NAREIT Submission to FASB on Joint Ventures and Similar Arrangements
February 15, 2000
Mr. Timothy S. Lucas
Director of Research and Technical Activities
Financial Accounting Standards Board
401 Merritt 7
P.O. Box 5116
Norwalk, CT 06856-5116
Re: G4+1 Special Report on Reporting Interests in Joint Ventures and Similar Arrangements
Dear Mr. Lucas:
The National Association of Real Estate Investment Trusts (NAREIT) is pleased to have the opportunity to respond to the Financial Accounting Standards Board's (the Board) Special Report on joint ventures and similar arrangements. NAREIT is the national trade association for REITs and other publicly traded real estate companies. Members include real estate investment trusts (REITs) and other businesses that develop, own, operate, and finance income-producing real estate, as well as those firms and individuals who advise, study, and service these businesses.
The business of developing, owning and operating income-producing property regularly and increasingly involves the use of joint ventures. In this context, the accounting standards for joint ventures are important to producing useful financial reports for publicly traded real estate companies.
NAREIT supports the Board's efforts to enhance the usefulness and relevance of financial reporting by developing international consensus on financial standards. Regardless of the method of accounting ultimately promulgated, our members agree that sufficient disclosures must be required that will permit users to make incremental consolidations or de-consolidations of the financial statement elements related to joint venture investments. It appears that the disclosure requirements outlined in the Special Report should fulfill this need.
Based on discussions with our members regarding a preference for the equity or proportionate share methods of accounting for joint ventures, we have discovered that there exists a diversity of opinion. Some members agree with the Special Report's conclusion that the equity method of accounting is the most appropriate method based on current financial reporting concepts, but believe that enhanced disclosures are necessary. Other members, especially credit and equity analysts, believe that the Special Report's conclusion is inconsistent with the objective of providing relevant information to financial statement users. Below we share some of our members' views of why the proportionate share method may be preferable.
Users of financial statements are seeking a portrayal of the consolidated entity's financial condition and operating results in relation to its assets, liabilities, revenues, expenses, and cash flows. When the equity method of accounting is used to report an investor's joint venture interests, financial statement users are required to gather information outside of the basic financial statements, both from the footnotes and company contact. This is necessitated by current joint venture disclosure practices that vary considerably and some users view as generally insufficient to adequately perform analysis to gain a meaningful understanding of the consolidated financial position, operations, and net cash flows. The proportionate method would provide financial statement users the information they are seeking in the basic financial statements.
In addition, these members believe that the use of proportionate consolidation would better provide the ability to perform financial analyses in electronic form. With the advent of electronic filing of financial statements, the proportionate method is viewed as providing users the ability to perform financial analyses (e.g., peer group) in this manner without having to consider additional information.
Another consideration is the equity method's impact on ratio analysis with respect to debt. Because the reporting company's share of liabilities from joint venture interests is not included on the face of the balance sheet, debt ratios differ significantly between the two methods, and generally appear more favorable under the equity method. Information about off-balance-sheet financing activities is of particular importance in the real estate industry. Because of the significant use of mortgage and securitized financing, analysts and investors place specific emphasis on debt- and/or fixed-charge related ratios.
NAREIT appreciates the opportunity to participate in the Board's considerations with respect to accounting for joint ventures and similar arrangements. If you should have any questions regarding this response, please contact George Yungmann at (202) 739-9432, David Taube at (202) 739-9442, or me at (484) 530-1888.
Timothy A. Peterson
Executive Vice President and Chief Financial Officer, Keystone Property Trust
Co-Chair, NAREIT Accounting Committee