by which REITs procure capital to reinvest into the business raises an accounting issue regarding the classification of assets. Currently, the buildings and property that REITs utilize to raise income are classified as property, plant, and equipment. However, it can be argued that these assets should be classified as inventory. The accounting definition of property, plant, and equipment specifies those properties of a durable nature used in the regular operations of the business. These assets consist of physical property such as land, buildings, machinery, furniture, tools and wasting resources. With the exception of land, most assets are either depreciable (such as buildings) or consumable (such as timberlands). These properties do reasonably fall into this category, especially in the cases where the REIT is involved in managing the property and receives revenue from rents. The definition for inventory relates to asset items held for sale in the ordinary course of business or goods that will be used or consumed in the production of goods to be sold. It can also be reasonably justified that these assets fall into this category, this is the nature of REITs, to buy and sell real estate. This is a gray area in which reasonable people can disagree. It is my opinion that these assets should be classified according the company's honest intent for its use. Many REITs own and operate apartment complexes and have no intent to sell the property, but are content to manage the units and collect rent. In these types of cases the property is not being sold but leased. Therefore, PP&E would be the appropriate classification, similar to the method that car rental agencies use. But, if the company intends to improve and sell the property then the property should be inventory. This method would be similar to method by which securities investments are accounted for. Depending on the company's intent, securities can be classified as held-t...
