Accounting and Financial Reporting Update (2016)
The ninth edition of our annual update highlights selected accounting and reporting developments that may be of interest to real estate entities. Among other topics, the publication discusses the issuance of (1) new guidance on the accounting for leases and the impairment of financial instruments, (2) new guidance to clarify the classification of certain cash receipts and payments in the statement of cash flows, and (3) refinements to the FASB’s new guidance on the recognition of revenue from contracts with customers.
The real estate market continued its modest recovery from 2013 through 2016, but it may be approaching the peak of the recovery cycle. Looking ahead, we believe that the impact of financial regulations under the Dodd Frank Act and Basel III will likely create a challenging financing environment for many individuals looking to invest in real estate. Higher interest rates and risk are expected outcomes of the new regulations. Through the third quarter of 2016, the national home price index gained single-digit year-to-date returns compared with double-digit growth in 2013. We can expect this growth to further decrease as interest rates increase.
In February 2016, after working many years on a new lease accounting standard, the FASB issued ASU 2016-02. The guidance is intended to address concerns related to off-balance sheet financing, as it brings most leases onto the balance sheets of lessees. From a lessor perspective, accounting for lease revenue will essentially be unchanged under the new standard, and most real estate leases will continue to be classified as operating leases.
In June 2016, the FASB issued ASU 2016-13, which provides guidance on the impairment of financial instruments. The ASU introduces the current expected credit loss model, which is an impairment model based on expected rather than incurred losses. This new impairment model is intended to result in more timely recognition of impairment losses since it requires an entity to recognize its estimate of expected credit losses at the earliest reporting date such expectations arise.
In August 2016, the FASB issued ASU 2016-15, which adds clarifying guidance on the classification of certain cash payments and receipts on the statement of cash flows. This guidance was based on a project of the FASB’s Emerging Issues Task Force (EITF) that focused on eight types of cash flows including (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon bonds, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, and (5) distributions received from equity method investees. The purpose of this project was to reduce diversity in practice and provide specific guidance for classification of these cash flows.
In November 2016, the FASB issued ASU 2016-18, which amends ASC 230 to clarify the guidance on the classification and presentation of restricted cash. The ASU was based on consensuses reached by the EITF.
The FASB is also currently working on projects that real estate entities should continue to monitor, including (1) clarifying the definition of a business, (2) clarifying the scope of asset derecognition in transactions with non-customers, (3) accounting for partial sales of nonfinancial assets, and (4) hedging of financial instruments.