Investment Securities for EQUITY

Investment Securities

Investment securities are accounted for in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and included in other assets in the consolidated balance sheets. These securities are classified as held-to-maturity and carried at amortized cost if management has the positive intent and ability to hold the securities to maturity. Otherwise, the securities are classified as available-for-sale and carried at estimated fair value with unrealized gains and losses included in accumulated other comprehensive income (loss), a separate component of shareholders’ equity.

Investment Securities

Investment securities are accounted for in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and included in other assets in the consolidated balance sheets. These securities are classified as held-to-maturity and carried at amortized cost if management has the positive intent and ability to hold the securities to maturity. Otherwise, the securities are classified as available-for-sale and carried at estimated fair value with unrealized gains and losses included in accumulated other comprehensive income (loss), a separate component of shareholders’ equity.

Investment Securities

Investment securities are accounted for in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities,
and included in other assets in the consolidated balance sheets. These securities are classified as held-to-maturity and carried at amortized cost if management has the positive intent and ability to hold the securities to maturity. Otherwise, the
securities are classified as available-for-sale and carried at estimated fair value with unrealized gains and losses included in accumulated other comprehensive income (loss), a separate component of shareholders’ equity.

STYLE="margin-top:12px;margin-bottom:0px; margin-left:2%">Deferred Financing Costs

Deferred
financing costs include fees and costs incurred to obtain the Company’s lines of credit and long-term financings. These costs are amortized over the terms of the related debt. Unamortized financing costs are written off when debt is retired
before the maturity date. The accumulated amortization of such deferred financing costs was $31.4 million and $28.0 million at December 31, 2008 and 2007, respectively.

STYLE="margin-top:12px;margin-bottom:0px; margin-left:2%">Fair Value of Financial Instruments, Including Derivative Instruments

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">The Company follows the guidance under SFAS No. 157, Fair Value Measurements, when valuing its financial instruments. The valuation of
financial instruments under SFAS No. 107, Disclosures about Fair Value of Financial Instruments, and SFAS No. 133 and its amendments (SFAS Nos. 137/138/149), Accounting for Derivative

F-14

Instruments and Hedging Activities, requires the Company to make estimates and judgments that affect the fair value of the instruments. The Company,
where possible, bases the fair values of its financial instruments, including its derivative instruments, on listed market prices and third party quotes. Where these are not available, the Company bases its estimates on current instruments with
similar terms and maturities or on other factors relevant to the financial instruments.

In the normal course of business, the Company is
exposed to the effect of interest rate changes. The Company limits these risks by following established risk management policies and procedures including the use of derivatives to hedge interest rate risk on debt instruments.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">The Company has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors. When viewed
in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, the Company has not sustained a material loss from those instruments nor does it anticipate any material adverse effect on its net income or
financial position in the future from the use of derivatives.

On January 1, 2001, the Company adopted SFAS No. 133 and its
amendments (SFAS Nos. 137/138/149), which requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. Additionally, the fair value adjustments
will affect either shareholders’ equity or net income depending on whether the derivative instruments qualify as a hedge for accounting purposes and, if so, the nature of the hedging activity. When the terms of an underlying transaction are
modified, or when the underlying transaction is terminated or completed, all changes in the fair value of the instrument are marked-to-market with changes in value included in net income each period until the instrument matures. Any derivative
instrument used for risk management that does not meet the hedging criteria of SFAS No. 133 is marked-to-market each period. The Company does not use derivatives for trading or speculative purposes.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">The fair value of the Company’s mortgage notes payable and unsecured notes were approximately $5.0 billion and $4.7 billion, respectively, at
December 31, 2008. The fair values of the Company’s financial instruments, other than mortgage notes payable, unsecured notes and derivative instruments, including cash and cash equivalents, lines of credit and other financial instruments,
approximate their carrying or contract values. See Note 11 for further discussion of derivative and other fair value instruments.

SIZE="2">Revenue Recognition

Rental income attributable to residential leases is recorded on a straight-line basis, which is not
materially different than if it were recorded when due from residents and recognized monthly as it was earned. Leases entered into between a resident and a property for the rental of an apartment unit are generally year-to-year, renewable upon
consent of both parties on an annual or monthly basis. Fee and asset management revenue and interest income are recorded on an accrual basis.

SIZE="2">Share-Based Compensation

The Company adopted SFAS No. 123(R), Share-Based Payment, as required effective
January 1, 2006. SFAS No. 123(R) requires all companies to expense share-based compensation (such as share options), as well as making other revisions to SFAS No. 123. As the Company began expensing all share-based compensation
effective January 1, 2003, the adoption of SFAS No. 123(R) did not have a material effect on its consolidated statements of operations or financial position.

FACE="Times New Roman" SIZE="2">The cost related to share-based employee compensation included in the determination of net income for the years ended December 31, 2008, 2007 and 2006 is equal to that which would have been recognized if the fair
value based method had been applied to all awards since the original effective date of SFAS No. 123(R).

The fair value of the option
grants as computed under SFAS No. 123(R) would be recognized over the vesting period of the options. The fair value for the Company’s share options was estimated at the time the share options were granted using the Black-Scholes option
pricing model with the following weighted-average assumptions:

F-15

The valuation method and assumptions are the same as those the Company used in accounting for option expense in its consolidated financial statements.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. This model is only one method of valuing options and the Company’s use
of this model should not be interpreted as an endorsement of its accuracy. Because the Company’s share options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its share options and the actual value of the options may be significantly
different.

Investment Securities

Investment securities are accounted for in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities,
and included in other assets in the consolidated balance sheets. These securities are classified as held-to-maturity and carried at amortized cost if management has the positive intent and ability to hold the securities to maturity. Otherwise, the
securities are classified as available-for-sale and carried at estimated fair value with unrealized gains and losses included in accumulated other comprehensive income (loss), a separate component of shareholders’ equity.

STYLE="margin-top:12px;margin-bottom:0px; margin-left:2%">Deferred Financing Costs

Deferred
financing costs include fees and costs incurred to obtain the Company’s lines of credit and long-term financings. These costs are amortized over the terms of the related debt. Unamortized financing costs are written off when debt is retired
before the maturity date. The accumulated amortization of such deferred financing costs was $31.4 million and $28.0 million at December 31, 2008 and 2007, respectively.

STYLE="margin-top:12px;margin-bottom:0px; margin-left:2%">Fair Value of Financial Instruments, Including Derivative Instruments

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">The Company follows the guidance under SFAS No. 157, Fair Value Measurements, when valuing its financial instruments. The valuation of
financial instruments under SFAS No. 107, Disclosures about Fair Value of Financial Instruments, and SFAS No. 133 and its amendments (SFAS Nos. 137/138/149), Accounting for Derivative

F-14

Instruments and Hedging Activities, requires the Company to make estimates and judgments that affect the fair value of the instruments. The Company,
where possible, bases the fair values of its financial instruments, including its derivative instruments, on listed market prices and third party quotes. Where these are not available, the Company bases its estimates on current instruments with
similar terms and maturities or on other factors relevant to the financial instruments.

In the normal course of business, the Company is
exposed to the effect of interest rate changes. The Company limits these risks by following established risk management policies and procedures including the use of derivatives to hedge interest rate risk on debt instruments.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">The Company has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors. When viewed
in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, the Company has not sustained a material loss from those instruments nor does it anticipate any material adverse effect on its net income or
financial position in the future from the use of derivatives.

On January 1, 2001, the Company adopted SFAS No. 133 and its
amendments (SFAS Nos. 137/138/149), which requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. Additionally, the fair value adjustments
will affect either shareholders’ equity or net income depending on whether the derivative instruments qualify as a hedge for accounting purposes and, if so, the nature of the hedging activity. When the terms of an underlying transaction are
modified, or when the underlying transaction is terminated or completed, all changes in the fair value of the instrument are marked-to-market with changes in value included in net income each period until the instrument matures. Any derivative
instrument used for risk management that does not meet the hedging criteria of SFAS No. 133 is marked-to-market each period. The Company does not use derivatives for trading or speculative purposes.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">The fair value of the Company’s mortgage notes payable and unsecured notes were approximately $5.0 billion and $4.7 billion, respectively, at
December 31, 2008. The fair values of the Company’s financial instruments, other than mortgage notes payable, unsecured notes and derivative instruments, including cash and cash equivalents, lines of credit and other financial instruments,
approximate their carrying or contract values. See Note 11 for further discussion of derivative and other fair value instruments.

SIZE="2">Revenue Recognition

Rental income attributable to residential leases is recorded on a straight-line basis, which is not
materially different than if it were recorded when due from residents and recognized monthly as it was earned. Leases entered into between a resident and a property for the rental of an apartment unit are generally year-to-year, renewable upon
consent of both parties on an annual or monthly basis. Fee and asset management revenue and interest income are recorded on an accrual basis.

SIZE="2">Share-Based Compensation

The Company adopted SFAS No. 123(R), Share-Based Payment, as required effective
January 1, 2006. SFAS No. 123(R) requires all companies to expense share-based compensation (such as share options), as well as making other revisions to SFAS No. 123. As the Company began expensing all share-based compensation
effective January 1, 2003, the adoption of SFAS No. 123(R) did not have a material effect on its consolidated statements of operations or financial position.

FACE="Times New Roman" SIZE="2">The cost related to share-based employee compensation included in the determination of net income for the years ended December 31, 2008, 2007 and 2006 is equal to that which would have been recognized if the fair
value based method had been applied to all awards since the original effective date of SFAS No. 123(R).

The fair value of the option
grants as computed under SFAS No. 123(R) would be recognized over the vesting period of the options. The fair value for the Company’s share options was estimated at the time the share options were granted using the Black-Scholes option
pricing model with the following weighted-average assumptions:

F-15

The valuation method and assumptions are the same as those the Company used in accounting for option expense in its consolidated financial statements.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. This model is only one method of valuing options and the Company’s use
of this model should not be interpreted as an endorsement of its accuracy. Because the Company’s share options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its share options and the actual value of the options may be significantly
different.

EQUITY RESIDENTIAL (EQR)

EQR » Topics » Investment Securities

Table of Contents

Table of Contents

Table of Contents

Table of Contents

EXCERPTS ON THIS PAGE:

RELATED TOPICS for EQR:

"Investment Securities" elsewhere: