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Experiences from across the pond Ten lessons from European IFRS conversion in the Real Estate industry October 2009

Experiences from across the pond Ten lessons from European ... · Experiences from across the pond 1 Ten lessons from European IFRS conversion in the Real Estate industry 1. Conversion

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Experiences from across the pondTen lessons from European IFRSconversion in the Real Estate industry

October 2009

Experiences from across the pond 1Ten lessons from European IFRS conversion in the Real Estate industry

1. Conversion can be conquered 3

2. The European Real Estate experience versus other industry sectors 4

3. Getting the strategic plan right is fundamental 5

4. Define the big issues early 7

5. An opportunity for consistency across the industry – and to deal 8with the valuation issue once and for all

6. Engage the right people 9

7. The importance of communication 10

8. Keep up-to-date with open matters and developments 11

9. Look out for common pitfalls 12

10. Make use of resources 13

Contacts 14

Contents

Experiences from across the pond Ten lessons from European IFRS conversion in the Real Estate industry 1

Background – The current position in the USSince November 2008 when the Securities andExchange Commission (“SEC”) issued a proposedroadmap for the mandatory adoption of InternationalFinancial Reporting Standards (“IFRS”) for publiccompanies, there has been a significant level ofspeculation regarding the future of the US accountingframework. Detractors have continued to critique andcriticize the IFRS framework for its lack of rigourcompared with US GAAP and highlighted its failure toenhance comparability. Supporters, however, havecontinued to deliver a robust challenge to such views,while bigger questions around timescales and theconversion-convergence debate remain unresolved.

In its response to the SEC’s roadmap proposal, theNational Association of Real Estate Investment Trusts(NAREIT) has indicated that it ‘believes that there are fartoo many open questions/issues regarding the adoptionof IFRS’ and ‘strongly recommends the continuedconvergence of US GAAP and IFRS’. While NAREITseems to be saying that US companies are not yet readyfor IFRS, the idea is not being dismissed.

The comment period for the roadmap has closed and theoutcome is eagerly anticipated. Mary Schapiro, the SECChairman, has confirmed that while she supports thenotion of a single accounting framework for useworldwide, she will be deliberate in moving forwardwith IFRS but not feel bound by the current roadmapproposal.

Whilst the G-20 group of global leaders continues thepush for standard setters to achieve a single set of globalaccounting standards, it is clear that a move to IFRS forUS public registrants is high on the agendas of somekey stakeholders – possibly sooner rather than later.And, with wide use of IFRS (in over 100 countries), anyglobal framework is likely to be closely aligned withcurrent IFRS.

Following adoption in Japan, all major economieswill be using IFRS with the exception of the US.Sir David Tweedie, Chairman of the InternationalAccounting Standards Board (IASB), has commented that global, economic and political pressures may forcethe US to adopt by 2011.

The adoption map

A recent poll conducted as part ofDeloitte’s ‘Dbriefs Real Estate’ seriesindicated that 17% of participants areplanning for early adoption of IFRS. In addition, 28% of those polledindicated that their organization hadalready begun their process of adoptingIFRS.

Experiences from across the pondTen lessons from European IFRS conversionin the Real Estate industry

United States(2009/14?)Mexico

(2008/12)

South Africa2005 Australia

2005

Japan(2010/16?)

China2007

Europe2005

India2011

Canada(2009/11)

Brazil2010

Chile2009

Argentina2010

Current or anticipated requirement or option to use IFRS (or equivalent)

In 2005, Europe, Australia and South Africa adopted IFRS as the primaryreporting framework with many others since following suit or setting a datefor conversion. One of the most recent countries to initiate their conversionprocess is Canada, where IFRS reporting becomes mandatory in 2011.

Reception in Europe has been positive with many stakeholders believingthat, on balance, IFRS has led to improved quality of financial reportingwith many believing that the commercial reality of transactions is betterreflected in IFRS than in other accounting frameworks.

2

Market contextAll of this is happening in the context of an economicdownturn which is adding further challenge to plans fornear term transition to an IFRS framework. In particular,rightly or wrongly, the appetite of many to move to aprinciples based accounting standards framework thatrequires a greater use of fair value than US GAAPappears to have diminished. This presents dangers toboth the ongoing march towards global financialreporting uniformity and to the more immediate practicalconcerns of those US Real Estate companies which aretrying to prepare for their anticipated conversion. The potential costs of conversion and the distractionthat IFRS may cause – at a time when focus on financialreporting rigour and quality of reporting to stakeholdersare key – are top concerns.

With this in mind, it is vital that the maximum value isextracted from every aspect of the effort put intoplanning and executing the conversion process.

The European experienceExperience in Europe has evolved from one of “gettingthrough conversion” to a colourful tale of four-to-fiveyears spent bedding down a reporting framework intoeveryday life across a range of Real Estate companies –investors, developers, contractors and funds. We canlook back on the process of getting through the initialadoption and learning from that process. But, havingbeen running with IFRS as “business as usual” for someyears, we also have a mature perspective on what isrequired to take a smart route through the transitionperiod, what pitfalls were laid for us and how toconduct an efficient and effective transition and securelong term financial reporting process efficiency.

Our optimistic prediction for the US Real Estatesector is that it has the potential to follow adifferent conversion path from the Europeanexperience. Whilst we had to learn IFRS for Real Estate companies as we went along, theEuropean experience can be leveraged effectivelyby US Real Estate companies. Engaging withthose who have previous experience, whetherof strategic input or detailed support, will leadto a more cost effective and time efficientconversion. That is why Deloitte in the US isinvolving our UK Real Estate team in discussionswith clients and contacts – to bring to the tableour practical experience of IFRS to help minimisethe potential cost burden of the conversionprocess.

Following on from Deloitte’s recent IFRS summit, wehave taken the opportunity to share ten key lessonsfrom our European experience of IFRS conversion forReal Estate investors and developers.

There are lessons, learnedthe hard way, that can beshared from the Europeantransition.

Experiences from across the pond Ten lessons from European IFRS conversion in the Real Estate industry 3

Conversion is complex, time consuming and requiresreal commitment. There is no doubt that a substantialamount of planning is required to make it a success.But our overriding sense from the busy conversionwindow in Europe was that the process was not aspainful as some feared it to be at the earlyimplementation stages if the company had the rightresources and advisors in place. Our experience was thatcompany CFOs and finance teams suffered a degree oftrepidation and indecisiveness as to where to begin forfear of starting in the wrong place. However, once theywere immersed in the conversion process, they beganto understand that it was not as daunting it was heldout to be.

There are two problems arising from “pre-matchnerves”. First, companies may place undue weighton planning for those areas that appear complex.In practice, this apparent complexity may not be thereality and an ineffective plan may result.

Second, building up the tension around an IFRSconversion may create an over-engineered solution tosome of the issues at hand. In the worst cases this isresource heavy and costly, and leads to an overly complexanswer being embedded into the “business as usual”reporting state in subsequent years.

Ultimately, searching for common sense answers to thetruly challenging accounting issues proved the right wayto approach the IFRS conversion plan, and the right wayto allocate resources to make it happen.

Ten lessons from European IFRS conversion in the Real Estate industry

1. Conversion can be conqueredPre-match nerves

An area that was, more often than not,over-engineered in the conversion of Real Estatecompanies in Europe was tackling theclassification of leases under IAS 17. Ultimately, a common sense approach to the principles ofthe standard, supported by some rationalanalytics, was the key to delivering anappropriately worked-through and accuratesolution. Many companies lost time performinghighly detailed calculations to support interestrates implicit in leases and analyses of land and buildings into their component parts,ignoring both materiality and a common senseperspective of where the accounting would end up.

Other areas which can be over complicated inReal Estate companies relate to pensions andother employee benefits as Real Estatecompanies usually have a low employeeheadcount and therefore material issues are fewer.

4

Ten lessons from European IFRS conversion in the Real Estate industry

A significant amount of the press coverage aboutimplementation of IFRS in Europe and the expectedimpact in the US has been focused on the impact“on companies” in general. However, Real Estatecompanies bring specific challenges whilst avoidingsome of the other complex accounting issues that othercompanies suffer. Some of the areas where IFRS is mostcomplex to apply relate to transactions that are rareamongst Real Estate companies.

Real Estate investors, for example, often are not asconcerned with the complexities of accounting formultiple and diverse revenue streams, but these areroutine issues in other sectors. Similarly, due to thecentralised nature of many Real Estate operations, whichhave a low employee headcount, significant pension andbenefit issues have been fewer in Real Estate than in othersectors. However, Real Estate has its own complexitiesthat do (or should) give focus to the conversion process.

2. The European Real Estate experience versus otherindustry sectorsHighlighting difference

Area What’s the issue?

Key differences Potential issues EU experience

InvestmentProperties

IFRS gives an option to report at eitherfair value or historical cost with disclosureof fair values.

May need to manage external stakeholderreactions to volatility in fair values and debtcovenant compliance may be at risk.

Need to assess fair value or engage a thirdparty to do so, bearing in mind that the marketexpectation is likely to be that an externalthird party valuation will be performed.

Companies adopting IFRS in the UK have, almostuniversally, adopted the fair value model.

In a recent Deloitte – EPRA1 survey 95% of Europeanlisted companies were found to apply the fair valuemodel.

Property,Plant andEquipment

IFRS requires a componentizationapproach for significant parts of Property,Plant & Equipment; revaluation modeloptional.

Potential difficulty in transition of existingassets to componentization, depending onage of assets and detailed informationavailable.

Componentization has not been a major issue forEuropean IFRS adopters within the mainstream investorand developer sectors due to a widespread use of therevaluation option in IAS 16 (now IAS 40) forinvestment properties under construction.

Impairment IFRS has only a one-step impairment test based on recoverable amount, IFRS impairment losses may be reversed if recovery occurs.

Increased focus on periodic assessments andpossibly increased volatility from morefrequent write-downs and reversals.

Impairment losses coming back through the incomestatement correlate with the treatment of revaluationgains and losses adopted by most entities – so theimpact on presentation in Income Statement may be limited.

Leases IFRS classification criteria contains nobright lines; broader than just land andProperty, Plant & Equipment.

Pre-Emerging Issues Task Force 01-0 contracts(not previously evaluated as containing leasesunder US GAAP) will require evaluation aspotential leases under IFRS.

IAS 17 was over-analyzed on transition in Europe andIFRIC 42 has had only a limited impact since conversion.A pragmatic approach is required.

Sale ofRealEstate

IFRS considers transfer of risks andrewards model, but without bright linesand little guidance on continuinginvolvement.

IFRS changes revenue recognition forcondominium unit sales and similartransactions.

IFRIC 153 has been issued which sets out furtherguidance to identify which revenue accountingmethod is appropriate where Real Estate is developedwith a view to being sold.

Sale andleasebacks

Potential for immediate gain recognitionfor sale leasebacks that are classified asoperating leases.

More sale-leaseback transactions may qualifyfor removal of the asset from the balancesheet under IFRS.

This was an area that took some time and effortduring European conversions due to the complexity of such arrangements and the need to work through numerous indicative factors.

JointVentures

IFRS recording differs for jointly controlledassets and operations vs. jointly controlledentities/ventures.

Proposed IFRS standard likely to removeproportionate consolidation option; potentiallychange evaluation of joint assets and operations.

Classification into the appropriate form of venturerequired companies to go back to legal agreements and start an assessment afresh.

Taxes No specific guidance related to uncertaintax positions in IFRS; IFRS deferred taxesnot required on certain JVs’ domesticundistributed earnings.

Foreign taxes in some foreign jurisdictionsbased on reported earnings may change.

In the UK, the REIT regime has led to substantialsimplification in the area of tax which was considered by most to be complex and very different from previous GAAP on conversion.

Debt andderivatives

No significant changes. Debt held atamortized cost, derivatives held at fair value.

Lending documents may require revision toaddress covenant impact of conversion.

Debt remains a key area of focus under IFRS. Derivativeswere a significant area of change for Europe.

Key differences between IFRS and US GAAP for Real Estate Companies and leading the European experience in these areasThe table below summarises the key differences between IFRS & US GAAP for Real Estate Companies and headlines the European experience in these areas.

1 EPRA is the European Public Real Estate Association2 IFRIC 4: Determining whether an arrangement contains a lease3 IFRIC 15: Agreements for the construction of Real Estate

Experiences from across the pond Ten lessons from European IFRS conversion in the Real Estate industry 5

Ten lessons from European IFRS conversion in the Real Estate industry

Engage the right people The broader implications of IFRS are often underestimated.In lesson 6 below, we set out some of the key peoplewithin your organisation that may need to be broughtinto the project from the outset.

Peer group views have also been important in theconversion to IFRS and evolution of practice thereafter.In Europe, members of various companies’ steeringgroups would meet regularly to share their experiencesand discuss the accounting policy options available tothem – either through informal meetings or via industrybodies such as the British Property Foundation (“BPF”)and the EPRA.

Learn from the experience of othersThe greatest resource you can find is someone who hasbeen through the process before. To enlist those fromboth within your organisation (for example, those whoalready apply IFRS in accounting for overseas operations)as well as from outside will help you build a team thatwill be able to bring the benefit of their experiences toyour conversion.

3. Getting the strategic plan right is fundamentalBuilding from solid foundations

The European experience of IFRS conversion really broughthome the importance of a good strategic plan. Some ofthe key recommendations arising from the successfulconversion processes we saw included the following:

Establish a steering committeeSetting up an internal steering committee will allow youto run the process effectively. The importance of havingthe right person leading this committee cannot beoveremphasized. Selecting a strong leader with a vision,rather than someone with a tendency to get lost in thedetail, will drive your process forward. In our experience,this does need to be an accountant – they may strugglewith understanding some of the financial reportingimplications, but equally importantly, they need to havethe right personal qualities – to be a decisive decisionmaker and not be someone who gets bogged down intechnical details.

By setting up this committee at the outset andconducting regular meetings you will be able tomonitor your progress and deal with any issues in atimely manner. This committee should have regularinteraction with the Board and Audit Committee toenable senior members of the organization to remaininvolved and engaged in the process. The committeeshould also engage with your external auditors.

Set a realistic and informed timetableHaving formulated your planned approach and set up a committee to oversee your transition process, you will need to establish a clear and realistic timetable forprogress and deliverables that all stakeholders believe in.We set out a suggested timetable on page 6.

Make the right accounting policy choicesIn our experience, identifying areas of accounting policy choice and selecting the right choice for thecompany, before beginning data collection and analysis,commonly led to a more efficient process. The rightchoice needs to reflect consistency with other accountingpolicy choices, practicality of implementation in the longterm and investor and peer group views.

This should be driven from the central finance teamof larger organisations. It’s a great opportunity tostreamline your accounting policies across your entiregroup, especially if you have overseas operations whereIFRS is already being applied.

Create documentation that will stand thetest of timeUpdating existing documentation and processes tomake sure you capture the right information in a waythat is efficient for your business will allow you to focuson more important operational matters and embed theIFRS differences quickly.

Focus on disclosure in addition to recognitionand measurement issuesThe presentation and disclosure changes may besignificant. You will have several key deliverables toproduce as part of your conversion and ongoingreporting, including restated financial statements. As the comparative balances are already there and ripefor amendment, don’t hold off putting pen to paperand making changes as early as possible. In Europe,financial statements grew by 50-100% on conversion to IFRS. The additional required disclosures createfurther information needs and puts pressure on thetimetable.

A timetable stakeholders believe inA structured and well planned transition will likely be more time and cost efficient. A realistic timetable will form the basis of an effective transition.

Now -3 years -2 years -1 year

• Transition to IFRS• Quarterly reporting• Investor communications

• US GAAP & IFRS openingbalance sheet

• Investor communications• Audit procedures

• Statutory implementation• Prepare an IFRS opening

balance sheet• ‘Dry runs’• Further training

• Awareness• Assessment• Planning• Initial training• Roadmap• Choose the leader• Set objectives• Targeted statutory

implementation• System & process redesign• Make accounting policy

decisions where possible

6

Ten lessons from European IFRS conversion in the Real Estate industry

Experiences from across the pond Ten lessons from European IFRS conversion in the Real Estate industry 7

Ten lessons from European IFRS conversion in the Real Estate industry

One of the first priorities for any steering committee isto define the big issues early – in our experience this isimportant enough to draw out as a separaterecommendation.

Define the big issues earlyThe steering committee should ensure key issues areidentified and set a strategy to address these:

• Valuations.

• Industry performance measures and educatingstakeholders.

• Tax.

• Financial Instruments.

• Presentation and disclosure.

The benefits we saw to companies adopting thismeasured approach included:

• A more cost- and time-efficient approach overall,enabling project costs to be spread and use ofoutside resources to be limited.

• A better thought-out process – the objective shouldbe “no surprises”.

• A practical process with less need for separate projectteam. Individuals running the detail of the conversionwould also implement and take responsibility for thechanges going forward.

• A well-communicated transition plan for investors and analysts.

When Europe went through IFRS conversion, therewere a large number of changes between IFRS andlocal GAAP. Derivatives on balance sheet, hedgeaccounting, properties at fair value, full provision fordeferred tax on property revaluation gains and a hostof other fundamental differences had to be assessed inthe conversion process for Real Estate companies.

We found that key areas of technical complexity werearound corporate structures, sale and leasebacks and,for us, derivatives. In contrast, easy wins included apragmatic approach to business combinations andgoodwill, few componentization issues and widespreadadoption of a transparent fair value framework.

A key area commonly missed, however, was presentationand disclosure matters which, contrary to expectations,took a very significant portion of the IFRS conversioneffort to get right.

4. Define the big issues earlyDrawing the map

Focusing on the really significant GAAP differencesat the planning stage was central to success, as was an avoidance of over-engineering theprocess or a particular area. We believe thisanalysis was best approached on a standard-by-standard basis, as this tended to lead to a morecomplete analysis compared with an accountbalance-by-account balance approach.

8

Ten lessons from European IFRS conversion in the Real Estate industry

5. An opportunity for consistency across the industry –and to deal with the valuation issue once and for allShowing your worth

One of the most critical differences for Real Estatecompanies between IFRS and US GAAP is the policychoice between the fair value and cost models forinvestment property. In the UK, investment property(and, in many instances, development property) werealready held at fair value and the change to IFRS hadlittle impact on balance sheets. Elsewhere in Europe,where cost bases were the norm, the move representeda significant opportunity to change to, what manyconsider, a more meaningful representation ofproperty on the balance sheet. A significant proportionof companies in those jurisdictions moved to a fairvalue model.

In the UK, where it was already common forvaluations to be performed at each reporting date(i.e. semi-annually), this practice has simply continued.This has cost implications but also brings substantialadvantages around embedding a regular and consistentvaluation approach into the reporting cycle and thebenefits this can deliver to management reportingand improved transparency of property performanceand decision making.

Current practice in the US is mixed, with public RealEstate Investment Trusts commonly taking a costapproach, while Real Estate funds already use avaluation model based on either external valuations orinternally generated valuations.

Clearly this area will be no small step for US publiccompanies, whatever accounting policy choices aremade, so engaging early with this element of theprocess will be key.

Within European companies, the demand of IFRSconversions on functions outside the accounting teamwas often underestimated. IFRS is not just aboutaccounting – it affects a wide range of functions.

Human ResourcesFor the core Human Resources function, three of thekey impacts in Europe involved benefits, training & useof specialists.

BenefitsIFRS accounting for benefits, such as stock option plans,was new and complex for European converters. In Europewe saw some companies engaging their HR function tore-design stock based compensation plans to avoidcash-settled accounting for example. Whilst US GAAP isclose to IFRS in stock based compensation accounting,IFRS has a wealth of rules and guidance across a rangeof employee benefits and ensuring the HR function isabreast of the impact and the data requirements onthem is key.

TrainingIn terms of training, giving staff timely training on IFRSand communicating the transition process was a time-consuming but worthwhile investment. We found itwas important to make sure this training was adequatelyfocused on both the short term process but also onlonger term principles and processes so that staff learnedhow to run the business-as-usual. This frequently meantbroader training was required for a wider range ofindividuals at the start of the process but it often led toa more holistic and considered approach.

Use of internal and external specialistsSecondments within and into companies were commonduring conversion and enabled companies to benefitfrom experience they could not otherwise access.Where you are considering using external specialistsor employees from overseas operations to assist ona short-term basis, planning how you retain theknowledge and expertise within your organisation willbe critical when advisors and consultants depart.We found that the “accounting manual” became aneven more important tool to help document and retainthe deep knowledge gained through the conversionprocess.

TaxWe found that many of the measurement andpresentation changes brought about by IFRS around,for example, lease accounting, property accounting,derivatives and revenue recognition, had important taxconsequences. Fully engaging the company’s taxprofessionals in the IFRS conversion plan was not justabout having a full and balanced conversion team butwas essential to protect against unexpected taxconsequences.

TreasuryIn the treasury area, the impact of measurementchanges in the financial statements on debt covenantsrequired thought, communication and, in some cases,amendment to lending documents. The additionaldisclosures required for financial instruments alsocreated significant work for treasury teams. In Europe,we also had to deal with hedge accounting for thefirst time, which will be less of a step-change in the US.Nonetheless, we found treasury teams to be one of themost stretched teams during conversion.

LegalWe found that converters needed to focus more thanexpected on corporate structures and transactions asthe requirements of the consolidation related standardsin IFRS had a number of impacts on the accounting.In this area and in others, we found a significantrequirement to go back and revisit contracts andagreements in detail to re-confirm the accountingadopted. Putting the legal team on notice wasimportant.

ITCollating the necessary information and representingyour financial information in your accounting systemsmay require your IT function to become involved inthe transition process. There is also an outstandingopportunity here as conversion provides a chance to getold systems up-to-speed and designed to meet longerterm needs, although this does create additionalpressure if attempted in parallel with conversion.

6. Engage the right peopleWho do you need on your side?

Ten lessons from European IFRS conversion in the Real Estate industry

9Experiences from across the pond Ten lessons from European IFRS conversion in the Real Estate industry

Europe reacted swiftly and, in many regards, as one toadopt stakeholder reporting practices that wereunderstandable and consistent. Notably, companiestook a straight-forward approach to dealing withincreased volatility and additional “difficult to grasp”items hitting the income statement – by adjusting themout of their non-GAAP performance measures.

Such a rapid and consistently-applied response wasachieved in part through regular, often quarterly, focusgroup meetings between CFOs of the major Real Estatecompanies. This collaborative approach ensured thatcommunication with investors, analysts and otherinterested parties was more consistent and significantlyreduced the possibility of an individual companyadopting a measure or presentation approach thatfundamentally differed from its peers.

Real estate professional bodies were also proactive inestablishing guidelines for the appropriate presentationof such measures. EPRA, which works closely withNAREIT, led the way through the European conversionperiod and worked towards the introduction ofrecommended bases for the calculation of key metricssuch as adjusted earnings per share. This had the effectof committing the industry to consistent andcomparable key performance indictors.

7. The importance of communicationIt pays to talk

A collaborative approachensured thatcommunication withinvestors, analysts andother interested partieswas consistent.

Ten lessons from European IFRS conversion in the Real Estate industry

10

In the aftermath of conversion, staying informed hasbeen the biggest lesson. The IASB continues to improveand amend existing standards. Improvements issued in2008 and applicable in 2009 have already fundamentallychanged the approach to accounting for propertiesacquired for future use as investment properties byaligning the accounting approach with completedinvestment properties. The IASB is also working closelywith the Financial Accounting Standards Board (“FASB”)on convergence projects including key topics such asrevenue recognition and leasing. Proposed changescould have sweeping implications for accounting, tax and commercial aspects of Real Estate companies.

For these reasons, keeping up-to-date with thechanging face of IFRS has proved to be vital in thepre- and post-conversion period for European RealEstate companies. There are many resources availableto assist you, we have listed some on the back of thisdocument.

A consultative process was generally the most effective– both within the industry group framework and withcontacts and advisors.

Keeping up-to-date with the changing face of IFRS has proved to be vital in the pre- andpost-conversion period for European Real Estatecompanies.

Ten lessons from European IFRS conversion in the Real Estate industry

11Experiences from across the pond Ten lessons from European IFRS conversion in the Real Estate industry

8. Keep up-to-date with open mattersand developmentsBe at the front of the pack

In Europe, we encontered a number of potentialhazards. These included:

Lack of direction from the topThe ‘tone from the top’ is of primary importance. When the Board and senior management drove this process we found staff were more engaged andembraced the process as an organization-wide mission.

Lack of connection with the bottomWe also found lack of connection with the supportingteams at lower levels. At transition, IFRS conversion inEurope was commonly approached top-down, with alarge number of companies retaining previous GAAPaccounting in subsidiary financial statements. Lack ofengagement with subsidiary accounting functions,particularly where they operated semi-autonomously oroverseas, was a common cause for delay and frustration.On an ongoing basis, where IFRS adjustments arehandled top-side, a disconnect between the head officeand subsidiary operations can make the production ofIFRS financial statements inefficient. Ensuring all of yourlocal teams understand the requirements of IFRS willenhance the information they provide to you; not onlyat conversion, but on an ongoing basis and promote asmooth and efficient reporting process.

Starting lateStarting the conversion process late was a commonissue frequently resulting in a more costly and time-consuming transition. This was compounded by a lack of lead-time for European conversions and agreater level of contemporary evolution of standards.The more up-front planning you can do, the better youwill embed a longer-term process.

Failing to achieve completenessThis was something we encountered quite often.Overall, we found that approaching an analysis of IFRSdifferences on a standard-by-standard basis rather thanan account balance-by-account balance basis was moresuccessful at promoting completeness.

Focusing on presentation and measurement– but not disclosureDisclosure is a significant aspect of IFRS. Many EuropeanReal Estate companies fell into the trap of becominghighly focused on detailed computations, especiallyleasing, but not giving enough consideration todisclosure matters. This put pressure on the process inthe later stages when the financial statements had tobe prepared rapidly.

Business-as-usual was not a core objectiveNot achieving a business-as-usual state in year one ofconversion led to ongoing cost and resource issues insubsequent years. The constrained implementation timeavailable for conversion in Europe, due to late resolutionto mandate conversion, resulted in short-term fixes andresource-heavy solutions. IFRS reporting processes,information systems and documentation had to besubstantially improved in subsequent years in order tofully embed IFRS into the day-to-day activity of thebusiness.

9. Look out for common pitfallsKnow your enemy

Ten lessons from European IFRS conversion in the Real Estate industry

12

European corporate advisors have a distinct advantage– we have already learned IFRS through training andrigorous implementation; we don’t need to re-learn itwhen we assist overseas companies with theirconversion processes. Europe’s professional advisorsplayed a vital role in ensuring a smooth transition to IFRS.

In the US, the key to taking forward the conversionprocess is consultation and sharing. That is why DeloitteLLP (UK) is engaging directly with the Deloitte US firmsand clients of the Deloitte US firms and the DeloitteTouche Tohmatsu network to offer advice and support.Your Deloitte contacts are ready to help you.

Deloitte offers companies assistance with:

• Evaluating the potential impacts of IFRS.

• Assessing readiness for IFRS conversions.

• Implementing IFRS conversions, providing supportwith technical research, project management, andtraining.

• Addressing the implications of IFRS in areas such astax, finance operations, technology, and valuation.

Deloitte’s Online ResourcesFor a wealth of online resources related to IFRS, visitwww.deloitte.com/us/ifrs. Available materials includenewsletters, whitepapers, pocket guides, timelines,webcasts, podcasts, and more.

www.iasplus.com is the international Deloitte resourcefor IFRS preparers and contains 700 web pages and4,000 downloadable files. With free access, it is one ofthe most visited IFRS resource sites globally, and is usedby our clients and Deloitte personnel on a regular basis.

International Accounting ResourcesThe IASB develops international financial reportingstandards for general purpose financial statements. Visitthe IFRS section of www.iasb.org for additional detailsand copies of the standards.

10. Make use of resourcesDon’t be afraid to ask

We are engaging directly with theDeloitte US firms and clients of theDeloitte US firms to offer advice andsupport.

Ten lessons from European IFRS conversion in the Real Estate industry

13Experiences from across the pond Ten lessons from European IFRS conversion in the Real Estate industry

Deloitte LLP (US)With 900-plus professionals, the Real Estate practice ofDeloitte LLP’s subsidiaries has a solid track record forhelping companies make smart Real Estate businessdecisions. Professionals of Deloitte LLP’s subsidiariesprovide assurance, reporting advisory, enterprise risk,tax, consulting, and financial advisory services tocompanies in most segments of the Real Estate industry.They can help clients structure transactions, developopportunities, monitor performance, and improveprocesses with information technology, includingassisting Real Estate clients as they plan and implementInternational Financial Reporting Standards.

Deloitte LLP (UK)The Deloitte UK Real Estate team comprises more than350 professionals with specialist Real Estate knowledgeacross all service lines. The breadth and depth of ourpractice allows us to assemble specialist teams withspecific skills to address our clients’ needs, whether toadvise on IFRS transition, mergers and acquisitions,capital raising, the impact of changing accountingstandards or tax legislation, identifying and managingrisks in major development opportunities, creating valuefrom an occupiers’ estate, or reviewing and advising onfinancing options and proposals. Deloitte LLP serves themajority of large companies in the sector and hasassisted most of these companies through their IFRSconversions.

Contacts

Claire FaulknerReal Estate Audit and Advisory PartnerDeloitte LLPLondon+44 20 7007 [email protected]

Mark GoodeyReal Estate Audit and Advisory PartnerDeloitte LLP London+44 20 7007 [email protected]

Rob HughesReal Estate Audit and Advisory Senior ManagerDeloitte LLPLondon+44 20 7303 [email protected]

Robert O’BrienReal Estate Leader, Audit and Enterprise Risk ServicesDeloitte & Touche LLPChicago+1 312 486 [email protected]

Kathy FeuchtSenior Manager, IFRSDeloitte & Touche LLPMilwaukee+1 414 977 [email protected]

14

Notes

15Experiences from across the pond Ten lessons from European IFRS conversion in the Real Estate industry

16

Notes

Deloitte refers to one or more of Deloitte Touche Tohmatsu (‘DTT’), a Swiss Verein, and its network of member firms, each ofwhich is a legally separate and independent entity. Please see www.deloitte.co.uk/about for a detailed description of the legalstructure of DTT and its member firms.

Deloitte LLP is the United Kingdom member firm of DTT.

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