Real Estate Investment Trust (RE) was created to hold hotel properties. RE currently holds 15 luxury and first-class hotels in Europe. The entity is structured as an investment trust, which means that the trust does not pay income taxes on the earnings from the assets that it holds directly. Instead, income taxes are paid by the unitholders those who own units in the trust. The other key feature of the trust is that 85% to 90% of the distributable income is required to be paid to unitholders every year. The units of RE trade on the national stock exchange. Distributable income is calculated as net income (according to GAAP) before special charges less a replacement reserve, which is an amount set aside to refurbish assets. RE distributed 127% and 112% of its distributable income in 2014 and 2013, respectively. Management calculates distributable income since this calculation is not defined by GAAP. As at the end of 2014, property and equipment was $1.7 billion compared with $l.9 billion in total assets. Net income
for the year was $55 million. According to the notes to the financial statements, RE accounts for its property, plant, and equipment at amortized cost.
Instructions
Assume the role of the entity's auditors, and discuss any financial reporting issues.