2. Update on Valuation for Financial Reporting Related Accounting Standards & Issues − 2 −

3. Introduction Overview Role of Audit Firm ASC 820 ASC 805 Lease Accounting Questions − 3 −

4. Role of Audit Firm Statement on Auditing Standards No. 73 - Using the Work of a Specialist Provides guidance to the auditor who uses the work of a specialist in performing an audit in accordance with generally accepted auditing standards (GAAS) − 4 −

5. Role of Audit Firm Specialist. A person (or firm) possessing special skill or knowledge in a particular field other than accounting or auditing. Specialists include, but are not limited to: Actuaries Appraisers Engineers Environmental Consultants Geologists − 5 −

6. Role of Audit Firm Real estate appraisers are valuation specialists in the area of real property. Often referred to as valuers Must understand and use the language of potential clients Professional attributes: property valuation (and valuation-related) skills, knowledge, education, experience and training − 6 −

7. Role of Audit Firm Real property valuation specialists – essential team members. Directed by auditor and company that the auditor represents Viewed as subject matter expert (SME) by the audit and tax users of their services − 7 −

8. Audit Issues Role of Audit Firm Land – quality of land sale data Replacement Cost New – source and applicability of data Indirect Costs & Entrepreneurial Profit – market support External Obsolescence – market support Downtime – market support Above/Below Market Leases – support for market rents Reimbursements – market support Discounted Cash Flow – market support for key underlying assumptions − 8 −

9. Role of Audit Firm Real property valuation specialists may be required to: Estimate fair value at highest and best use Allocate a purchase price among land, building and site improvements and assist others with personal property and intangible assets Evaluate asset impairment Perform valuation assignments for other purposes (i.e., alternate use, etc.) − 9 −

10. ASC 820 Fair Value Measurements and Disclosures − 10 −

11. Fair Value under ASC 820 ASC 820 The FASB issued ASC 820 (formally known as FAS 157), which defines fair value as, “the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Source: SFAS No. 157, Financial Accounting Standards Board, Sept. 2006 − 11 −

12. Fair Value Objectives ASC 820 Make financial reports understandable, relevant, reliable, and comparable Provide greater transparency than historical cost- based measurements Define fair value Establish a framework for measuring fair value Expand disclosures about fair value measurements − 12 −

13. Fair Value Applications ASC 820 ASC 820 applies to all other statements issued by the FASB where fair value is discussed and it amends previous statements that provided different definitions of fair value. It does not eliminate the practicability exceptions to fair value measurements in accounting pronouncements within the scope of the Statement Market participants include buyers and sellers in the principal or most advantageous market for the asset − 13 −

14. Fair Value – Standard Expressed in ASC 820 ASC 820 Intended to provide information to investors about the price an asset could be sold for at the measurement date Not intended to provide information on anticipated IRR or future results Retains exchange price notion in earlier FASB definitions of fair value Clarifies that the exchange price is the price in an orderly transaction between market participants and not a forced transaction − 14 −

15. Fair Value – Standard Expressed in ASC 820 ASC 820 The Board revised the definition of fair value in this Statement to refer to an orderly transaction, as do other definitions used in valuations for purposes other than financial reporting that are similar to fair value (for example, fair market value) Fair value is generally consistent with similar definitions of fair market value The FASB recognized that fair market value relates mostly to assets (property) − 15 −

16. Definitions - Some real estate assets affected before others: ASC 820 For all financial and nonfinancial assets recognized at fair value on a recurring basis …. For nonfinancial assets measured on a nonrecurring basis, such as impaired real estate For real estate investment companies investing in office buildings and the like, having a calendar year, and marking that investment to fair value on a recurring basis − 16 −

17. Definitions - Some real estate assets affected before others: ASC 820 Provides a new definition of fair value Creates a framework for developing fair value estimates (or opinions) Requires additional disclosures for fair value estimates (or opinions) − 17 −

18. Note the distinction between estimates and opinion: ASC 820 Preparer of financial statements may estimate an asset’s fair value In other instances, a fair value opinion will be acquired from a valuation specialist − 18 −

19. Fair Value under IFRS 13, is effective after January 1, 2013 IFRS 13 Fair value is the estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties. A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. − 19 −

20. ASC 820 prioritizes valuation inputs ASC 820 1)Identify exit market 2)Identify market participants a)Principal or most advantageous market b)In-use or in-exchange 3)Identify valuation premise (highest and best use) 4)Determine market participant assumptions 5)Apply inputs to valuation techniques 6)Exit price/fair value − 20 −

21. Three Level Hierarchy ASC 820 Level 1 Quoted market prices in active markets for identical assets An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available…. Example: Valuation of an investment in the stock of a publicly traded REIT. − 21 −

22. Three Level Hierarchy ASC 820 Level 2 - Directly or Indirectly Observable Inputs Quoted market prices in active markets for similar assets Quoted market prices for identical or similar assets in inactive markets Inputs other than quoted prices that are observable (credit risks, default rates, prepayment speeds, volatility index, interest rate and yield curves at quoted intervals) − 22 −

23. Three Level Hierarchy ASC 820 Level 2 - Directly or Indirectly Observable Inputs (continued)  There are few transactions for the asset  The prices are not current  Price quotations vary substantially, either over time or among market makers  Little information is released publicly  Inputs other than quoted prices that are observable for the asset − 23 −

24. Three Level Hierarchy ASC 820 Level 3 - Unobservable Inputs Allowed when observable inputs are not available For situations when there is little, if any, market activity at the measurement date Reporting entity’s own assumptions about the assumptions market participants would use Most private companies and the equity and debt securities in them fall into the Level Three category Developed from the best information available in the circumstances, which may include the reporting entity’s own data. − 24 −

25. Framework for Evaluating Fair Value ASC 820 Assumptions Exposure to the market prior to the measurement date Not a forced transaction (e.g., forced liquidation or distressed sale) Sale of the asset occurs from the perspective of a market participant that holds the asset The price is the one that would be received to sell the asset at the measurement date. The FASB determined that exit price is appropriate as it presumes current expectations of future cash flows pertaining to the asset. − 25 −

26. Framework for Evaluating Fair Value (continued) ASC 820 Reporting entity and valuation specialists need to determine: The asset that is the subject of the measurement For an asset, the valuation premise appropriate for the measurement (consistent with its highest & best use) The principal (or most advantageous) market for the asset The valuation technique(s) appropriate for the measurement − 26 −

27. Framework for Evaluating Fair Value (continued) ASC 820 Principal (or Most Advantageous) Market Fair value assumes the sale of the asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market.  Principal market is the market … with (1) the greatest volume and (2) the greatest level of activity.  Most advantageous market … maximizes the amount that would be received for the asset considering transaction costs …. − 27 −

28. Framework for Evaluating Fair Value (continued) ASC 820 Principal (or Most Advantageous) Market Fair value is considered from the perspective of the reporting entity, allowing for differences between, and among, companies having different activities. If there is a principal market for the asset, then the fair value measurement represents the price in that market, even if the price in a different market is potentially more advantageous. − 28 −

29. Framework for Evaluating Fair Value (continued) ASC 820 Transaction Costs The price used to develop an asset’s fair value is not to be adjusted for transaction costs.  Represent the incremental direct costs to sell the asset or transfer the liability in the principal (or most advantageous) market for the asset or liability … not an attribute of the asset or liability…[but] specific to the transaction ….  Do not include cost to transport the asset to or from its market (applies to personal property). − 29 −

30. Framework for Evaluating Fair Value (continued) ASC 820 Transaction Costs However, when disposition of the asset is typical for developing the fair value, then the disposition costs are included. Example In developing fair value using a DCF model, where the market participant would anticipate disposition costs in the final year’s reversion amount, those costs are relevant in estimating what a buyer would be willing to pay for the asset. − 30 −

31. Framework for Evaluating Fair Value (continued) ASC 820 Identification of Market Participants Buyers and sellers in the principal (or most advantageous) market for the asset that are:  Independent  Knowledgeable  Able to transact for the asset  Willing to transact for the asset (not forced or compelled) − 31 −

32. Framework for Evaluating Fair Value (continued) ASC 820 Identification of Market Participants Determination of fair value uses the same assumptions market participants would use to price the asset. The reporting entity identifies:  Characteristics that distinguish market participants  The principal (or most advantageous) market for the asset  Market participants with whom the reporting entity would transact in that market − 32 −

33. Framework for Evaluating Fair Value (continued) ASC 820 Highest and Best Use: Value In-Exchange The highest & best use of the asset is in-exchange if the asset would provide maximum value to market participants principally on a standalone basis. If the highest & best use of the asset is in-exchange, the fair value of the asset shall be measured using an in-exchange valuation premise. When using an in-exchange valuation premise, the fair value of the asset is determined based on the price that would be received in a current transaction to sell the asset standalone. − 33 −

34. Framework for Evaluating Fair Value (continued) ASC 820 The highest & best use of the asset establishes the valuation premise used to measure the fair value of the asset, specifically in-use or in-exchange. Fair value of an asset in-use is based on the use of the asset together with other assets as a group (at its highest & best use from the perspective of market participants), even if the asset … is aggregated (or disaggregated) at a different level for … other accounting pronouncements. − 34 −

35. Framework for Evaluating Fair Value (continued) ASC 820 Highest and Best Use Management’s intention may not be relevant unless by coincidence it indicates market participants’ assumptions. For real estate (and personal property), the highest & best use principle can have a significant influence on fair value. The highest & best use for the asset is based on its use by market participants, not the subject reporting entity. − 35 −

36. Framework for Evaluating Fair Value (continued) ASC 820 Initial Recognition When an asset is acquired in an exchange transaction for that asset, the transaction price represents the price paid to acquire the asset (an entry price). In contrast, the fair value of the asset represents the price that would be received to sell the asset (an exit price).  Valuation specialists need to understand that conceptually, entry prices and exit prices are different and entities do not necessarily sell assets at the prices paid to acquire them. − 36 −

37. Framework for Evaluating Fair Value (continued) ASC 820 Initial Recognition  “In many cases, the transaction price will equal the exit price and, therefore, represent the fair value of the asset or liability at initial recognition.”  In determining whether a transaction price represents the fair value of the asset at initial recognition, the valuation specialist needs to consider factors specific to the transaction and the subject asset. − 37 −

38. Framework for Evaluating Fair Value (continued) ASC 820 Initial Recognition The transaction price may not represent the fair value… at initial recognition if:  Transaction is between related parties  Transaction occurs under duress or seller is forced to accept the price  Unit of account represented by the transaction price is different from the unit of account measured at fair value  Market in which the transaction occurs is different from the market in which the reporting entity would normally sell the asset − 38 −

39. Accepted Methods of Valuation ASC 820 In selecting the appropriate valuation techniques, it is important to consider the availability of data to develop valuation inputs that represent the assumptions that market participants would use in pricing the asset … and the level in the fair value hierarchy within which the inputs fall. ASC 820 recognizes the three generally accepted valuation approaches: Market (Sales Comparison) Approach Income Approach Cost Approach − 39 −

40. Accepted Methods of Valuation ASC 820 In some cases, a single valuation technique is appropriate If multiple valuation techniques are used, the results (respective indications of fair value) shall be evaluated and weighted (i.e., reconciled) as appropriate, considering the reasonableness of the range by those results A fair value measurement is the point within that range that is most representative of fair value in the circumstances − 40 −

41. Conclusion — Opportunities for Appraisal ASC 820 “Typical” valuation assignment Client and Audit Firm will review Results impact Client’s financial statements − 41 −

42. ASC 805 Business Combinations − 42 −

43. Overview ASC 805 ASC 805 requires that intangible assets, aside from goodwill, be recognized if:  Contractual or other legal rights, such as patents or trademarks, give rise to intangible assets, or  The intangible asset can be separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged individually, or in combination with a related contract, asset or liability. − 43 −

44. Tangible and Intangible Assets ASC 805 In accordance with ASC 805, the allocation of purchase price considers following tangible and intangible asset categories: Tangible Assets Land Building and site improvements Equipment and/or FF&E Tenant improvements − 44 −

45. Tangible and Intangible Assets ASC 805 Intangible Assets Above/below market leases (leasehold value) In-place lease value, inclusive of downtime costs, lease commissions and legal fees Mark-to-market value of assumed debt Mark-to-market value of assumed ground lease position Customer (tenant) relationships − 45 −

46. Land Value ASC 805 Using the Sales Comparison Approach land is valued by comparing the subject site to similar, recently sold properties in the surrounding or competing area. This approach relies on the principle of substitution, which holds that when a property is replaceable in the market, its value tends to be set at the cost of acquiring an equally desirable substitute property. − 46 −

47. Building and Site Improvements ASC 805 The Cost Approach is based upon the economic principle of substitution, which states that the price of an asset tends to be no higher than the cost of producing a substitute property having equal utility, available without delay. This approach considers all hard and soft costs and the three potential forms of depreciation: Physical depreciation Functional depreciation External obsolescence − 47 −

48. Go-Dark Analysis (Land + Building and Site Improvements) ASC 805 Alternatively, the combined value of the site and building improvements can be estimated via an estimate of the “as vacant” value of the property, with consideration given to the following: Lease-up period (to stabilization) Carrying costs, including all fixed and variable operating expenses Lease-up costs, including tenant improvements, leasing commissions and legal fees Typically accomplished using a discounted cash flow analysis, considering market conditions − 48 −

49. Tenant Improvements ASC 805 Tenant improvements for occupied space is a negotiable item and ranges from “as-is” to “turn-key.” The value of tenant improvements should be based on the cost of the original fit- out of the space, but current market data can be considered when actual costs are unavailable. − 49 −

50. Equipment and/or Furniture, Fixtures and Equipment ASC 805 Tangible personal property is defined as: “a right or interest in things of a temporary or moveable nature.” Typically valued using Cost or Market Approach methodology. − 50 −

51. Above/Below Market Leases (Leasehold Value) ASC 805 The value of above and below market leases is estimated by calculating the difference between present value of the rental income coupled with the expense reimbursement revenue of each tenant as set forth in the lease agreements and the rental revenue that would be generated for that same tenant space at a market oriented rate as of the acquisition date. − 51 −

52. In-place Lease Value ASC 805 Collectively, downtime costs, leasing commissions and legal fees are added together in order to calculate the in-place lease value. Downtime costs represent the value of the revenue that would be lost during downtime, including all rents and reimbursements, if the property were purchased 100% vacant and were then leased to the existing tenants using market oriented lease-up assumptions. Leasing commissions and legal fees reflect the estimated commissions/fees the landlord would have paid had they originated the leases in place on the acquisition date. − 52 −

53. Mark-to-Market Value of Assumed Debt ASC 805 A mark-to-market adjustment (enterprise value component) for application to the free and clear estimate of property value is estimated by discounting the remaining loan payments at a market oriented interest rate and comparing the resulting value to the current principal balance. Factors that warrant consideration include loan-to-value (LTV) ratios, debt service coverage ratios (DSCR) and debt yield. − 53 −

54. Ground Lease ASC 805 The value of the leasehold position associated with a ground lease is estimated in the same manner in which the value of above and below market leases are estimated. An estimated market rent for the site is compared to the contractual rent obligation and the difference is discounted to a present value. − 54 −

55. Customer (Tenant) Relationship ASC 805 Reflects the value associated with establishing an ongoing relationship with tenants, which are anticipated to generate income to the landlord through new, future lease agreements. The value must be measured separately from the value of in- place leases and can be quantified as the value resulting from the income that the relationship will generate. − 55 −

56. Purchase Price Allocation Steps ASC 805 1)Estimate the fair value of the real estate interest acquired 2)Fair value of land via sales comparison approach or mark ground lease to market using income approach 3)Value of building as if vacant using the cost and/or income approach 4)Estimate fair value of site improvements using the cost approach − 56 −

57. Purchase Price Allocation Steps ASC 805 5)Estimate the fair value of tenant improvements (if paid for by the tenant) based on the cost 6)Estimate the fair value of in-place leases via an income approach 7) Estimate the above/below market lease fair value using income approach 8) Estimate customer (tenant) relationship fair value using income approach − 57 −

58. Purchase Price Allocation Steps ASC 805 9)Estimate mark-to-market value of assumed debt using income approach 10)Allocate the fair value based upon the resulting purchase price allocation component values − 58 −

59. Conclusion — Opportunities for Appraisals ASC 805 Niche Business Client and Audit firm will review. Results impact client’s future financial statements. Understand the accounting literature before being engaged − 59 −

60. Lease Accounting − 60 −

61. Current Practices and New Considerations Lease Accounting The objective of the proposed standard is to ensure that all assets and liabilities arising from leases are reported in the financial statements in a consistent manner. As a result, the Boards concluded that certain fundamental changes are required and that the proposed changes address this issue. Any organization that is required to comply with International Financial Reporting Standards (IFRS) or U.S. Generally Accepted Accounting Principles (U.S. GAAP) will be affected by the proposed changes. − 61 −

62. The Underlying Asset Approach Lease Accounting The lessee would amortize the right-of-use asset based on the estimated consumption of the underlying leased asset over the lease term. Consequently, the higher the consumption rate, the more the income statement effects would resemble those that would arise from purchasing the underlying asset and financing it separately. The lower the rate of consumption, the more the income statement effects would resemble the rental expense pattern under current operating lease accounting. − 62 −

63. The Underlying Asset Approach Lease Accounting Where it stands...  Although the boards did not make any formal decision, the IASB indicated an initial leaning toward this approach, if it is confirmed that it is operational and useful. − 63 −

64. The Interest-based Amortization Approach Lease Accounting The lessee would amortize the right-of-use asset on a systematic basis that reflects the pattern of consumption of expected future economic benefits (this is consistent with the 2010 Leases exposure draft) for those leases for which substantially all of the risks and rewards of the underlying leased asset have been transferred to the lessee. − 64 −

65. The Interest-based Amortization Approach Lease Accounting For leases that do not transfer substantially all of the risks and rewards of the underlying leased asset, the lessee would use an amortization approach that would result in recognizing total lease expense in a pattern that would typically resemble the rental expense pattern under current operating lease accounting. Where it stands...  Although the boards did not make any formal decision, the FASB indicated an initial leaning toward this approach. − 65 −

66. Conclusion — Opportunities for Appraisals Lease Accounting Yet to be determined…. Large companies will use model-based approach. Smaller companies may use outside help or complete analysis internally. − 66 −

67. Questions − 67 −

68. Contact Information Michael P. Hedden, MAI, CRE, FRICS Managing Director (646) 632-3842 Michael.Hedden@FTIConsulting.com Marc R. Shapiro, MAI, MRICS Managing Director (973) 852-8154 Marc.Shapiro@FTIConsulting.com Brian Johnson, MAI, CRE, FRICS Partner (212) 872-5838 BrianJohnson@KPMG.com − 68 −

69. About FTI Consulting, Inc. FTI Consulting, Inc. FTI Consulting, Inc. is a global business advisory firm dedicated to helping organizations protect and enhance enterprise value in an increasingly complex legal, regulatory and economic environment. FTI Consulting professionals, who are located in all major business centers throughout the world, work closely with clients to anticipate, illuminate and overcome complex business challenges in areas such as investigations, litigation, mergers and acquisitions, regulatory issues, reputation management and restructuring. www.fticonsulting.com − 69 −