Disclosing interest expense in financial statements of firms that self-construct assets: the effect on financial analysis of real estate investment trusts
Department of Business Administration, North Georgia College and State University, Dahlonega, GA 30597, USA
Department of Finance and Real Estate, University of Texas, Arlington, Box 19449, Arlington, TX 76019, USA
email: Pete H. Oppenheimer (phoppenheimer@ngcsu.edu)
Correspondence to Pete H. Oppenheimer, Department of Business Administration, North Georgia College and State University, Dahlonega, Georgia 30597, USA.
Abstract
Statement of Financial Accounting Standards (SFAS) 34 requires firms that develop or self-construct their own assets to capitalize related interest payments. As a result, the reported interest expense of self-constructing firms may be understated, and earnings per share overstated. This study compares key profitability ratios between Real Estate Investment Trusts (REITs) that actively self-construct properties with REITs that do not. It was found that self-constructing REITs will report significantly favourable profitability ratios as compared with REITs that invest in fully developed properties. Because many REITs do self-construct, explicit capitalized interest expense disclosure are recommended so that financial analysts can make appropriate comparisons. Copyright ? 2006 John Wiley & Sons, Ltd. |
