The overall objective of the financial accounting reporting according to the conceptual framework of the International Accounting Standards Table (IASB), is to provide users with the most decision-useful information. Measurement of investment property at fair value according to the IASB more relevant information than the alternative transaction-based historical cost, by presenting a value that represents the market value of the property, ie that it can be sold in a transaction at arm’s length, between knowledgeable, willing parties. The financial statements reflect the company as a direct return in terms of rental income and indirect returns in the form of changes in value of the properties. The goal is to provide users of financial statements relevant information. Unreliable information will not be relevant to a user of the financial statements. Type and extent of the additional information provided must be determined by how reliable fair value can be determined. Investment properties are valued primarily using valuation techniques based on expected future cash flows, the least reliable level measurement hierarchy to the IASB. The greater the extent that it is of judgment and uncertainty, the greater the need for qualitative and quantitative supplementary information in the financial statements.
The main provision of additional information relating to the valuation of investment properties IAS 40 § 75 letter d), which reads: “An entity shall disclose (… ) about the methods and significant assumptions applied in determining the fair value of investment property (… )” formulation is general and the specific requirements for information to be provided and the level of detail associated with these may be unclear. Interaction with IAS 1 is central and this standard requires disclosures about key sources of estimation uncertainty, see § § 116 to 120 Based on the wording, it is not possible to establish a comprehensive and accessible overview of all the information that must be provided when the extent and type of qualitative and quantitative information is situational. Which level of information that adequately protects the user’s account information needs to be evaluated against quality standards of the IASB framework. To assess the requirements of the standard, it would be natural to look to the present best practices recommendations. For example, the International Valuation Standards Committee (IVSC) and the European Public Real Estate Association (EPRA) has developed best practices-recommendations related to valuation, disclosure quality and presentation. The question will often be what the company should be disclosed and not what they should disclose. The purpose of best practices releases is to ensure comparability between real estate companies, as well as being a professional benchmark for valuers to meet user information needs. The objective is achieved by providing guidance on how information should be provided in accordance with IFRS and what additional information beyond that IFRS should be given (EPRA 2009), and to publish standards for valuation should be carried out in practice (IVSC 2005). But the publishers of best-practices recommendations are not standard setters, and thus has no authority to interpret or oblige companies an enhanced disclosure requirements. Lack of compliance with various guidelines is not in itself a breach of duty under IFRS. Which recommendations in the best practices that should be understood that the specification of the disclosures required by IAS 40, or only as recommendations beyond the standard, is not necessarily given.
The purpose of the fair value determination is to find the most relevant estimate of the transaction price of the asset on the valuation date, so that assets are measured at the same value in the balance as similar assets sold in an active market. The Norwegian property market is very liquid and very transparent. The requirements for an active market as defined by IFRS, is not true for investment property in Norway. Fair value is determined so hypothetical, using various valuation techniques. The most common way to value investment property in practice is the use of discounted cash flows. An alternative, or complementary, valuation method is the use of transaction prices recently achieved for similar properties, see IAS 40 § 46 letter b). It should then be given specific explanations for the similarities and differences between the property valued and comparison property, including technical standards, area and location. Based on our study seems data related to market evidence supporting the valuation allowance to be absent, although the stated principle notes that such comparisons are made. We see that it is apprised that market documentation used as an element to evaluate the reference value, but it is not given any information related thereto. Norwegian Society of Financial Analysts believes that information about whether the value estimates are supported by observable transactions are imprecise and often lack. Users’ ability to assess the reliability is thus not present.
IAS 40 § 46 letter c) deals with discounted cash flow forecasts, and says that the fair value is determined by the estimated market rent and a discount rate that reflects current market assessments of the uncertainty in the amount and timing of cash flows. Future market is estimated on the basis of existing leases and external knowledge of current market rents for similar properties. IASB refers to the valuation profession in general, and especially the IVSC, the Basis for Conclusions on IAS 40 in conjunction with the guidance for determining the fair value of investment property. IVSC provide detailed guidance on a discounted cash flow analysis to be applied in practice and which components are typically used as the basis for valuation. Number of years as net cash flows are discounted over – valuation period, usually five to ten years for investment property. Cash flows after this valued on a terminal value. Yield will be determined for the valuation period and terminal value, and it is accepted that required returns are consistent provided the required returns are based on relevant market evidence. It has emerged that current valuation methods do not have good enough models to calculate risk. The extent of hidden assumptions, which are added to the cost of capital is too extensive, so that the reliability and comparability weakened.
Among other Finance Authority (2010) believes that it is necessary to have a more robust method for the determination of discount rates for compiling, organizing and documenting the information that forms the basis for assessment. Establishment of a systematic collection and publication of market data will contribute to increased standardization using methodology and an increased focus on the application of theoretical financial models for estimating the discount rate. A systematic exercise of discretion can ensure consistency in assessments over time and between different properties.
On the basis of IAS 40 § 75 letter d) it is clear that a company must disclose the methods that have been applied to the valuation, and the extent to which valuations are based on market factors. In order for a user to understand the company’s valuation is essential that the method of valuation is clearly communicated, and that the extent of hidden assumptions are kept to a minimum.
Users of real estate companies’ accounting is concerned with the value of the measurement object; investment property. Investors and other primary users would input their own valuation models based on the normalized values. Specific information on the hard bricks rather soft numbers, ie data unaffected by management’s judgment, is therefore important. Value is generally highly correlated with location, so that information about the properties’ location is crucial. Investment Judges say location is often divided into various segments, such as CBD (central business district – the CBD), the center core, less centralized districts, and the like. Information regarding matters square meters, current and future market per square meter, cash flow, net rent, and unemployment should be given on a segmented level. Requirements for information about operating segments required by IFRS 8, and EPRA recommendations operationalize our discretion these.
A valuation based on discounted future cash flows are largely based on management’s judgment and values are sensitive to changes in the assumptions used. IAS 1 § 116 requires that an entity shall disclose in the notes on the key assumptions and other key sources of estimation uncertainty (… ), which carries the risk of causing a material adjustment to the carrying value. Moreover, it follows from § 118 that this applies estimates that require management’s most difficult or most subjective or complex assessments. Section 120 requires that it be presented and explained for the next fiscal year’s expected outcomes associated with uncertainty and the range of possible reasonable outcomes related to the book values of the assets and liabilities.
The global economic downturn has resulted in a significant decrease in the volume of transactions and activities, so that assessors have placed more emphasis on judgments than relying on historical transactions. Under such circumstances there is a greater degree of uncertainty in the estimation of fair value than a more active market. With greater uncertainty, one should expect an increased level of information relating to the valuation of the financial statements. This is considered necessary in order to satisfy the quality requirements, particularly the reliability and intelligibility.
The requirements for disclosure under IAS 40 must be regarded as comprehensive. Quantitative and qualitative disclosures about the valuation method, the principal assumptions, estimates and uncertainties must be a result of the financial statements, so that the user is able to understand the company’s valuation. The use of discounted cash flows must be specified market, growth in the market, estimated costs, diskonteringsperiode, return requirements and terminal values. Accounting manufacturers should keep hidden assumptions to a minimum. For all key assumptions must be presented sensitivity analysis that reflects the estimated confidence limits. The users of financial statements has a significant need for specific information related to investment properties in the company’s portfolio. This will be information that is unaffected by management’s discretion, and that enables the user to make independent valuations – or evaluations.