Quarterly report pursuant to Section 13 or 15(d)

Summary of Significant Accounting Policies

v2.4.0.8
Summary of Significant Accounting Policies
6 Months Ended
Jun. 30, 2013
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
 
Basis of Presentation
 
The COPT consolidated financial statements include the accounts of COPT, the Operating Partnership, their subsidiaries and other entities in which COPT has a majority voting interest and control.  The COPLP consolidated financial statements include the accounts of COPLP, its subsidiaries and other entities in which COPLP has a majority voting interest and control.  We also consolidate certain entities when control of such entities can be achieved through means other than voting rights (“variable interest entities” or “VIEs”) if they are deemed to be the primary beneficiary of such entities.  We eliminate all significant intercompany balances and transactions in consolidation.

 We use the equity method of accounting when we own an interest in an entity and can exert significant influence over the entity’s operations but cannot control the entity’s operations. We discontinue equity method accounting if our investment in an entity (and net advances) is reduced to zero unless we have guaranteed obligations of the entity or are otherwise committed to provide further financial support for the entity.
 
We use the cost method of accounting when we own an interest in an entity and cannot exert significant influence over its operations.

These interim financial statements should be read together with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2012 for COPT (included in COPT’s 2012 Annual Report on Form 10-K) and COPLP (included in our Current Report on Form 8-K dated July 25, 2013).  The unaudited consolidated financial statements include all adjustments that are necessary, in the opinion of management, to fairly present our financial position and results of operations.  All adjustments are of a normal recurring nature except for the revisions and reclassifications noted below.  The consolidated financial statements have been prepared using the accounting policies described in COPT’s 2012 Annual Report on Form 10-K and our Current Report on Form 8-K dated July 25, 2013.

Reclassifications
 
We reclassified certain amounts from prior periods to conform to the current period presentation of our consolidated financial statements with no effect on previously reported net income or equity. 

Revisions

As reported in COPT’s 2012 Annual Report on Form 10-K, the following errors were identified in 2012:

the misapplication of accounting guidance related to the recognition of a deferred tax asset resulting from an impairment of assets in the fourth quarter of 2011 that failed to consider a partial reversal of that asset that would result from a cancellation of related inter-company debt in the first quarter of 2012.  The effect of this error was an overstatement of our income tax benefit and an understatement of our net loss for the year ended December 31, 2011 of $4.0 million.  Based on an evaluation against our projected annual net income at that time, this error was previously reported for COPT as an out-of-period adjustment in the three months ended March 31, 2012;
an over-accrual of incentive compensation cost, the effect of which was an overstatement of general and administrative expenses and an overstatement of net loss for the calendar quarter and year ended December 31, 2011 of $711,000. Based on an evaluation against our projected annual net income at that time, this error was previously reported for COPT as an out-of-period adjustment in the three months ended March 31, 2012;
the misapplication of accounting guidance requiring that we recognize loss allocations to a noncontrolling interest holder in a consolidated real estate joint venture associated with decreases in such holder’s claim on the book value of the joint venture’s assets, despite the fact that the real estate held by the joint venture was under development and the joint venture had no underlying losses. The effect of this error was an understatement for COPT of losses attributable to noncontrolling interests in other consolidated entities of $1.8 million for the nine months ended September 30, 2012 and $1.4 million for the year ended December 31, 2011; and
the misapplication of accounting guidance pertaining to our reporting for a noncontrolling interest in a consolidated real estate joint venture formed in March 2010 for which the holder of such interest has the right to require us to acquire the interest at fair value. Accounting guidance requires that this noncontrolling interest be classified outside of permanent equity and reported at fair value as of the end of each reporting period, with changes in such fair value reported as equity transactions with no impact to net income or comprehensive income. This error resulted in an overstatement of equity and offsetting understatement of the line entitled “redeemable noncontrolling interest” in the mezzanine section of COPT’s consolidated balance sheet of $8.9 million as of December 31, 2011. This error had no effect on COPT’s consolidated statements of operations, including reported net income (losses) or earnings per share.

With respect to the errors in the first two bullets above, we assessed the materiality of these errors on COPT’s consolidated financial statements in connection with previously filed periodic reports, in accordance with ASC 250 (SEC’s Staff Accounting Bulletin No. 99, “Materiality”), and concluded at such time that the errors were not material to any prior annual or interim periods. In assessing the cumulative effect of all such errors, we have considered ASC 250 (SEC Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”), and accordingly, the financial statements as of, and for the year ended, December 31, 2011 were revised in COPT’s 2012 Annual Report on Form 10-K. We revised COPT amounts pertaining to the first quarter of 2012 in COPT’s Form 10-Q filed on April 30, 2013 and amounts pertaining to the second quarter and first six months of 2012 herein. We will revise COPT amounts pertaining to the third quarter and first nine months of 2012 in a future quarterly filing on Form 10-Q.
The following are selected line items from COPT’s consolidated financial statements as of, and for the three and six months ended, June 30, 2012 illustrating the effect of adjustments pertaining to reclassifications and revisions (in thousands):
 
Consolidated Balance Sheet as of June 30, 2012
 
Per June 30, 2012 10-Q
 
As Revised
 
Change
 
Revisions
Redeemable noncontrolling interest
$

 
$
9,578

 
$
9,578

 
$
9,578

Additional paid-in capital
$
1,450,923

 
$
1,447,781

 
$
(3,142
)
 
$
(3,142
)
Cumulative distributions in excess of net income
$
(562,678
)
 
$
(560,262
)
 
$
2,416

 
$
2,416

Noncontrolling interests in common units in COPLP
$
52,152

 
$
52,300

 
$
148

 
$
148

Noncontrolling interests in other consolidated entities
$
18,315

 
$
9,315

 
$
(9,000
)
 
$
(9,000
)
Total equity
$
1,353,349

 
$
1,343,771

 
$
(9,578
)
 
$
(9,578
)
Total liabilities, redeemable noncontrolling interest and equity
$
3,715,075

 
$
3,715,075

 
$

 
$


 
Consolidated Statements of Operations for the
 
Three Months Ended June 30, 2012
 
Per June 30, 2012 10-Q
 
Per June 30, 2013 10-Q
 
Change
 
Discontinued Operations
 
Other Reclassifications
 
Revisions
Total revenues
$
133,386

 
$
127,664

 
$
(5,722
)
 
$
(5,722
)
 
$

 
$

Expenses
 
 
 
 


 
 
 
 
 
 
Property operating expenses
$
42,384

 
$
39,441

 
$
(2,943
)
 
$
(1,833
)
 
$
(1,110
)
 
$

Depreciation and amortization associated with real estate operations
29,853

 
28,295

 
(1,558
)
 
(1,558
)
 

 

Construction contract and other service expenses
16,285

 
16,285

 

 

 

 

General, administrative and leasing expenses
7,742

 
8,851

 
1,109

 
(1
)
 
1,110

 

Business development expenses and land carry costs
1,298

 
1,298

 

 

 

 

Total operating expenses
$
97,562

 
$
94,170

 
$
(3,392
)
 
$
(3,392
)
 
$

 
$

Operating income
$
35,824

 
$
33,494

 
$
(2,330
)
 
$
(2,330
)
 
$

 
$

Interest expense
$
(24,747
)
 
$
(24,239
)
 
$
508

 
$
508

 
$

 
$

Income tax expense
$
(17
)
 
$
(17
)
 
$

 
$

 
$

 
$

Income from continuing operations
$
11,544

 
$
9,722

 
$
(1,822
)
 
$
(1,822
)
 
$

 
$

Discontinued operations
$
296

 
$
2,118

 
$
1,822

 
$
1,822

 
$

 
$

Net income
$
11,861

 
$
11,861

 
$

 
$

 
$

 
$

Net income attributable to noncontrolling interests in common units in COPLP
$
(390
)
 
$
(422
)
 
$
(32
)
 
$

 
$

 
$
(32
)
Net income attributable to noncontrolling interests in other consolidated entities
$
(552
)
 
$
31

 
$
583

 
$

 
$

 
$
583

Net income attributable to Corporate Office Properties Trust
$
10,754

 
$
11,305

 
$
551

 
$

 
$

 
$
551

Basic and diluted earnings per common share:
 
 
 
 

 
 
 
 
 
 
Income from continuing operations
$
0.09

 
$
0.07

 
$
(0.02
)
 
$
(0.03
)
 
$

 
$
0.01

Discontinued operations

 
0.03

 
0.03

 
0.03

 

 

Net income attributable to COPT common shareholders
$
0.09

 
$
0.10

 
$
0.01

 
$

 
$

 
$
0.01


 
Consolidated Statements of Operations for the
 
Six Months Ended June 30, 2012
 
Per June 30, 2012 10-Q
 
Per June 30, 2013 10-Q
 
Change
 
Discontinued Operations
 
Other Reclassifications
 
Revisions
Total revenues
$
270,996

 
$
259,398

 
$
(11,598
)
 
$
(11,598
)
 
$

 
$

Expenses
 
 
 
 
 
 
 
 
 
 
 
Property operating expenses
$
87,301

 
$
80,628

 
$
(6,673
)
 
$
(3,722
)
 
$
(2,951
)
 
$

Depreciation and amortization associated with real estate operations
59,172

 
56,029

 
(3,143
)
 
(3,143
)
 

 

Construction contract and other service expenses
36,892

 
36,892

 

 

 

 

Impairment recoveries
(2,303
)
 
(4,836
)
 
(2,533
)
 
(2,533
)
 

 

General, administrative and leasing expenses
14,759

 
18,420

 
3,661

 
(1
)
 
2,951

 
711

Business development expenses and land carry costs
2,874

 
2,874

 

 

 

 

Total operating expenses
$
198,695

 
$
190,007

 
$
(8,688
)
 
$
(9,399
)
 
$

 
$
711

Operating income
$
72,301

 
$
69,391

 
$
(2,910
)
 
$
(2,199
)
 
$

 
$
(711
)
Interest expense
$
(49,667
)
 
$
(48,670
)
 
$
997

 
$
997

 
$

 
$

Income tax (expense) benefit
$
(4,190
)
 
$
(221
)
 
$
3,969

 
$

 
$

 
$
3,969

Income from continuing operations
$
20,056

 
$
22,112

 
$
2,056

 
$
(1,202
)
 
$

 
$
3,258

Discontinued operations
$
(1,239
)
 
$
(37
)
 
$
1,202

 
$
1,202

 
$

 
$

Net income
$
18,838

 
$
22,096

 
$
3,258

 
$

 
$

 
$
3,258

Net income attributable to noncontrolling interests in common units in the Operating Partnership
$
(549
)
 
$
(795
)
 
$
(246
)
 
$

 
$

 
$
(246
)
Net income attributable to noncontrolling interests in other consolidated entities
$
(528
)
 
$
629

 
$
1,157

 
$

 
$

 
$
1,157

Net income attributable to Corporate Office Properties Trust
$
17,431

 
$
21,600

 
$
4,169

 
$

 
$

 
$
4,169

Basic and diluted earnings per common share:
 
 
 
 

 
 
 
 
 
 
Income from continuing operations
$
0.14

 
$
0.18

 
$
0.04

 
$
(0.01
)
 
$

 
$
0.05

Discontinued operations
(0.01
)
 

 
0.01

 
0.01

 

 

Net income attributable to COPT common shareholders
$
0.13

 
$
0.18

 
$
0.05

 
$

 
$

 
$
0.05



Recent Accounting Pronouncements

We adopted guidance issued by the Financial Accounting Standards Board (“FASB”) effective January 1, 2013 related to the reporting of the effect of significant reclassifications from accumulated other comprehensive income. This guidance requires an entity to report, either parenthetically on the face of the financial statements or in a single footnote, changes in the components of accumulated other comprehensive income for the period. An entity is required to separately report the amount of such changes attributable to reclassifications (and the statements of operations line affected by such reclassifications) and the amount of such changes attributable to current period other comprehensive income. For amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about those amounts. Our adoption of this guidance did not affect our consolidated financial statements or disclosures.