Stephanie Urbanski is the global real estate sector resident and assurance senior manager at Ernst & Young. Boasting a decade of experience at the Big Four firm, Ms. Urbanski is a lead member of the real estate accounting team. She spoke with The Commercial Observer last week about financial accounting issues impacting the commercial real estate industry, potential future changes to financial reporting practices and the risks of another bubble in the market.
The Commercial Observer: What is your role at Ernst & Young?
Ms. Urbanski: First and foremost, I am a senior manager in the assurance practice, and I’ve been with Ernst & Young since 2003. I also serve a dual role as our global real estate sector resident, and in that role I am officially part of the Global Real Estate Center, and that group oversees the real estate process globally for Ernst & Young and drives initiatives from a global level. My particular role is channel one sector resident, which is essentially our assurance audit practice. So I’m the go-to person in terms of technical accounting areas, on a global level.
As we approach tax season, are there any particular challenges for the commercial real estate industry?
For financial reporting purposes, the main change for 2012 was additional fair value disclosure requirements. Now, that would only impact a U.S. historical GAP reporter if they were recording real estate at fair value, either because it was impaired or it was held for sale. For funds, that’s been a much more challenging exercise, because they have more assets at fair value.
Essentially, the fair value disclosure requirements require you to disclose more fair value process information—so, the actual process you took to come up with the fair values embedded in your financial statements for assets that are recorded based on unobservable inputs, and real estate assets are usually considered those types.
So companies that have real estate assets recorded at fair value in their financial statements, they would be required to disclose more detail about the actual valuation process—who prepared the valuations, what kind of support they obtained to support the values they are coming up with, and what’s probably the most challenging is disclosing quantitative information about significant, unobservable input. Specifically, disclosing things such as capitalization rates and discount rates.
So companies are now required, if they are recording real estate at fair value under U.S. GAP, for one reason or another, to disclose the inputs they are using in those valuations.
That’s been the largest change specifically impacting real estate for 2012, and most companies are still in the process of wrapping up their 2012 financial statements.
Will there be any changes to the process for 2013?
There is nothing effective in 2013 that I would say drastically changes anything for most real estate companies. There are some changes on the horizon that could significantly impact real estate companies.
Such as the convergence project in terms of moving toward a converged international accounting standard.