Depreciation on real estate is excluded from FFO because most investors believe that real estate maintains its value to a greater extent than does other types of long-term business assets. Therefore, taking depreciation deductions, which reduce the value of the real estate, does not represent economic reality. FFO is accounting net earnings excluding depreciation charges on real estate, deferred tax charges, and gains or losses from sales of property and debt restructuring. Property operating expenses and property taxes are both normal rental expenses deducted to arrive at operating income.
(Study Session 13, LOS 39.f) |
