Journal Entries for ASC 972-205 Funds from Operations Calculation - REITs

Posted In | ASC Education | Gridlex Academy

Accounting Standards Codification (ASC) Topic 972-205, Real Estate Investment Trusts - Presentation of Financial Statements, provides guidance on the presentation of financial statements for Real Estate Investment Trusts (REITs) under Generally Accepted Accounting Principles (GAAP). One of the key financial metrics for REITs is Funds from Operations (FFO), which is a non-GAAP measure used by investors to assess a REIT's performance. This article will explore the key aspects of FFO calculation under ASC 972-205 and provide examples of journal entries to help you better understand the accounting treatment.
 

Gridlex_Ultra_Customizable_All-In-One_App_Builder_Banner_Image

ASC 972-205 Overview

Funds from Operations (FFO) is a widely accepted non-GAAP financial measure used to evaluate the operating performance of REITs. It is calculated by adjusting net income for gains or losses from property sales, real estate depreciation, and amortization. The National Association of Real Estate Investment Trusts (NAREIT) provides guidance on the calculation of FFO, which is widely followed by the industry.

 

FFO Calculation

To calculate FFO, a REIT starts with net income and makes the following adjustments:

1. Add back depreciation and amortization expenses related to real estate assets.

2. Subtract gains or add losses from the sale of real estate properties.

3. Make any other adjustments necessary to present a more accurate picture of the REIT's operating performance.
 

Journal Entries for FFO Calculation

To illustrate the calculation of FFO, let's consider an example. A REIT reports the following financial results for the year:

 

Here are the journal entries for the REIT to record these transactions

1. Record net income:

Debit: Retained Earnings $2,000,000
Credit: Net Income $2,000,000
 

2.  Record depreciation expense:
 

Debit: Depreciation Expense $500,000
Credit: Accumulated Depreciation $500,000
 

3.  Record amortization expense:

Debit: Amortization Expense $200,000
Credit: Accumulated Amortization $200,000
 

4.  Record gain on sale of real estate properties:

Debit: Cash (or other consideration) [Amount]

Debit: Accumulated Depreciation [Amount]

Credit: Real Estate Properties [Amount]

Credit: Gain on Sale of Real Estate Properties $300,000
 

Now, to calculate FFO, the REIT will make the following adjustments to net income:
 

 

ASC 972-205 provides guidance on the presentation of financial statements for REITs, which includes the calculation of Funds from Operations (FFO) as a non-GAAP financial measure. By understanding the calculation of FFO and the associated journal entries, REITs can provide investors with a better understanding of their operating performance. While FFO is not a GAAP measure, it is widely accepted and used in the real estate industry, offering valuable insights into a REIT's ability to generate cash flows from its core operations. Adherence to the provisions of ASC 972-205 and the guidance provided by NAREIT ensures that financial statements accurately reflect the financial position and performance of REITs, providing transparency and comparability for investors and other stakeholders.

Proper calculation and reporting of FFO is essential for REITs to demonstrate their financial performance and allow investors to make informed decisions. By focusing on operating performance, FFO provides a more accurate picture of a REIT's ability to generate income from its real estate portfolio, excluding the impact of non-operating items such as gains or losses from property sales and depreciation. As a result, FFO is an essential metric for evaluating the performance of REITs and their potential for future growth and income generation.