Public Storage 2012 Annual Report Download - page 43

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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our financial statements and
notes thereto.
Critical Accounting Policies
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
discusses our financial statements, which have been prepared in accordance with United States (“U.S.”) generally
accepted accounting principles (“GAAP”). The amounts reported in our financial statements, notes to financial
statements and MD&A are affected by judgments, assumptions and estimates that we make. The notes to our
December 31, 2012 financial statements, primarily Note 2, summarize our significant accounting policies.
We believe the following are our critical accounting policies, because they have a material impact on the
portrayal of our financial condition and results, and they require us to make judgments and estimates about matters
that are inherently uncertain.
Income Tax Expense: We have elected to be treated as a real estate investment trust (“REIT”), as defined
in the Internal Revenue Code. As a REIT, we do not incur federal income tax on our REIT taxable income
(generally, net rents and gains from real property, dividends, and interest) that is fully distributed each year (for this
purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational
and operational rules. We believe we have met these REIT requirements for all periods presented herein.
Accordingly, we have recorded no federal income tax expense related to our REIT taxable income.
Our evaluation that we have met the REIT requirements could be incorrect, because compliance with the
tax rules requires factual determinations, and circumstances we have not identified could result in noncompliance
with the tax requirements in current or prior years. For any taxable year that we fail to qualify as a REIT and for
which applicable statutory relief provisions did not apply, we would be taxed at the regular corporate rates on all of
our taxable income for at least that year and the ensuing four years, we could be subject to penalties and interest, and
our net income would be materially different from the amounts estimated in our financial statements.
In addition, our taxable REIT subsidiaries are taxable as regular corporations. To the extent that amounts
paid to us by our taxable REIT subsidiaries are determined by the taxing authorities to be in excess of amounts that
would be paid under similar arrangements among unrelated parties, we could be subject to a 100% penalty tax on
the excess payments. Such a penalty tax could have a material adverse impact on our net income.
Impairment of Long-Lived Assets: The analysis of impairment of our long-lived assets involves
identification of indicators of impairment, projections of future operating cash flows, and determination of fair
values, all of which require significant judgment and subjectivity. Others could come to materially different
conclusions, and we may not have identified all current facts and circumstances that may affect impairment. Any
unidentified impairment loss, or change in conclusions, could have a material adverse impact on our net income.
Accruals for Operating Expenses: Certain of our expenses are estimated based upon assumptions
regarding past and future trends, such as losses for workers compensation, employee health plans, and estimated
claims for our tenant reinsurance program. In certain jurisdictions we do not receive property tax bills for the
current fiscal year until after our earnings are finalized, and as a result, we must estimate property tax expense based
upon anticipated implementation of regulations and trends. If our related estimates and assumptions are incorrect,
our expenses could be misstated.
Accruals for Contingencies: We are subject to business and legal liability risks due to events that have
occurred, which could result in future payments. We have not accrued certain of these payments, either because
they are not probable or not estimable, or because we are not aware of them. We may have to accrue additional
amounts for these payments due to the results of further investigation, the litigation process, or otherwise. Such
accruals could have a material adverse impact on our net income.