NAREIT Submission to AcSEC Cost Capitalization Task Force - Comments on Composite/Group Method of Depreciation


August 21, 2000


Mr. Mark Simon
AICPA - Accounting Standards
1211 Avenue of the Americas, 6th Floor
New York, New York 10036


Re: Proposed Statement of Position - Capitalization of Certain Costs Related to Property, Plant and Equipment


Dear Mark,


Subsequent to our August 15, 2000 letter, we have discussed with you and certain other members of the AICPA's Task Force, NAREIT's position that the July draft of the SOP implicitly eliminates the composite or group method of depreciation as it is defined in a number of references (listed below) and applied in practice. The specific issue is the accounting for replacements. Many companies use the composite/group method of depreciation for major portions of an investment property and do not recognize gains and losses on retirement of components within the major categories.


Under the July draft of the SOP (paragraph 38), the original cost and accumulated depreciation of a replaced component would be estimated and any remaining net book value would be recorded as an expense. Requiring such recognition would result in a significant change in practice and represent a clear inconsistency with the widely accepted definition of the composite/group method of depreciation.


We have reviewed the discussion of the composite/group method of depreciation in the following texts:

  • Accounting Principles; Fess & Warren; Seventeenth Edition, 1993, page 389.
  • Intermediate Accounting; Keiso and Weygandt; Seventh Edition, 1992, pages 550 - 552.
  • Intermediate Accounting; Welsch and Zlatkovch; Eighth Edition, 1989, pages 490 - 493.
  • Intermediate Accounting; Smith & Skousen; Eighth Edition, 1984, pages 396 - 398.
  • Intermediate Accounting; Meigs, Johnson and Keller; McGraw Hill, 1963, pages 556 - 557.


    Specifically, all of these references indicate that no recognition of gain or loss is required under the composite/group method of depreciation upon retirement/replacement of a component. If you have any references that indicate the contrary, we would appreciate your sharing them with us.


    With respect to another matter discussed in our conversation, you mentioned that the Task Force suggested that "investment property" is only defined in international accounting standards, and, therefore, reference to this specific type of asset may not be relevant in the context of the SOP. As we discussed, the FASB defined "income producing property" in SFAS No. 41. The terms "investment property" and "income producing property" are synonymous. SFAS No. 41 is no longer effective because it was issued in connection with the FASB's Current Cost Disclosures Project - SFAS No. 33 - that was rescinded.


    We hope our letters provide the basis for the Task Force or AcSEC to reconsider the issues raised. We know that this project is on a fast track, but these are important issues in the context of financial reporting for investment property companies. If we can support this project further, please do not hesitate to contact us.


    You can reach me at (202) 739-9432 or or my associate David Taube at (202) 739-9442 or




    George L. Yungmann
    Vice President, Financial Standards