Real estate investors and builders as well as financial statement preparers need to be well-informed and prepared for the impact International Financial Reporting Standards (IFRS) will have on financial statements.

The Securities and Exchange Commission has developed a proposed roadmap to help U.S. companies make the transition to IFRS. Since the release of the proposed roadmap in 2008, the SEC has yet to commit to the adoption of the international standards.

However, the convergence of U.S. generally accepted accounting principles (U.S. GAAP) and the international standards has recently changed gears and increased in momentum.

Over the next couple of years, monumental changes will have a costly and significant impact on all industries and companies reporting under U.S. GAAP. Arguably, the real estate industry is close to the top of the list.

Prominent changes to U.S. GAAP have resulted from convergence.

Business combinations and noncontrolling interests are possibly the most important convergence issues currently pertaining to real estate because the new standards have had a significant impact on real estate developers and investors.

Also, new U.S. GAAP pronouncements have already affected fair value guidance because U.S. GAAP and IFRS have differing definitions and usages of fair value.

Regardless of the SEC’s ultimate decision to either stick with U.S. GAAP or shift to IFRS, the accounting rules are changing for real estate companies in the near future. These companies should be aware of the following examples of major reporting issues resulting from the adoption of IFRS or the convergence of U.S. GAAP and IFRS.

Accounting for Investment Properties

When real estate companies adopt the international standards, one of the most significant accounting policy elections is the recognition of investment properties. Investment properties are initially measured at cost in accordance with International Accounting Standard (IAS) 40. However, IAS 40 provides for an election on subsequent measurement as follows:

• Fair value model – If the fair value model is elected, all investment properties must be measured at fair value unless it is indeterminable. Changes to the fair value from period to period are recognized in profit or loss.
• Cost model – If the cost model is chosen, generally, investment properties are measured at cost in accordance with IAS 16, Property, Plant and Equipment. However, if the cost model is elected, the fair value of the investment properties must be disclosed in the notes to the financial statements, with very limited exceptions.

Certain properties are specifically excluded from being classified as investment properties in accordance with IAS 40.

On March 10, 2010, the Financial Accounting Standards Board added a project to decide whether to permit or require investment properties to be carried at fair value.

Construction Contracts

The IFRS Interpretations Committee, formerly known as the International Financial Reporting Interpretations Committee (IFRIC), released IFRIC 14, Agreements for the Construction of Real Estate, which provides guidance on when revenue should be recognized from the construction of real estate assets.

The adoption of this interpretation (effective Jan. 1, 2009) could lead to a significant number of real estate developments being treated as “sales of goods.” A sale of goods falls within the scope of IAS 18, Revenue. It would preclude the use of percentage-of-completion accounting under IAS 11, Construction Contracts, because the sale would be recognized when an individual unit is delivered to the customer.

Impairment

IFRS has only a one-step impairment test based on recoverable amount in accordance with IAS 36, Impairment of Assets. The carrying value is compared with the asset’s recoverable amount. The recoverable amount is defined as the higher of the asset’s value in use, which is based on the discounted future cash flows, and fair value less costs to sell.

If higher, the asset is written down to the recoverable amount. As a result, impairment losses are generally recognized sooner and more frequently under IFRS. In addition, impairment losses may be reversed if recovery occurs.

While wholesale changes have yet to be seen, convergence will have a significant impact on real estate companies in the next couple of years. Being caught off guard could prove to be not only costly but detrimental. Companies should begin to prepare for these changes through education and identify any shortcomings now.

Construction projects require a lot of people to be in sync about a lot of issues. They require teamwork, communication and coordination.

While you may work with lumber, steel, bricks and mortar, the most critical ingredient in your construction process is people. Getting people to understand what needs to be done and, more importantly, to agree to do it is the key to successful construction projects.

People generally want to do a good job. It’s unlikely that many people show up for work planning to mess things up.

While some may be more motivated than others or more skilled than others, the desire to do at least a baseline good job is prevalent. When people don’t do a good job, it’s often because they don’t know what to do or how to do it.

Understanding what needs to be done is the first component. We often take for granted that others see things from the same perspective we do – that their experience is similar to our own. That’s a bad assumption to make.

Construction workers come with all different types of experience and quality assumptions. Some may have learned their craft in a place where speed was more critical than aesthetics as long as the structural quality was in order. For someone else, aesthetics might have been deemed a sign of quality and given higher priority than speed. Given these two mindsets, the same basic instructions to workers may result in very different outputs.

It is important that your team understand and agree to your cultural norms. What are some of the signs of quality on your jobs? A clean work area? Tools well maintained? Workers who start on time and stay on schedule? If you aren’t clear on these items, there is no way your team can agree to them. They’ll simply use their own notions about what looks like quality to them.

Getting agreement on your cultural norms isn’t just a function of stating what they are. It’s important that people understand the “why” behind them. Studies show that people are more likely to comply with requests when a “because” statement is used.

For example, “We keep our workplace clean because it minimizes the chances that someone will step on or trip over something and get hurt” is more effective than “Keep your area clean.” The “because” helps the rule mean something to the people being asked to comply. It gives them a reason to agree.

Some may think that the reason is so elementary that it should just be taken for granted. Don’t assume. Clarify for best results.

Understanding how to do what has been asked is also important. This can be especially challenging if you are reteaching a skill or training someone to do things your way as opposed to the way they learned at another job. Reteaching may require that the students “unlearn” what they already know. That’s often a challenge.

In their minds, what was learned before worked, became a habit and now occurs without much thought. Relearning will require that employees consciously think about the task at hand and resist falling into familiar patterns.

You can tell them to do that by instructing them that they must, but you’ll more likely get more positive results if you explain the “because” behind the way you want it done and ask for agreement that they’ll work to do it your way.

Relearning requires repetition, just as learning the first time required it. If you reinforce positive actions toward the new method and continue to ask for agreement to fine-tune the process, your team will be more likely to comply.

Managers often wish people would just do what they were told. But people aren’t generally wired that way. They think, they feel, they reason and, sometimes, they resist. It’s the manager’s job to get them to agree so that the project can move forward smoothly.

Most contractors across the United States would agree that the economy has provided both opportunity – and pain – over the past few years.

If keeping your doors open in this rocky economic climate was as easy as installing them, most contractors would still be in business today.

Unfortunately, that has not been the case for many construction businesses. The housing bubble – and burst – has seen to that. An already large glut of existing inventory, coupled with further declines in the demand for new building construction, has forced many companies into a fight, flight or fold response.

Even so, there have been some bright spots.

Berkeley Building Company’s president, Emil Frei, and Ball Construction Services’ chief executive officer, Rick Ball, each offered some insights into how the economy has affected the construction industry overall – and what their companies have done to survive these tough economic times.

“We’re a small, young company, and we mostly focus on projects valued at $500,000 or less,” Frei said. “One of the first things we encountered last year was that larger firms wanted to come and play in our sandbox. It’s been a very strange dynamic – our market’s gotten more crowded with bigger fish, but there’s less competition overall.”

Ball says his company has seen an erosion in overall construction volume in Iowa since 2008. He estimates it is down about 15 to 20 percent.

“In my experience, and that of some of my colleagues, it’s been hard trying to replace the momentum we had just a few years ago,” Ball said. “Unfortunately, we had to lay off some strategic people, and we had to critically review how our overhead was structured. We’ve also had to eliminate several components of insurance and some charitable contributions, too. We’ve spent much more time as a group trying to cultivate market leads, much more time on business development. It’s really been an ‘all-hands-on-deck’ approach for us.”

Right-sizing his company has been Frei’s main challenge.

“We’ve had to become our own general contractor and employ our own work force, which we believe offers us greater efficiencies and more control over labor and other expenses,” Frei said. “And if we do use subs, we now pay them on a 30-day cycle. We’ve observed getting paid quicker provides better incentives – and these usually translate to better project numbers and better job performance.”

Ball’s company has had to focus its business development efforts on growing lucrative sectors like health care, agriculture, bio-fuels and even convenience stores.

“We’re traveling much farther geographically for projects than in years past. For companies seeking to expand their target areas, another option to explore would be to go non-union – this could give you even more flexibility in estimating projects and staffing levels,” Ball said. “Ultimately, every job’s important, and this economy has certainly hammered that home. Owner expectations have been raised substantially, and you’ve got to focus on creating efficiencies in your organization, tightly managing your billables and cutting waste. You have to always know where your dollars are being spent – and be smart!”

Time and again, the construction industry has proven resourceful in the best of times and resilient even in the worst of times. The changing economic landscape over the past few years has proven this again.

But what can change is how companies react, adapt and overcome when adversity strikes. Those that are successful will be well-positioned when new opportunities arise once again.