SEC's Segment Disclosure Letter on Funds From Operators



February 6, 1998

Stephen Richter
Co-Chair Accounting Committee
National Association of Real Estate Investment Trusts
1129 Twentieth Street, NW
Suite 305
Washington, DC 20036-3482

Dear Mr. Richter:

The SEC staff has reviewed your letter dated January 20, 1998 on behalf of the National Association of Real Estate Investment Trusts concerning the presentation by entities in the real estate industry of funds from operations within the operating segment disclosures required under the provisions of Statement of Financial Accounting Standards No. 131. Your letter indicates that chief operating decision makers of Real Estate Investment Trusts (REITs) and other commercial real estate companies rely on funds from operations as a standard measure of operating performance.

As noted in your letter, Statement 131 relies on a "management approach" to the determination of operating segments. This management approach allows the use of judgment in identifying the activities for which information is used by the enterprise's chief operating decision maker to make decisions about resources allocated to the segment and assess its performance. The information presented under this approach may be on a non-GAAP basis; however, the nature of any differences between the measurements of the reportable segments' profits and losses and assets must be reconciled to comparable amounts reported in the consolidated financial statements.

To the extent that the chief operating decision maker of any entity uses funds from operations or other derivation, other than net income before income taxes and other items as determined under generally accepted accounting principles (GAAP), as a performance measure, that entity may present such information within its operating segment disclosures. However, in such circumstances, the provisions of Statement 131 require that a reconciliation to net income before income taxes and other items also be provided. Furthermore, the amount of depreciation, depletion, and amortization, should be separately shown for each reportable segment.

The SEC staff's determination not to object to the presentation of funds from operations deemed by a real estate entity's chief operation decision maker to represent a performance measure acknowledges the judgment afforded management under Statement 131. However, the staff's determination not to object should not be viewed as an endorsement of any standard definition of performance measurement other than net income as determined under GAAP.

Please call me at (202) 942-4400 with any questions.


John W. Albert
Associate Chief Accountant