NAREIT Submission to FASB on Comprehensive Income

 

Mr. Timothy S. Lucas
Director of Research and Technical Activities
401 Merritt 7
P.O. Box 5116
Norwalk, CT 06856-5116


Dear Mr. Lucas:

The National Association of Real Estate Investment Trusts ("NAREIT") appreciates the opportunity to share with you our comments on the proposed Statement of Financial Accounting Standards, "Reporting Comprehensive Income." NAREIT is the national, not-for-profit trade association that represents over 230 real estate investment trusts and over 1,600 accountants, analysts, investment bankers, lawyers and other professionals who provide services to REITs. The proposed Statement would establish standards for reporting and display of comprehensive income and its components (revenues, gains, and losses) in a full set of general-purpose financial statements. The proposed Statement would require that all items that are recognized under accounting standards as components of comprehensive income be reported in one or two statements of financial performance. It also would require that an enterprise display an amount representing total comprehensive income for the period and a per-share amount for that total.

While NAREIT supports the FASB's efforts to improve the meaningfulness and usefulness of financial statements, we believe that reporting comprehensive income will not meet this objective. Meaningful financial statements, especially performance reporting, is crucial to this industry as its long-term real estate assets create an ongoing demand for capital. Also, as a relatively new public industry, REITs stand to benefit a great deal when investors have an improved understanding of the operations, financial position and performance of REITs and real estate companies.

Of all the ratios and information reported in financial statements, earnings per share and net income are the most commonly regarded and widely observed by financial statement readers. We believe that an additional performance measure and its related per share information will create unnecessary confusion among REIT investors and lenders. When comprehensive income differs from net income, we wonder how the investing public will interpret net income. It is possible that comprehensive income and comprehensive income per share may dilute the significance of net income and net income per share.

As mentioned before, the growth of the REIT industry relies on the capital markets to sustain its growth. Attracting and keeping a loyal investor following relies primarily on earnings. As a new public industry, NAREIT has been proactive in creating awareness and understanding of the financial position and earnings of these unique companies. Based on our experience in educating REIT financial statement users about REIT performance, we are familiar with the impediments that are created, and the heightened investor scrutiny when supplemental information and disclaimers are included in statements of financial position and income. Investors and lenders carefully scrutinize or sometimes even dismiss management's explanations when GAAP earnings are not consistent with management's report. Under comprehensive income, management might find it necessary to also explain the differences between net income and comprehensive income by including a description of the intricacies of FASB No. 115, FASB No. 87, and the new accounting for derivatives.

As a practical way to resolve the problem of reporting consistently disparate performance measures, some financial managers have indicated that accounting for derivatives and reporting comprehensive income may justify restructuring financing arrangements in order to reduce volatility in reported earnings and equity. NAREIT believes that accounting standards should not eclipse good business judgment. Changes in the way that REITs and other real estate companies are managed should be driven by more relevant business strategies other than concerns about perceptions.

NAREIT is unsure that the addition of comprehensive income adds anything meaningful to financial statements since information concerning changes in nonowner equity are already made available in financial statements. We also are concerned that the Exposure Draft places comprehensive income in the same class as net income in financial statements, leading readers to the inaccurate conclusion that net income is less relevant.

NAREIT strongly urges the Board to reconsider the need for reporting comprehensive income. Should financial statement users need to know about non-owner changes in equity, that information is currently available in financial statements and may be easily located within existing statements. We believe that the misperceptions about performance will result from reporting comprehensive income are too great a cost for the benefit of making comprehensive income easily recognizable either on the income statement or on its own statement.

The Board specifically requested comment on the following:
Questions

Issue 1: This proposed statement would require than an enterprise display a per-share amount for comprehensive income. Do you agree with the Board's decision to require a per-share amount? If not, why?

NAREIT disagrees with the Exposure Draft's requirement to show comprehensive income on a per-share basis. This implies that elements of comprehensive income are as important to an evaluation of operating results as are items included in the determination of net income. Since elements of other comprehensive income receive less prominence in financial reporting as evidenced by their placement, related per share amounts should not be accorded prominence equal to that of net income per share.

Issue 2: This proposed Statement would require that an enterprise display reclassification adjustments separately from other changes in the balance sheet (gross display) for all items of other comprehensive income, except for minimum pension liability adjustments. Thus, an enterprise would have to determine reclassification amounts for gains and losses on available-for-sale securities and for foreign currency translation items. Is it practicable to determine reclassification amounts for gains and losses on available-for-sale securities and foreign currency items? If not, why? Would it be practicable to determine a reclassification amount for minimum pension liability adjustments?

The Exposure Draft's requirement to display what is considered "reclassification adjustments," to avoid double counting certain items in comprehensive income is expected to create practical recordkeeping problems if not impossibilities. For example, gains realized during the current period and included in net income for that period may have been included in other comprehensive income as unrealized holding gains in the periods in which they arose. Financial managers have not historically tracked the unrealized gains and losses that are included as a separate component of stockholders equity. Going forward, when gains are actually recognized in net income, the double-counting problem arises and is difficult to address.

Issue 3: This proposed Statement would require that an enterprise display comprehensive income in either one or two statements of financial performance. Do you agree with the Board's decision, or do you think that the Board should mandate only one approach?

NAREIT objects to reporting comprehensive income and displaying this concept anywhere in financial statements in such a manner that users may mistake it for an indicator of operating performance. The perception of comprehensive income as a performance measure on par with net income is simply misleading. If comprehensive income is presented on the existing income statement, the credibility of net income as the most significant indicator of operating performance is diminished. On the other hand, the concept of comprehensive income is hardly worthy of a separate financial statement. If comprehensive income must ultimately be displayed, management should determine the most appropriate venue for the disclosure.

NAREIT urges the FASB to reconsider the all-inclusive income concept's validity and whether it is a sound measure of performance. We strongly disagree with the guidance described in the Exposure Draft for the many reasons noted in this letter and would be happy to explain these comments should you have any questions.

Sincerely,
Mary Jane Morrow, Co-Chair
NAREIT Accounting Committee
and
Senior Vice President, Finance & Treasurer
Federal Realty Investment Trust