GAAP versus IFRS. REITs exist all over the globe, and while they're structurally similar, there are differences in the accounting. Following is a survey of some of the main differences between US GAAP and IFRS treatment. IFRS 40 is the first main divergence between GAAP and IFRS. Long-term assets like PP&E are generally handled according to IFRS 16. However, for investment property, a test must be applied. To qualify as investment property and be subject to IFRS 40, a property must either earn rental revenue or be held for capital appreciation purposes or both. Most traditional PP&E does not fit this definition. Once it qualifies as investment property, the fair value model applies, meaning it is revalued at each reporting date. What does this mean for the income statement? A US company on the left is showing massive amounts of depreciation and a Canadian company on the right is showing no depreciation at all but a fair value adjustment. Here are the same two companies. For the US company, the D&A is a non-cash expense and is therefore added back to cash flow from operations. On the right, for the Canadian company, the fair value adjustment is a non-cash increase in profit so it is deducted from cash flow from operations.

Let's look at how FFO would stack up for a non-US REIT. On the left, we have FFO under US GAAP. In the UK and Europe, FFO is called EPREA Earnings. EPREA, European Public Real Estate Association, is the European equivalent to NAREIT, the National Association of Real Estate Investment Trusts, which is the American association. Canada uses an IFRS based association called Real Pack. For EPREA in Canada, we start by deducting the fair value adjustments that increase profits as these have overstated income in a non-cash way. Losses on sales of assets are added back and gains are deducted. Also, unlike FFO, both EPREA and Real Pack add or subtract the fair value of financial instruments not used in hedging. To calculate AFFO, adjusted funds from operations, the adjustments that are made in the US are the same that would be used for Canada. There is no AFFO or similar under EPREA. Obviously, these accounting differences will have ramifications when it comes time to value a company. Under IFRS, the real estate assets are always valued at or near current market value. Therefore, approaches like net asset value, which we will look at in valuation, are not appropriate for companies using IFRS. Apart from NAV, all other valuation techniques are applicable.