).
• Early application will be permitted in periods
  for which financial statements have not yet been
  issued.

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SEC UPDATE
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SEC Update
SAB No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements
in the Current Year Financial Statements

• Issued September 13, 2006
• Does not change the SEC staffs previous
  positions in SAB 99
• Registrants and Auditors must quantify the
  effects of errors under both the rollover and
  iron curtain methods
• Special transition provision in circumstances
  where its application would have altered previous
  materiality conclusions
• Cumulative effect adjustment to retained earnings
  as of the beginning of the first fiscal year
  ending after November 15, 2006
• Expanded disclosure required
• Not acceptable in situations where previous
  assessments did not consistently follow an
  acceptable methodology or did not reach
  reasonable conclusions

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SEC Update

• Comment Letter Trends
• Segments
• Goodwill Impairment
• Derivatives
• Legal Contingencies
• Classification in Financial Statements