REITs Object to Proposal
To Change Accounting Rule

The real-estate investment trust industry is hotly debating a recent accounting rule on asset sales that could force companies to restate current and historical financial results downward.

Some industry analysts and REIT executives have been objecting to a February ruling by the Financial Accounting Standards Board that would require firms to report gains and losses from sales of investment properties -- and operating earnings from the properties -- as discontinued operations.

The ruling would mean that if a firm sold a building in 2001, for example, it would have to remove any rental income it had included in its financial statements for the years it owned the building. Some REIT executives and analysts say the ruling, which would apply to all corporations, would have a disproportionate effect on REITs because selling real estate is a core business. They say it would lead to widespread restatement of funds from operations, the industry's supplemental earnings measure.

The new rule "would be a complete disaster for accurate real-estate reporting," says Lee Schalop, analyst at Banc of America Securities in New York. "This would be like saying every time an airline sold an airplane, they would have to restate their earnings from prior periods because all the revenue that they earned from flying that particular airplane would have to be removed from last year's earnings."

The National Association of Real Estate Investment Trusts, which sets guidelines for REITs, has been soliciting feedback on the FASB ruling from analysts and executives. A Nareit spokesman said the Washington-based trade group is considering the potential implications of the ruling and declined to speculate when a decision would be made. The group can choose to not adopt the rule as it pertains to funds from operations.

Tim Lucas, director of research and technical activities at the FASB, says, "We hadn't really thought about how our change might indirectly apply to" supplemental earnings measure. We think it would be appropriate if a company wanted to make a funds-from-operations calculation, that it be clear about how it was made."

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