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Accounting and Financial Reporting Update (2015)
The eighth annual accounting and financial reporting update discusses topics that may be of particular interest to real estate entities. It summarizes notable developments and activities that occurred during 2015, including (1) the issuance of new guidance on the consolidation framework and amendments to the classification and measurement of financial instruments and (2) the continued work of the FASB on accounting for leases and financial instruments, the definition of a business, and simplification.
The real estate market continued its modest recovery from 2013 into 2015. Through late 2015, gains in the national home price index were modest compared with the double-digit growth seen in 2013. Factors contributing to the continued increase in home prices include shrinking unemployment, low mortgage rates, and rising income for consumers. The commercial real estate market has also seen steady increases in value over the past five years. Companies have turned the page from the 2008–2009 collapse and are now focused on potential disruptions that may affect the industry’s future. Industry leaders are increasingly thinking about longer-term strategic issues and how they can stay ahead of the potential disruptions.
Economic Growth by Major Group
Commercial Real Estate
In 2009 and 2010, rental revenues in the commercial real estate industry declined dramatically because of weakened demand for commercial spaces. The U.S. markets are recovering on the backs of stronger economic fundamentals and, most importantly, falling unemployment. In 2015, revenues increased marginally, resulting in a five-year compound average revenue growth rate of about 3 percent. However, many factors could constrain long-term increases, including rises in mobility, cloud computing, urbanization, e-commerce, and the war for talent.
Growth in REITs
REIT fundraising has been increasing in recent years. REIT IPOs have been at their highest level (in terms of number and value of transactions) since 2005 and have involved both traditional and nontraditional real estate asset classes (e.g., single-family rentals, cell towers, billboards, data centers, and storage facilities). The volume of REIT conversions and spin-offs continues to increase such that the IRS has put entities that own nontraditional real estate on notice that it has decided to study the definition of “real estate” in the context of REIT conversions.
As a result of the economic downturn in 2008 and 2009, rental vacancy rates decreased as more consumers opted to rent rather than purchase. Depending on geographies and asset class, demand for office and industrial space continues to be mixed as entities have reduced their workforces, closed operations, or expanded through growth opportunities. Nationally, growth in property management was strong in 2015 and is forecasted to remain so.
During 2015, the FASB issued ASU 2015-02, which amends the consolidation guidance in ASC 810 and contains new requirements for assessing whether a decision maker’s fee is a variable interest and whether an entity is a variable interest entity. The ASU also eliminates the guidance on evaluating limited partnerships that are not variable interest entities by incorporating the concepts from ASC 810-20 into the general consolidation requirements. See the Consolidation section in the attached PDF for a discussion of key accounting issues and potential challenges related to limited partnerships and similar entities. For a comprehensive discussion of the new guidance, see Deloitte’s Consolidation — A Roadmap to Identifying a Controlling Financial Interest.
On January 5, 2016, the FASB issued ASU 2016-01, which amends the guidance on the classification and measurement of financial instruments. The new standard significantly revises an entity’s accounting related to (1) investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. See the Classification and Measurement section in the attached PDF for a discussion of the key changes as a result of the ASU.
In addition, over the past few years the FASB has issued ASUs as part of its simplification initiative on topics including discontinued operations, extraordinary items, debt issuance costs, and private-company accounting alternatives for goodwill and acquired intangibles. Items on the horizon include the implementation of the new revenue recognition standard and the release of new standards on leasing, impairment, hedging of financial instruments, and the definition of a business. Real estate entities should continue to monitor the progress on these projects.
For additional information about industry issues and trends, see Deloitte’s 2015 Financial Services Industry Outlooks.