Key change to property investment valuation
A new international accounting standard could result in property trusts declaring more write-downs this financial year.
The International Financial Reporting Standards has amended the investment property standard, which will affect the valuation of development properties.
Currently, a fund manager would value a development under construction at cost, but the new standard requires this to be valued at a market ‘fair value’.
PKF national director of professional standards Marj Wessels said the old way of valuing development property didn’t always present the truth.
“The new standard takes out calculated guesses on the value of the development and reflects what is happening in the actual market,” she said.
“So instead of just looking at the construction cost, the property manager will have to value the asset based on what it would sell at in the current market.”
This will be a double-edged sword for managers as in rising property markets, the asset will be reflected on the books at a higher value than the construction cost.
“But with high inflation or declining property market values, the cost of construction could exceed the fair value of a property being built,” Wessels said.
“The adoption of this revision could see downward adjustments to balance sheets and ‘fair value’ losses being posted to income statements as early as financial reporting periods ending June 30, 2009.”
The new standard requires managers to value development property at ‘fair value’ from January 1 next year.
However, a manager has to elect whether they will take up the new standard for reporting the value of its property assets.
“The new standard won’t affect reporting for companies that have a half year ending December 31 this year,” she said.
“But managers need to look forward now and decide whether they are going to adopt the standard.”
Wessels said it would be good practice to inform investors of the adoption of the standard in this current report season of 2008 results.
“The changes could affect distributions next year as we are in a volatile market, so managers should explain the changes and any possible impact,” she said.
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