Investment Companies Audit and Accounting Guide Background and Implementation Discussion February 19, 2004

February 19, Discussion Topics Status of Proposed SOP and Implementation Date How did we get here ? Who should follow it ? What are we doing ? What’s different ?

February 19, Status of the Proposed SOP and How We Got Here  Original Exposure Draft would have precluded most commingled funds from reporting under market value accounting  NCREIF, PREA and numerous investment advisors and investors provided comments  AcSEC made sweeping changes to proposal, recognizing that private equity real estate investment is different  Revised SOP includes illustrations – Appendices B and C  Revisions cleared by AcSEC – September 2003  FASB clearance – ?? 2004  Proposed effective date – Fiscal years beginning after 12/15/04 Could this be deferred another year ?

February 19, What is an investment company? (or Who has to follow it?)  Definition: An investment company is a separate legal entity whose business purpose and activity is investing in multiple substantive investments for current income, capital appreciation, or both, with investment plans that include exit strategies. (para. 5)  Includes: Entities regulated under the 1940 Act Common (collective) trust funds Separate accounts of insurance companies Foreign entities subject to regulations similar to the 1940 Act  Multiple investors => commingled funds; debatable whether it applies to single investor entities

February 19, To Do  Propose AICPA add a project to its agenda – additional guidance for real estate Prospectus/issues summary submitted on December 15 – posted on NCREIF website Meeting with planning subcommittee of AcSEC on March 15  Alternate step: Propose changes to REIS for 2005 in case the AICPA project does not proceed in time

February 19, Implementation Issues (or What’s Different?)  Presentation of the balance sheet and income statement Define investment and define income –Gross or net (investment, net rental income, etc) –Accrual or cash recognition of operating results  Generally, consolidation or use of equity method of accounting in a non-investment company investee is not appropriate Lack of specific guidance within the Guide for real estate investments In theory, there is no impact to total return, but could impact components of the return  Valuation of Debt/Valuation of leveraged equity position Property level Venture level Fund level

February 19, Other Issues  Consistency of reporting Investment company covered by the Guide Core separate accounts covered by (1) SFAS 35 and the AICPA Guide for Audits of Employee Benefit Plans, or (2) GASB 25  Ability to address entire spectrum of entities using fair value reporting – primarily less than 100% owned companies  Performance measurement  Potential impact on how adviser fees are determined (benchmark against NPI or based on NOI)  Recent accounting pronouncements/proposed standards SFAS 141/142 SFAS 144 PP&E and component accounting  Other ____________________?