SFO Alert (November 4, 2011)

November 4, 2011

Further Guidance on Reporting FFO

On October 31, 2011, NAREIT issued an SFO Alert, Updated Guidance on Reporting FFO: Write-Downs for Impairment, in which NAREIT reaffirmed its July 2000 guidance on NAREIT-defined FFO, which indicated that impairment write-downs of depreciable real estate should be excluded in the computation of FFO.

Due to the timing of the October 31 SFO Alert (in conjunction with Q3 2011 earnings releases and impending filings with the Securities and Exchange Commission (SEC)), some NAREIT members have asked whether or not they may state that they have calculated FFO in accordance with the NAREIT definition if it includes impairment write-downs. For purposes of Q3 2011 reporting, given the guidance provided by NAREIT in the Financial Reporting Alert dated October 1, 2003 (updated February 2004), NAREIT considers the calculation of FFO to be compliant with the NAREIT definition whether impairment write-downs associated with depreciated operating property were included or excluded from NAREIT FFO. Either way, the treatment of impairment write-downs should be clearly and separately disclosed so that investors have a clear understanding of the issuer's calculation of FFO. In conjunction with 2011 year-end financial reporting and thereafter, NAREIT expects that all member companies will implement the updated guidance on FFO (i.e., exclude impairment write-downs of depreciable real estate in the calculation of NAREIT FFO).

Additionally, a number of member companies have raised broader questions as to the nature of impairment write-downs covered by this guidance. As an example, we have been asked how the guidance might apply to the "other-than-temporary impairment" of investments in joint ventures. NAREIT's Best Financial Practices Council will evaluate these questions, and NAREIT anticipates issuing clarifying guidance prior to December 31, 2011.

Background

In July 2000, NAREIT addressed the question as to whether impairment write-downs of depreciable property should be included in NAREIT FFO. In the Real Estate Accounting Quarterly, NAREIT noted that the impairment write-downs associated with previously depreciated operating property should be added back to GAAP net income to arrive at FFO, whether the property is held for sale or is held or operated as a long-term investment. Subsequently, in February 2004, SEC staff advised NAREIT that it did not agree with this position. In its Financial Reporting Alert (updated February 2004), NAREIT communicated to its membership the SEC staff's position that impairment write-downs must be included in FFO for all periods included in future filings. Notwithstanding the position of the SEC staff on the issue, NAREIT did not formally rescind its July 2000 guidance, but it did indicate that the inclusion of impairment write-downs in the computation of FFO is consistent with the NAREIT definition of FFO and its White Paper on FFO dated April 2002. Therefore, the Financial Reporting Alert (updated February 2004), clarified that NAREIT would consider the calculation of FFO to be compliant with the NAREIT definition whether impairment write-downs associated with depreciated operating property were included or excluded from NAREIT FFO.

Contact

For further information, please contact Christopher Drula, NAREIT's Senior Director, Financial Standards, at cdrula@nareit.com, or George Yungmann, NAREIT's Senior Vice President, Financial Standards, at gyungmann@nareit.com.