Reference no: EM132775809

Real Estate Investment Trust (RET) was created to hold hotel properties. RET currently holds 15 luxury and five-star hotels in Europe. The entity is structured as an investment trust, which means that the trust does not pay income taxes because it distributes taxable income from the assets that it holds directly to unitholders (i.e. those who own units in the trust). Income taxes are, therefore, paid by the unitholders. 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 and the units of RET 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). RET distributed 127% and 112% of its distributable income in 2017 and 2016, respectively. Management calculates distributable income since this calculation is not defined by GAAP. As at the end of 2017, property and equipment was $1.7 billion compared with $1.9 billion in total assets. Net income for the year was $55 million.
• According to the notes in the financial statements, RET accounts for its property, plant and equipment at amortized cost.

Instructions

Problem 1: Assume the role of the entity's auditors and discuss any financial reporting issues.