Fair value reporting for investment properties under US GAAP. August 2010

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1 Fair value reporting for investment properties under US GAAP August

2 Table of contents Executive summary...1 History of the US investment property standard proposal...1 History of investment property standard under IFRS...3 Definition of investment property under IAS Examples of investment property under IAS Difficulties in applying IAS 40 and Fair Value Accounting for Investment Property...6 Potential issues in applying an investment property standard in the United States...7 Timetable for the proposed standard...10 Contact us...11

3 Executive summary At its July 14, 2010 meeting, the Financial Accounting Standards Board ("FASB") tentatively decided to issue a proposed Accounting Standard Update ( ASU ) to attempt to achieve convergence with International Accounting Standards ( IAS ) on accounting for investment properties. However, the FASB concluded that, as opposed to the international accounting standard on investment property, which provides an option to account for investment property at cost or fair value, the US standard, would require an investment property to be measured at fair value. This new guidance is partially driven by the recently issued Exposure Draft for leasing. Assuming that both standards are adopted, lessors who are in the scope of the investment property guidance would not apply the new leasing standard. An investment property is defined as real estate (including integral equipment) held by the owner or held on a finance lease (under certain circumstances operating leases may also be classified as investment properties) to earn rentals, for capital appreciation, or both. This does not include owner-occupied property, property held for sale in the ordinary course of business (e.g., residential homes held by a home builder), or property constructed on behalf of third parties. The exposure draft could be issued as early as September 2010, with an abbreviated comment letter period expected to end December 15, 2010 (concurrently with that of the exposure draft on the Lease Project issued in August). If completed, it is expected that the new investment property standard will be adopted concurrently with the proposed new leasing standard. The date of adoption of the new leasing standard has not yet been determined, but could be as early as 2013/2014. Who could be affected? This new guidance will have broad implications to many owners/investors in real estate and could impact the following entities: Real Estate Investment Trusts (REITs) Real Estate Operating Companies (REOCs) Insurance companies (e.g., general account investments) Banks (e.g., real estate investments and some OREO assets) Owner entities for non-traditional real estate that may be leased under take or pay/power purchase arrangements including power plants, oil/gas pipelines, wind/solar farms, and production facilities Property Companies in OPCo./PropCo structures used by private equity firms for certain portfolio investments Owners of properties leased to other affiliated companies Franchisors that lease property to franchisees All other investors in rental real estate History of the US investment property standard proposal As part of the overall convergence efforts, the FASB and the International Accounting Standards Board ( IASB ) recently completed an exposure draft for their joint project on accounting for leases, which will result in significant changes to the accounting model for leases. The IASB included a scope exception within the exposure draft that if a lessor of investment properties measures those properties at fair value in accordance with International Accounting Standards ( IAS ) 40, Investment Property ( IAS 40 ), it would not apply the proposed new lessor accounting requirements to the lease. Instead, it would continue to account for those leases as operating leases, as specified in IAS 17, Leases. This decision assumes that fair value is a more informative and preferred model. Currently, there is no Fair value reporting for investment properties 1 PricewaterhouseCoopers

4 equivalent US standard that allows for investment properties to be measured at fair value and there would be no basis for excluding investment properties from the new proposed lessor accounting requirements. To remedy this lack of consistency between IASB and FASB guidance, and at the request of some participants in the real estate industry, the FASB announced at its March 10, 2010 meeting that it was adding a project to its agenda to consider whether entities should be given the option (or potentially be required) to measure an investment property at fair value through profit and loss (FVTPL). A similar project previously had been on the FASB s agenda under phase two of the fair value option project, but was removed from the agenda in October 2008, partially because of resistance to optional fair value accounting by the SEC Advisory Committee on Improvements to Financial Reporting and concerns about the use of fair value models in general for "non-traded" assets. Staff resource constraints are also believed to have played a role in the original removal of the project from the agenda, with the expectation that the United States would ultimately adopt IFRS, including IAS 40. At its July 14, 2010 meeting, the FASB discussed the investment property project and certain proposed models put forth by the staff. Rather than starting with a new model, the FASB tentatively decided to issue a proposed Accounting Standard Update using IAS 40 as a basis, however the ASU would require an investment property to be measured at fair value. The FASB recognized that its tentative decision would not achieve complete convergence with IAS 40, which permits, but does not require, investment properties to be measured at fair value. Nonetheless, the FASB instructed the staff to begin drafting the ASU and to continue to reach out to constituents and hear their concerns and thoughts. It is also possible that the IASB will amend IAS 40 to be consistent with this new ASU and require the use of fair value for investment properties. The exposure draft for Accounting for Investment Properties could be issued as early as September 2010, with a comment period to end contemporaneously with that of the lease standard (i.e., December 15, 2010). In the United States there are certain entities that currently report investment property at fair value, including pension funds and entities that are considered to be investment companies under ASC 946 (formerly the AICPA Audit and Accounting Guide - Investment Companies). As part of the convergence project on consolidation, the IASB is nearing the issuance of an exposure draft on the definition of an investment company, a designation that did not previously exist in IFRS. The discussion to date bears striking similarities to SOP 07-1, Clarification of the Scope of the Audit and Accounting Guide "Investment Companies" and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies, issued by the AICPA in 2007 and subsequently indefinitely deferred. If the FASB adopts a similar definition or ultimately converts to IFRS, entities will need to re-evaluate whether they are or are not investment companies under the new guidance; and if not, if they would no longer be able to report as investment companies. In some cases, certain real estate entities (generally vertically integrated property operating companies) may no longer qualify as investment companies, but many investors in those entities may still need fair value information for their own reporting (e.g. pension funds). If adopted by the FASB, this new guidance on investment properties may provide some relief for those funds that would no longer be within the scope of an investment company, by requiring investment properties to be reflected at fair value under non-investment company US GAAP. On the other hand, because of the definition of investment property within IAS 40, some investments, such as hotels and assistedliving facilities, which had historically been reported by these investment company entities at fair value, may no longer have a basis to be reported at fair value because the entities owning such property may not be investment companies and the property may not meet the definition of an investment property. For entities that historically have not been deemed to be investment companies, but which have owned or operated rental properties, the current reporting model is based on the historical cost of the property as adjusted for depreciation and impairment. Depending on the type of underlying properties, this includes many of the real estate investment trusts (REITs) and real estate operating companies (REOCs). In addition, many financial institutions, such as banks and insurance companies, which hold such investments for their own account (i.e., general account investments), will also be affected if these investments meet the definition of investment property. Absent the ability to reconsider fair value elections on related debt financing these investments (both recourse and non-recourse), many of these financial Fair value reporting for investment properties 2 PricewaterhouseCoopers

5 institutions could have mismatches, creating unusual net results with liabilities carried at amortized cost. IAS 39.9 allows the classification of such liabilities at FVTPL in order to eliminate a mismatch (where applicable). This new FASB guidance could also affect owners of non-traditional real estate, such as production facilities, power plants, wind/solar farms, or pipelines, which otherwise may meet the definition of an investment property, and which are subject to leases, either directly or through take-or-pay contracts or power purchase contracts under ASU (formerly EITF 01-8). While international standards (International Financial Reporting Interpretations Committee ["IFRIC"] 4) have equivalent lease definitions, whether or not they were considered investment property under IAS 40 has not been a focus for owners of these assets because fair value reporting has been optional. In addition, due to the complexities of valuation, historical cost has generally been elected. Since the FASB s new investment property standard would not allow for such an option, the evaluation of whether these are considered investment properties will be critical. Banks and other financial institutions also receive property in foreclosure (i.e., other real estate owned or OREO assets) that they may hold for sale/rent for a period of time to maximize their returns/recovery. These OREO assets may meet the definition of an investment property and may be required to change from the current historical cost model to a fair value model once obtained in foreclosure until their ultimate disposal. Many historical cost-reporting entities, such as REITs/REOCs, have long disagreed with the concept of depreciating appreciating assets, which has lead them to provide the market with alternative measures of performance, such as Funds from Operations ( FFO ). FFO excludes the impact of depreciation of these real estate assets from earnings. Others have argued that the asset on the balance sheets of REIT and REOCs were not comparable among companies because property acquisitions are recorded at historical cost at the time of acquisition (which is at different times for different acquisitions and different companies) and subsequently were depreciated using a method that doesn t necessarily reflect the real economic decline in value of a property. These industry participants believe that fair value reporting would improve the relevance of financial reporting. Critics of the fair value model note that real estate valuations are generally level 3 under the current fair value framework and point to the inherent uncertainty of valuations and potential differences of assumptions such as market rents or discount and cap rates by different parties for similar properties. These critics believe that fair value reporting would not improve the comparability of financial statements among different real estate companies. Ultimately, it remains to be seen whether the public markets will embrace this change or not. History of investment property standard under IFRS Prior to the adoption of IFRS, the accounting for investment properties was governed by local GAAP. Although the accounting in each jurisdiction varied, it generally followed either the historical cost model or the revaluation model, or an option to choose between the two. The cost model was based on the historical cost of the property as adjusted for depreciation and impairment. Under the revaluation model, properties were carried at fair value, with changes in fair value recorded in equity. The fair value model, in which properties are carried at fair value with changes in fair value through profit or loss, was generally not applied internationally prior to the adoption of IAS 40. Under IFRS (specifically IAS 40), the initial measurement of an investment property is its purchase price plus any directly attributable transaction costs. Subsequent to initial measurement, Global Survey of listed Investment Property owners* 8% 92% Applied the fair value model for subsequent measurement of investment property Applied the cost model * In a 2008 global survey of listed investment property owners conducted by PricewaterhouseCoopers - 50 entities surveyed. Fair value reporting for investment properties 3 PricewaterhouseCoopers

6 management makes a policy election to either carry an investment property at fair value, or at cost (less depreciation and impairment). In practice, the vast majority of companies in most jurisdictions that apply IFRS have elected to carry their investment properties at fair value. In certain jurisdictions, there has been less use of fair value because of a lack of valuation infrastructure or for competitive reasons. However under IFRS, when a company elects the cost model, they must still disclose fair value information. In addition, the adoption of IAS 40 took place during a period when real estate values were generally increasing, and this undoubtedly created a bias toward the use of the fair value model. It is not clear, however, how the percentage for those electing fair value would have changed if the adoption of IAS 40 had occurred in a poor economic environment with declining real estate values. The policy chosen is applied consistently to all of the investment properties that the entity owns (i.e., it cannot be applied selectively), and a change from one model to the other can be made only if it will result in a more appropriate presentation. As noted specifically in IAS 40, however, a change from fair value to cost is not likely to be considered a more appropriate presentation and is generally not acceptable. Once elected, there is effectively no going back. Definition of investment property under IAS 40 Investment property is defined under IAS 40 as: Property held by the owner; held on a finance lease to earn rentals or for capital appreciation; or both Existing investment property that is being redeveloped for continued use as an investment property in the future Effective in 2008, investment properties in the course of construction or development are also within the scope of IAS 40 (previously they were accounted for as Property, Plant, and Equipment ("PPE") at historical cost until the completion of the construction). Where fair value is elected under IAS 40, such a property is generally measured at fair value; however, if the value of the investment property under construction is not reliably measurable, it is measured at cost until the earlier of the date construction is completed or the date at which fair value becomes reliably measurable. The following are examples of investment property under IAS 40: Land held for long-term capital appreciation rather than for short-term sale in the ordinary course of business Land held for a currently undetermined future use If an entity has not determined that it will use the land as owneroccupied property or for short-term sale in the ordinary course of business, the land is regarded as held for capital appreciation. A building owned by the entity (or held by the entity under a finance lease) and leased out under one or more operating leases A building that is vacant but is expected to be leased out under one or more operating leases Property that is being constructed or developed for future use as investment property The definition specifically excludes the following: Owner-occupied property Property intended for sale in the ordinary course of business Property being constructed on behalf of third parties Fair value reporting for investment properties 4 PricewaterhouseCoopers

7 Leasehold interests A property interest that is held by a lessee (i.e., a lease In or a Head Lease ) under an operating lease may be classified and accounted for as investment property, provided that it meets the following criteria: All other definition criteria of investment property are met The operating lease is accounted for as if it were a finance lease The lessee uses the fair value model This allows leasehold interests under operating leases which would otherwise have no carrying value to be accounted for as investment property. For example, a leasehold interest in land would normally be an operating lease under current international leasing standards; without this special treatment, there would have been no asset to reflect at fair value. If the new lease model is finalized as currently proposed, there will no longer be a need for this specialization since there would be a right-to-use asset recorded. Multipurpose property Separate accounting should be applied where a property is used for both investment purposes and administrative or/productive purposes. One portion should be accounted for as an investment property and the other as PPE. Separate accounting can be applied only if it is possible for the portions to be sold separately (or leased separately under a finance lease). The existence of a third-party lessee indicates that a separate sale or finance lease is possible. If they cannot be sold separately, the entire property is treated as investment property only if an insignificant portion is held for use in the production or supply of goods or services or for administrative purposes. Services provided to occupants of property In cases where an entity provides ancillary services to occupants of a property owned by the entity, the property is considered an investment property if such services are a relatively insignificant portion of the arrangement as a whole. If such services are more significant, such as in a hotel, the property is treated not as investment property, but as an owner-occupied property. Significant judgment is required to determine whether a property qualifies as investment property when ancillary services are provided. Property occupied by group members, associated companies, or joint ventures In cases where property is leased from one member of a group to another, and occupied by that other, the property is not an investment property from the standpoint of the consolidated group as a whole -- that is, it is not treated as investment property in the consolidated financial statements. However, it may qualify as investment property in the individual financial statements of the group company that is the lessor, if it meets the other conditions set out in the definition. Property occupied by an associated company or joint venture accounted for using the equity method should be accounted for as investment property in the consolidated financial statements. Associates and joint ventures accounted for using the equity method are not part of the consolidated group, and therefore the property is not owner occupied from the group s perspective. Fair value reporting for investment properties 5 PricewaterhouseCoopers

8 Examples of investment property under IAS 40 The model does not easily lend itself to broad categorization of investment properties by property type without consideration of the facts and circumstance specific to the property. The evaluation of whether a property is considered investment property under IAS 40 depends on the nature and purpose of the activities conducted at the property and which party conducts those activities. Accordingly, careful consideration is warranted of the types and significance of services rendered. An entity treats a property as investment property, even if it provides ancillary services to the tenant, if those services are considered insignificant to the arrangement as a whole and assuming all other criteria have been met; for example, in a case where the owner of an office building provides security and maintenance services to the lessees who occupy the building. On the other hand, those services could be significant for other property types which may not qualify as investment property. For example, an entity that owns and manages a hotel (or hires a third-party manager), where services to guests would generally be significant to the arrangement as a whole, may consider the property to be owner-occupied property rather than investment property. The following table illustrates how similar traditional real estate property types may be classified differently under IAS 40: Property type Qualifying as investment property Not qualifying as investment property Land Hotel Land held for investment or undetermined future use Hotel leased to third-party hotel operator. Owner s role is that of a passive investor and exposure to variability in cash flows is limited. Land held for development and sale in the short term Hotel managed by owner or third-party hotel manager. Owner is involved in significant operating decisions and exposed to variability in operating cash flows. Retail store Retail store leased to retailer Retail store owned and operated by retailer Office building Apartment building Office building leased to tenant as corporate headquarters Typical apartment building with long-term leases and basic services provided to tenants (e.g., security and maintenance). Office building used by owner as corporate headquarters High-end apartment building with short-term leases and significant ancillary services provided to tenants, including services provided for a fee (e.g., on-site restaurant, health spa). Since nontraditional real estate, such as power plants, pipelines, cell towers, wind/solar farms, and leases to franchisees, generally involve substantial ancillary services, there will be significant judgment in the evaluation of whether these would constitute investment property. Difficulties in applying IAS 40 and Fair Value Accounting for Investment Property The following areas may require special attention under IAS 40: Movement between categories (PPE vs. inventory vs. investment property) Complexities of valuing development property Fair value reporting for investment properties 6 PricewaterhouseCoopers

9 Adequacy of local valuation infrastructure in some jurisdictions and level of available market information (impact of recent financial crisis) Frequency of using management valuations vs. external appraisals Leasing as lessor: When applying the fair value option under IAS 40 today, companies generally report rental income for operating leases on a straight-line basis for non-cancelable lease terms. US entities applying fair value accounting as investment companies or as pension plans do not apply the straight-line rent model but instead reflect revenue on a contract accrual basis. Leasing as lessee: Today, when applying IAS 40 to value an investment property, land leases are allowed to be accounted for as finance leases in order to have an asset that can be adjusted to fair value. Deferred tax issues: It is not uncommon for international real estate transactions to be effectuated by so-called wrapper transactions (i.e., the purchase of the stock of an entity whose sole asset is the investment property). These entities are often taxable structures. If the transaction is a business combination, this poses a significant problem with what to do with the inside basis differential and related deferred tax liabilities in purchase accounting. Since this type of transaction is common, it is possible that the deferred taxes will never be paid, but rather passed on to the next buyer. In addition, transaction costs on a business combination are expensed immediately. Disclosure: How to get transparency and the reality of proprietary information when trying to achieve the right balance between comparability and relevancy of fair value reporting. Potential issues in applying an investment property standard in the United States The overall impact of applying IAS 40 and a requirement of fair value reporting for investment properties is uncertain and may vary widely for specific companies, depending on such factors as property type, market conditions, and when the property was originally acquired. In the United States, most investment properties held by noninvestment companies/pension funds have been reflected in financial statements using historical-cost models and generally classified as held-and-used assets subject to impairment review. This review requires a two-step approach for impairment. If the gross cash flows from property operations exceed the carrying value of the asset, then no impairment write-down is necessary. If the gross cash flows do not exceed the carrying value of the asset, then the asset must be written down to its fair value. It is conceivable that assets that would be impaired on a fair value basis have not yet reflected impairment write-downs because of this two-step approach. Conversely, assets that have been held for extended periods of time and that have reflected significant depreciation charges may require significant write ups. The FASB has already stated that the proposed ASU will not be identical to IAS 40 because it will not include an option to use historical cost. However, the writing of the Exposure Draft should not be as easy as taking IAS 40 verbatim and making the change to eliminate the option to use historical costs. Among other things, a number of technical corrections would be needed, as well as some integration issues or outright conflicts with other US accounting standards, which would need to be addressed. There are also some practical and regulatory issues to confront. A brief discussion of each of these issues follows. Fair value reporting for investment properties 7 PricewaterhouseCoopers

10 Technical corrections, integration, and conflict resolution In addition to eliminating the ability to use historical cost, rule makers will need to consider other technical matters, including (but not limited to) the following points. Some of these issues may be addressed by the IASB as technical corrections to standards: Revising links to lease accounting Existing references to lease accounting literature in IAS 40 for operating leases will need to be eliminated, as that literature will no longer exist with the completion of the proposed new leasing standard. Further, it is likely that the revenue model will convert from the straight-line rent model used today to something more like a contract accrual basis which is more consistent with fair value accounting for investment companies. Leases in (e.g., underlying ground leases) could be accounted for consistent with the proposed new leasing standard, but the resulting asset will need to be included in the carrying value of the investment property. Fair value premise It is expected that the fair value premise will be consistent with ASC 820 (formerly SFAS 157). Among other things, this will require consideration of highest and best use of the property, as well as appropriate documentation of all significant assumptions. Sensitivity disclosures required by ASU 820 are also difficult to provide for real estate valuations, which are affected by many interconnected assumptions, including discount rates, cap rates, market rental rates, property operating costs, and capital expenditure costs. Reconsideration of existing fair value option elections for related real estate financing - As part of the transition to the new Investment Property accounting in the US, existing fair value option guidance for financial assets and liabilities may need to be modified to allow impacted entities to reconsider existing elections in place for financing associated with the investment property. Absent the ability to reconsider fair value elections on related financing, entities including financial institutions could have mismatches, creating unusual net results with liabilities carried at amortized cost. Business combinations There is a perceived conflict with the business combinations guidance in ASC 805 [formerly SFAS 141(R)] since most accounting practitioners in the US believe that ASC 805 currently includes the acquisition of rental real estate in its scope as business combinations, which would be defined as investment property under IAS 40. ASC 805 requires different accounting than the model used for investment companies -- including whether to expense or capitalize transaction costs; and the requirement under ASC 805 to allocate purchase price amongst tangible and intangible assets and liabilities relating to the lease contracts that may be part of the investment property. The business combination rules under ACS 805 and IFRS 3(R) were created under a joint project and are nearly identical. However, internationally, many believe that: - Investment properties would not be considered as businesses under IFRS 3(R) - The guidance to fair value investment properties should specifically exclude investment properties from certain aspects of IFRS 3(R), such as expensing transaction costs and allocating purchase basis to acquired lease intangibles (e.g., above/below market rents, in-place lease value, tenant relationship value). It is expected that IFRS will likely address this issue in connection with its post-two-year implementation review of IFRS 3(R). In the United States, substantially all rental real estate is considered a business under ASC 805; consequently, transaction costs are expensed and a portion of the purchase consideration is allocated to lease intangibles. We believe these issues should be addressed by the FASB in its proposed investment property standard. Under the business combination model, the deferred tax issue for wrapper transactions is easier to address. Fair value reporting for investment properties 8 PricewaterhouseCoopers

11 Regulatory issues Many reporting entities subject to the regulations of Sarbanes-Oxley Section 404 may have significant practical concerns about reporting the fair value of investment property, including the ability to rely on valuation experts or completing real estate valuations themselves. Significant issues include: The need to create and/or enhance processes, controls, and systems Best practices on valuation methodology and process may involve a significant amount of periodic external valuations Considerations about when to adjust discount/cap rates or market rents Property-specific information and data-flow for changes in events (e.g., such as tenant bankruptcy,, leasing activity, or changes in cost structure from increased utility, insurance, or tax costs) may not be captured in valuations in the required financial reporting timetable. Some of the affected companies are in regulated industries, such as banks and insurance companies. It is not yet clear how, when, or even if regulators will adjust risk-based capital requirements for investment property. Typically, regulators do not address such matters until a standard is closer to being issued in final form. Furthermore, some regulators apply statutory accounting, which may not adopt this model immediately -- or ever. Fair value reporting for investment properties 9 PricewaterhouseCoopers

12 Timetable for the proposed standard The exposure draft could be issued as early as September 2010, with an abbreviated comment letter period ending contemporaneously with that of the exposure draft on the Lease Project issued in August. If completed, it is expected that the new investment property standard will be adopted concurrently with the proposed new leasing standard, and that an exclusion from the lease standard will be made for lessors of investment properties accounted for at fair value in the United States, similar to the one already discussed by the IASB for those reporting at fair value under IAS 40. It is also expected that the adoption dates of the two standards will be aligned even if the finalized release of each standard is different. For many public REITs/REOCs, substantial new processes and controls will be needed in moving to an investment property standard. In most cases a system-based solution will be the answer. Today, many real estate accounting systems can transfer key data, such as rent rolls, into valuation software and frequently do so to prepare valuations for lenders. This may need to be further refined, and require additional processes to be developed to review and approve assumptions and output. Given that the potential adoption date of such a standard may be as early as 2013, it is not too early for real estate companies to start considering their systems, processes, and human capital needs as they consider long-term strategies. Lease project/investment property project timeline and path forward Exposure Draft Final standard Effective date (mid-2010) (2011) 2013/2014 Phase I Training/awareness Preliminary assessment Strategic planning for the future Process and technology readiness Phase II Issues resolution Business strategy changes Systems changes/upgrades Execution Planning for the future Phase III Go live and business as usual Reporting updates Ongoing monitoring US GAAP today Project management, communication, knowledge transfer US GAAP tomorrow Assess impact and determine strategy Establish policies and prepare financial results Embed the new standard Fair value reporting for investment properties 10 PricewaterhouseCoopers

13 Contact us If you would like to have a more in depth conversation or require services for any of the topics discussed in this publication, please contact any of the following PwC professionals: National real estate Tim Conlon US Real Estate Leader (New York) timothy.c.conlon@us.pwc.com Tom Wilkin National Office Real Estate Partner (Florham Park) tom.wilkin@us.pwc.com John Gottfried Technical Accounting Group Partner (New York) john.gottfried@us.pwc.com Industry contacts Banking Chip Currie frederick.currie@us.pwc.com Insurance Jill Butler jill.butler@us.pwc.com Utilities Tom McGuinness thomas.mcguinness@us.pwc.com Retail Peter Schlicksup peter.j.schlicksup@us.pwc.com Fair value reporting for investment properties 11 PricewaterhouseCoopers

14 pwc.com The fees and billing rates established in this proposal are premised upon your acceptance of engagement letter terms including client indemnification and liability limitations which are usual and customary under internal audit services and other non-attest arrangements. This proposal does not constitute a contract to perform services. Final acceptance of this engagement by PricewaterhouseCoopers is subject to the successful completion of PricewaterhouseCoopers engagement acceptance evaluation procedures. Any engagement arising out of the proposal will be subject to the execution of our formal engagement letter, including our standard terms and conditions. This proposal is protected under the copyright laws of the United States and other countries. This proposal contains information that is proprietary and confidential to PricewaterhouseCoopers LLP, and shall not be disclosed outside the recipient's company or duplicated, used or disclosed in whole or in part by the recipient for any purpose other than to evaluate this proposal. Any other use or disclosure in whole or in part of this information without the express written permission of PricewaterhouseCoopers LLP is prohibited PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity.

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