Effective January 1, 2005 publicly listed companies were obliged to adopt a new financial
reporting standard (IFRS/IAS). The objective of IFRS/IAS was to increase transparency and
comparability in financial reports between companies. The authors have chosen to write about
IAS 40 where the accounting treatment for investment property and related disclosure
requirements are regulated.
The purpose of this thesis is to investigate potential effects of valuation of investment
property at fair market value for real estate companies at times when market price decreases
and to investigate what an acceptable difference for the valuation could be.
To fulfil this purpose the authors have chosen a qualitative method interviewing accountants,
property analysts and a credit analyst to obtain a deeper understanding of the problem. Base
data for the thesis have been collected during meetings, telephone interviews and e-mails.
Additional data was collected from public available sources such as the internet, relevant
professional magazines and professional newsletters. The authors have designed a model
showing how Income and Balance Sheet statements are influenced by changed valuation of
investment property. Our model is meant to show what consequences changes is property
valuation may have for real estate companies.
When companies are using a fair market value the outcome will mainly be influenced by
changed value of the investment property. Exacly how a downturn in the economy will
impact property companies is impossible to forecast, but the authors have concluded that there
is an increased risk of higher losses compared to the situation before implementation of IAS
40. The authors have concluded that there is no defined limit for how much one valuation
may differ from another. Our respondents have all assessed an acceptable difference to be five
to ten percent. When a decreased value of a couple percent of investment property may
eliminate the profitability in a company, the authors have identified a significant risk for
management teams to advocate an adjusted value of the property to increase profit or to
2008. , 47 p.