Challenges and Opportunities in adopting IFRS for Real Estate

skylineBy Accommodation Times Research

An IFRS conversion is not primarily an exercise in reshuffling the chart of accounts, nor

is it principally a technical accounting and financial reporting matter. In fact, companies

are likely to spend significant amounts of time addressing concerns around tax, valuation,

treasury, legal, people, technology, and communications. Companies with global

operations or properties usually grapple with numerous statutory reporting requirements

under different accounting standards in each country. In such cases, there are significant

benefits that can be gained from transitioning the financial reporting of all global

subsidiaries and affiliates to IFRS — including potential for reduced lead time in

preparing consolidated financial statements, reduced consolidation issues, improved

controls, reduced personnel costs, and a centralized approach to addressing statutory

reporting issues. Transitioning to a uniform set of standards carries the possibility of

enhancing shareholder value.

Valuation: Measurements of fair value weave their way through many sections of IFRS,

transcending many functional areas of a real estate firm, including M&A via purchase

accounting or the reporting of investment property at fair value. Fair value also

potentially has a direct impact on tax through asset impairment testing, as well as on

treasury functions through disclosure and transparency effects. In addition, legal areas

may be affected through debt covenants, partnership or joint venture agreements, or even

compensation arrangements with employees or management. Estimating, supporting,

documenting, and reporting fair value requires a thoughtful process and the allocation of

appropriate resources to manage this important aspect of IFRS. Several areas related to

fair value estimates may be considered, including the use of qualified specialists; the

determination of proper extent and frequency; careful scoping of the analysis and report;

and the development of a detailed policy or standard. Fair value disclosures in financial

statements will likely vary in detail; however, they should include information on

valuation methods, assumptions (cost of capital, discount rates, capitalization rates, rental

and expense growth rates, etc.), qualification of the valuation specialist, and explanations

of fair value conclusions.




Mergers and Acquisitions: Implementation of a single set of accounting standards for

all properties, subsidiaries, and joint ventures around the world will allow for streamlined

integration of new acquisitions into your company’s consolidated financial reporting

system.

Also, the transparency resulting from fair value reporting of investment properties may

impact your strategic business decisions around acquisitions and dispositions based on

their likely impact to your financial statements under IFRS.

Tax: As certain foreign jurisdictions require taxes to be paid based on earnings reported

in the financial statements, the changes to net earnings due to an IFRS adoption may

result in significant fluctuations — increases or decreases — in the foreign taxes owed.

This is an area that management would be expected to carefully evaluate as an IFRS

adoption is considered. Adoption of IFRS may also result in changes in profit recognition

and ultimately pre-tax income. These changes will likely result in the need to evaluate

their impact on the deferred taxes recorded, the timing of reversals of deferred items, and

valuation allowances. It is important to acknowledge these changes and understand that

the book revenue/expense recognition policies may all need to be reviewed to get them

right. Additionally, the many changes to the financial reporting of assets, liabilities,

profits, and losses may result in significant impacts on compliance with regulatory

requirements – particularly for REITs.

Information Technology: Expansive real estate holdings equal extensive IT needs. From

leasing data to depreciation schedules to tax recordkeeping to recording the fair value of

investment properties, there’s plenty of financial information for real estate companies to

track. The merits of a single consolidated system to do this are well known but,

unfortunately, not widely practiced. Rather, a patchwork of legacy systems, home grown

programs, standalone machines, and inherited equipment often predominates. Constantly

changing portfolios complicate an already far-from-simple picture. In sum, it’s a situation

calling out for remedy.





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