Generally Accepted Accounting Principles -- "GAAP" -- and Income Tax Basis Accounting Often Yield Very Different Financial Reporting Results; Real Estate Companies Need to Understand What the Choices Mean for Their Business and Apply What Is Best for Their Bottom Line, Says Partner at NY Accounting Firm Marks Paneth & Shron
NEW YORK, NY--(Marketwire - June 9, 2010) - Generally Accepted Accounting Principles, also known as GAAP, is a common accounting method but is not the only choice for real estate companies that issue financial statements.
Real estate owners should also consider how the use of the income tax basis for financial reporting would impact their financial results. This accounting method can produce financial results that are usually more closely aligned with the economics of the business, according to an authority on real estate accounting.
"GAAP reporting would be required if the real estate entity is a public company, such as a REIT, and would likely be required by institutional investors who are partners in a private real estate company. But when the entity's choice of accounting method is not dictated by governing bodies, business owners should be aware that income tax basis financials might be a more useful management tool and provide greater transparency and insight into how the business is performing," says Susan H. Nadler, CPA, a real estate partner at the New York accounting firm Marks Paneth & Shron.
Ms. Nadler is available for interviews and can also author a bylined article that discusses:
If the income tax basis of accounting was used, rent income reported on the financial statements would be $450,000. Since the landlord actually billed $450,000 and presuming that all rent was paid, the income reported is in synch with the $450,000 of cash flow received from the tenant and the amount of income the company will report on its income tax returns, Ms. Nadler says.
On the other hand, expenditures incurred by a real estate company that have not yet been paid to related party cash-basis service providers such as management, cleaning or leasing companies, can be deducted under GAAP but not for income tax basis reporting. Moreover, in the early years of a lease containing step-ups, GAAP can produce phantom income.
For instance, under GAAP, real estate must be measured periodically for impairment and in this market, write-downs are not uncommon which result in a reduction in the basis of assets carried on the balance sheet. Under income tax basis accounting, real estate is generally carried at historical cost, less accumulated depreciation and no write-downs for impairment are necessary or allowed.
The effects of your choice of accounting method should be carefully reviewed beforehand to ensure that you will be able to meet all of your financial covenants.
"There's no across-the-board answer to which accounting method might work best for a company," Ms. Nadler says. "The choice depends on each owner's business situation. But income tax-basis accounting is something that every real estate entity should consider if the choice is available."
For more information, or to schedule an interview, contact Itay Engelman of Sommerfield Communications at (212) 255-8386 or itay@sommerfield.com.
About Marks Paneth & Shron
Marks Paneth & Shron LLP is an accounting firm with nearly 475 people, of whom 64 are partners and principals. The firm provides businesses with a full range of auditing, accounting, tax, bankruptcy and restructuring services as well as litigation and corporate financial advisory services to domestic and international clients. The firm also specializes in providing tax advisory and consulting for high-net-worth individuals and their families, as well as a wide range of services for international, real estate, media, entertainment, nonprofit, professional and financial services and energy clients. Visit www.markspaneth.com for more information.
Contact Information:
For more information, contact
Itay Engelman
Sommerfield Communications
(212) 255-8386
itay@sommerfield.com