IFRS for real estate

Current issues and financial statements survey

January 2009

Executive summary

This publication follows our 2007

survey of financial statements. It provides an analysis of some of the key financial reporting issues and coming developments for real estate investors reporting under IFRS with examples from recent financial statements. investment property and property under development, recognition of disposals of property, impairment goodwill and accounting for joint ventures have not significantly changed since our 2007 survey. have to adopt different accounting policies from 1 January 2009 when the IASBs moratorium on changes to IFRS expires and a whole raft of changes to accounting standards are effective in particular many companies will need to carry their investment property under construction at fair value, rather than at cost.

New reporting requirements in respect

of financial instruments were typically addressed by explaining the potential impact of changes in interest rates on reported results and providing a commentary on gearing ratios and targets. conditions in late 2008 will prompt preparers of financial statements to provide considerably more detail about the methods and judgements underlying the reported fair value of investment property.

We found that policies for measuring

We anticipate that the difficult market

It is clear that many companies will

Companies will need to keep a close

eye on forthcoming changes to accounting for business combinations, taxation and joint ventures as these changes will likely have significant (and perhaps unexpected) impacts on financial statements.

IFRS for real estate Current issues and financial statements survey

The survey

In our 2007 survey, we analysed the accounting policies and disclosures in the financial statements of twenty five property companies from Europe, Australia and the Far East. This update includes entities from the United Arab Emirates and Israel to complement those in Europe, Australia and the Far East and comprises 27 property companies. In addition we have looked at the implementation of new standards such as the financial instrument disclosure standard, IFRS 7.

Company
Westfield Group (Westfield Holdings Ltd and controlled entities) (Westfield) The GPT Group (GPT) Goodman International Limited (Goodman) Stockland Trust (Stockland) Confinimmo SA (Confinimmo) Foncire des Rgions SA (Fonciere) GECINA (Gecina) Unibail-Rodamco SA (Unibail-Rodamco) Klpierre SA (Klepierre) Deutsche Annington Immobilien GmbH (Deutsche Annington) IVG Immobilien AG (IVG) Hong Kong Land Limited (Hong Kong Land) Gazit-Globe Limited (Gazit-Globe) Beni Stabili S.p.A (Beni Stabili) Corio NV (Corio) Globe Trade Center S.A (Globe) Fortune Real Estate Investment Trust (Fortune) Inmobiliaria Colonial, S.A (Immobiliaria) Castellum AB (Castellum) Fabege AG (Fabege) PSP Swiss Property Group Ltd (Swiss Property) Land Securities Group PLC (Land Securities) The British Land Company PLC (British Land) Liberty International PLC (Liberty) Hammerson PLC (Hammerson) EMAAR Properties PJSC (Emaar) ALDAR Properties PJSC (Aldar)

Location
Australia Australia Australia Australia Belgium France France France/The Netherlands France Germany Germany Hong Kong Israel Italy Netherlands Poland Singapore Spain Sweden Sweden Switzerland UK UK UK UK UAE UAE

Financial year-end
31 December 2007 31 December 2007 30 June 2008 30 June 2008 31 December 2007 31 December 2007 31 December 2007 31 December 2007 31 December 2007 31 December 2007 31 December 2007 31 December 2007 31 December 2007 31 December 2007 31 December 2007 31 December 2007 31 December 2007 31 December 2007 31 December 2007 31 December 2007 31 December 2007 31 March 2008 31 March 2008 31 December 2007 31 December 2007 31 December 2007 31 December 2007

IFRS for real estate Current issues and financial statements survey

Measurement of investment and development property

The fair value option for investment property

Predictably, given previous findings and the industry focus on asset values, almost all of the companies in our survey have adopted the fair value option in IAS 40 for the measurement of their investment property. Two entities, Klepierre and Emaar, measure investment property at cost. Klepierre provides additional pro forma financial data that restates its investment property on a fair value basis in order that it may produce financial reporting that is both complete and comparable.

The revaluation option for investment property under construction

There also continues to be some consensus with regard to the policy adopted for measuring development properties with the majority of those companies that included a policy for investment property under construction choosing to measure them at cost. As with previous findings, of the five companies that chose to measure such assets by applying the revaluation option in IAS 16, four of these were based in the UK. The question of whether the revaluation option was available under IAS 16 for development properties was raised with the IFRIC during 2006. The IFRIC noted that, whilst the Basis for Conclusions to IAS 40 implies that investment property under construction may not be revalued, IAS 16 does not preclude accounting for such property using the revaluation model. The IFRIC also noted that, since IAS 40 was written, the use of fair values in accounting has become more widespread and valuation techniques have become more robust. The IFRIC, therefore, considered that the requirement that investment property under construction be accounted for under IAS 16 might no longer be necessary. Consequently, as part of their 2008 annual improvements process, the IASB amended IAS 40 to include investment property under construction within its scope for periods beginning on or after 1 January 2009. This change in accounting is covered in more detail in the Ernst & Young publication, Caution: fair values in progress (available at ey.com/ifrs).

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Valuation methodology and assumptions

The best evidence of fair value is given by current prices in an active market for a similar property in the same location and condition and subject to similar lease and other contracts. However, with transaction volumes having slowed down significantly in 2008, other sources of information may need to be considered, including recent prices of similar properties in less active markets (with appropriate adjustments to reflect any changes in economic conditions since the date of the transactions that occurred at those prices), and discounted cash flow projections based on reliable estimates of future cash flows. Paragraph 75(d) of IAS 40 requires the disclosure of: The methods and significant assumptions applied in determining the fair value of investment property, including a statement whether the determination of fair value was supported by market evidence or was more heavily based on other factors (which the entity shall disclose) because of the nature of the property and lack of comparable market date. In our survey we found that whilst most companies explained their methodology, often by reference to International Valuation Standards Council (IVSC) or Royal Institute of Chartered Surveyors (RICS) methods, few provided quantitative information about the key assumptions in their valuation estimates. Perhaps the most comprehensive explanation of their valuation methodology is provided by Castellum whose narrative continues for three pages. The other Swedish company in other survey, Fabege, also bucked the trend by including a table that disclosed annual inflation, weighted cost of capital, weighted yield requirement, residual value, average long-term vacancies, and operation and maintenance cost per square metre. Other companies that disclosed quantitative assumptions were PSP, Gazit-Globe and IVG. IVG explained that the discount rates it used were in the range 4.6% to 13.75%, whilst Gazit-Globe used 4.85% to 8.0%. PSP provided a detailed table of discount rates per region and long-term achievable market rents per region and property type. The European Public Real Estate Association (EPRA) recommended in its May 2008 Best Practices Policy Recommendations that: Real estate companies should disclose the valuation methodology applied (e.g. open market value existing use, net of purchasers costs), and specify (on an average basis for each sector of the portfolio) the quantitative elements and assumptions applied in valuing the investments property. For instance, when a DCF approach is used, the average growth rates, costs, discount rates and exit yields should be quoted.

IFRS for real estate Current issues and financial statements survey

Disposals of complete and incomplete property

In the appendix to paragraph 9 of IAS 18, Real estate sales it is stated that: Revenue is normally recognised when legal title passes to the buyer. However, in some jurisdictions the equitable interest in a property may vest in the buyer before legal title passes and therefore the risks and rewards of ownership have been transferred at that stage. In such cases, provided that the seller has no further substantial acts to complete under the contract, it may be appropriate to recognise revenue We found considerable variety in the way that the industry has addressed this issue and as noted in our 2007 survey, not all entities explicitly state how this issue is interpreted. But, in practice, some companies delay profit recognition until legal completion, whilst others recognise profit before that point at which the significant risks and returns have been transferred to the buyer.

The recognition of revenue on real estate sales becomes more complex in the case of real estate developments where the asset has been forward sold to the ultimate buyer prior to the completion of construction. Such forward sale contracts are common in areas such as multiple-unit real estate developments (for example, residential apartment blocks), commercial property developments that the developer has decided not to build speculatively and where agreements for sale are reached before construction is complete. In these situations, the developers start marketing the development before construction is complete or perhaps even before construction has started and buyers enter into agreements to acquire either the entire building, or a specific unit within the building, upon completion of the construction. The contracts may require the buyer to pay a deposit and progress payments, which are refundable only if the developer fails to complete and deliver the unit. The balance of the purchase price may be payable only when the buyer gains possession, which often coincides with the point at which legal title is transferred to the buyer. However, legal title may transfer at different times, depending on national laws and practices.

The majority of the companies in our survey did not provide an explicit accounting policy for this issue, but IVG, Emaar, Immobiliaria and Globe demonstrate the different methods that are currently used. IVG sets out that its turnover includes: Revenue from project development, either in the form of construction contracts accounted for using the percentage of completion method if its criteria are met, or with revenue recognition on completion and transfer of economic ownership Conversely Immobiliarias policy states that: Under IFRS, revenues from sales of developments are recognised by the Group when ownership of the goods is transferred. Until then, expenses incurred in connection with the development construction work are accrued in inventories and down payments received against the total sale price are recorded under Customer pre-payments on the accompanying balance sheet.

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Emaar gives a detailed explanation of its approach to recognising the sale of condominiums and villas as follows: Revenue on sale of condominiums and villas is recognised on the basis of percentage completion as and when all of the following conditions are met:

Globe states that: Revenue from the sale of houses and apartments is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer and when the revenue can be measured reliably. The risks and rewards are considered as transferred to the buyer when the houses or apartments have been substantially constructed, accepted by the customer and the full amount resulting from the sale agreement was paid by the buyer.

The buyers investment, to the

date of the financial statements, is adequate (20% and above) to demonstrate a commitment to pay for the property; Construction is beyond a preliminary stage. The engineering, design work, construction contract execution, site clearance and building foundation are finished; The buyer is committed. The buyer is unable to require a refund except for non-delivery of the unit. Management believes that the likelihood of the Group being unable to fulfil its contractual obligations for this reason is remote; and The aggregate sales proceeds and costs can be reasonably estimated.

IFRS for real estate Current issues and financial statements survey

This diversity in practice is the subject of an IFRIC Interpretation, IFRIC 15 Agreements for the Construction of Real Estate, which was issued in June 2008. IFRIC 15 provides guidance on how to determine whether an agreement for the construction of real estate is within the scope of IAS 11 Construction Contracts or IAS 18 Revenue and, accordingly, when revenue from the construction should be recognised:

If the buyer does not have that ability,

An agreement for the construction of

real estate is a construction contract within the scope of IAS 11 only when the buyer is able to specify the major structural elements of the design of the real estate before construction begins and/or specify major structural changes once construction is in progress (whether it exercises that ability or not). If the buyer has that ability, IAS 11 applies, in which case the percentage of completion approach is used.

IAS 18 applies. However, even if IAS 18 applies, the agreement may be to provide construction services rather than goods, in which case the percentage of completion can be used. This would likely be the case, for instance, if the entity is not required to acquire and supply construction materials. If the entity is required to provide services together with construction materials in order to perform its contractual obligation to deliver the property to the buyer, the agreement is accounted for as the sale of goods under IAS 18. But even when an agreement is for the sale of goods, then it is still possible for a developer to recognise revenue by reference to the stage of completion, if the risks and rewards of ownership are transferred to the buyer on a continuous basis. For example, if it were the case that if the agreement is terminated before construction is complete, the buyer retains the work in progress and the entity has the right to be paid for the work performed, this may indicate that control is transferred along with ownership.

The last provision above was a late addition to IFRIC 15 and is another harbinger of the control model of the IASB (perhaps first highlighted in IFRIC 12). The analysis of the legal terms in contractual arrangements is very important to determine the accounting treatment even if those terms have little economic substance. The first experiences of applying IFRIC 15 have revealed issues of application such as the unit of accounting, that is to say, whether the provisions on continuous transfer and control relate to an individual buyer or a group of buyers (of, for example, residential apartments). IFRIC 15 is effective for accounting periods beginning on or after 1 January 2009. Earlier application is permitted.

IFRS for real estate Current issues and financial statements survey

Goodwill

Previously we noted that goodwill can only arise on a business combination and, in many cases, the acquisition of an entity owning just a few properties is not a business combination rather, it may often be an asset purchase. Each transaction must be judged on its own merits. We also considered the argument that investment property companies that carry their property at fair value cannot have goodwill on their balance sheets since goodwill needs to be justified by future cash flows and a property investors future cash flows are already built into the fair value of the investment property. In this context it is also important to note that, on a business combination, deferred taxation is provided in accordance with IAS 12 and that is usually far in excess of the fair value of the expected liability to taxation. As it is the latter that is generally considered in setting the price for the business acquired, such an approach tends to increase the amount of goodwill arising.

Whilst IAS 36 explicitly requires tax to be excluded from the estimate of future cash flows used to calculate any impairment, it is our view that it cannot have been the intention of IAS 36 to require an immediate impairment of goodwill generated by the recognition of deferred tax liabilities in excess of their fair value. Nevertheless, we have seen cases of immediate impairment of goodwill (see our publication, Goodwill hunting available at ey.com/ifrs). Fionciere, for example, impaired their acquired goodwill immediately and explained: As of 31 December 2007, Foncire des Rgions held 67.94% of Beni Stabilis equity. The total goodwill was 154.7m. This resulted from the difference between the acquisition price and the share of fair value of Beni Stabilis assets and liabilities. Since the goodwill cannot be justified for accounting purposes, it was fully written off.

Last year, we noted that two companies reported negative goodwill that had been recognised in income immediately. This year, one company, Deutsche Annington, recognised negative goodwill in the income statement. This may be a feature of a sector where, especially in the dislocated financial markets of late 2008, the market capitalisation of companies can be far less than the recorded fair value of the net assets acquired.

IFRS for real estate Current issues and financial statements survey

Impairment test disclosures

Many companies did carry goodwill in their balance sheets and, in this situation, IFRS mandates an annual impairment test of goodwill in accordance with IAS 36. In so doing IAS 36 requires, amongst other things, description of the key assumptions used by management for example, in the case of a value-in-use calculation, the assumptions on which management based cash flow projections for the period covered by the most recent budgets and forecasts. However, it is rare to find such detailed disclosures. This may be short lived the United Kingdom financial reporting regulator, for example, has made it clear that it expects considerable improvements in this area in 2008/9 financial statements. In the meantime, it is worth noting that GPT, uses a fair value less cost to sell approach and states that: The recoverable amount of the goodwill has been determined based on fair value less costs to sell. Due to these entities being recently acquired and currently managing approximately AU$3b in real estate along with the recent launch of two property funds, German Retail Partnership (GRP) and the Dutch Active Fund (DAF) by GPT Halverton since July 2007 with several others in the pipeline, the recoverable amount of the goodwill has been assessed to be the same as its carrying value.

Future changes
It is also of note that a revised business combination standard, commonly referred to as IFRS 3R, must be used in financial statements starting on or after 1 July 2009 and many think that one of the changes in that standard is a particularly urgent issue facing real estate investors. This change is hidden in the apparently innocuous change in the definition of a business. This revised definition includes: An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits However, the standard goes on to say that a business need not include all of the inputs or processes that the seller used in operating that business if market participants are capable of acquiring the business and continuing to produce outputs, for example, by integrating the business with their own. The definition of a business is applied regardless of whether the entity purchases a property directly or via the shares in a single-asset entity. The phrase capable of applied in the definition of business under IFRS 3R is sufficiently broad that judgement will be required in assessing if an acquired set of activities and assets, such as investment property, constitute a business. Under IFRS 3R, however, this requirement could be interpreted to include at least the following types of property:
1 Empty investment property 2 A single leased investment property 3 A portfolio of leased investment

property Up to now, many property acquisitions especially those in category 1 and 2, but sometimes those in category 3 as well have been accounted for as the acquisition of an asset and not as the purchase of a business. This may all be about to change.

IFRS for real estate Current issues and financial statements survey

Financial instrument disclosures

We concluded our 2007 survey by noting that, given the differing customs and legislation between national markets, comprehensive disclosures about assumptions and judgements are vital for investors intending to compare performance and forecast, it would be interesting to see how the disclosure requirements of IFRS 7 (mandatory from 1 January 2007) would be tackled.

Sensitivities
IFRS 7 requires that an entity discloses information that enables users of its financial statements to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed at the reporting date. It also requires sensitivity analyses for each type of market risk to which the entity is exposed at the reporting date, showing how profit or loss and equity would have been affected by changes in the relevant risk variable that were reasonably possible at that date. The methods and assumptions used in preparing the sensitivity analysis would also need to be disclosed. This would suggest managements view of market conditions at reporting date. However, what is deemed to be reasonably possible changes in risks leaves room for interpretation as can be seen by the range of impact disclosed by surveyed companies. The new disclosure requirements undoubtedly resulted in companies spending more time, particularly to determine the level of disclosures that would be relevant to users. The main areas of risk identified by companies were interest and currency risk. Only two companies did not disclose that interest rate was a consideration which impacted their businesses. Most companies applied a range of sensitivities of between 25 to 100 basis points. Some companies, such as GPT, provided a value-at-risk analysis which reflects interdependencies between currency and interest risks.

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Under GPTs policy, the parameters for assessing the impact of upward or downward movements in market rates is made by reference to each foreign currency exchange rates maximum move over a three month period. This sensitivity was used as it provides a reasonable sensitivity given the level of debt and currency exposure the group has and the impact they have to group results and investor expectations. Currency risk was disclosed as a risk area by nearly half of the surveyed companies, a reflection of the geographically diversified portfolio held by some companies. Whilst most companies applied movements in percentage points for sensitivity analysis, others disclosed

the impact by way of movements in absolute terms (for example, an 8 cents movement against another currency). The companies surveyed, with two exceptions, were generally of the view that credit and liquidity risks did not have a critical impact on the business. Whilst the scope of IFRS 7 only includes financial instruments, some entities extended these principles for example, other areas where a sensitivity analysis was carried out include property valuation and listed security prices. Fabege also disclosed sensitivity analyses on rent level, occupancy, property expenses and property values. But there may be other reasons for this for example sensitivity analyses are also required by IAS 1 when there is significant uncertainty of estimation.

If prepared without care, such disclosures can just be a mathematical exercise of computing the expected financial impact of each risk. However, thoughtful disclosures of methods and assumptions surrounding the analysis can provide users of the financial statements with relevant insights about the management of the business.

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Specific targets for capital

The IASB believes that the level of an entitys capital and how it manages it are important factors for users to consider in assessing the risk profile of an entity and its ability to withstand unexpected adverse events. Furthermore, the level of capital might also affect the entitys ability to pay dividends. For these reasons, in August 2005, IAS 1 was updated to require for periods starting on or after 1 January 2007 disclosure of information that enables users of financial statements to evaluate an entitys objectives, policies and processes for managing capital. The original proposals were likely focused on financial institutions with regulated capital and, consequently, often have little meaning for other types of company. However, the IASB did not restrict them to an industry sector and, therefore, imposed them universally. This has led, perhaps unsurprisingly, to widespread boiler plate disclosures of little relevance to the user. Many of the companies in the survey disclose no specific numerical targets for their capital. Those companies that did disclose quantitative targets primarily based them on a gearing ratio. For example British Land disclosed that: A loan to value ratio across the entire business in the range of 4555% is currently targeted, subject to the Boards view of the market, the prospects of the portfolio and its recurring cash flows. EMAAR stated: The Group monitors capital using a gearing ratio, which is net debt divided by total capital plus net debt. The Groups policy is to keep the gearing ratio between 33% and 50%. The Group includes within net debt, interest bearing loans and borrowings, less cash and cash equivalents. Capital includes equity attributable to the equity holders of the parent less the net unrealized gains reserve. As at 31 December 2007, Groups gearing ratio is 13% (31 December 2006: 8%) In a similar vein, Liberty set out: The group seeks to enhance shareholder value both by investing in the business so as to improve the return on investment and by managing the capital structure. The group uses a mix of equity, debt and hybrid financial instruments and aims to access both debt and equity capital markets with maximum efficiency and flexibility. The key ratios used to monitor the capital structure are the debt to assets ratio and the interest coverage ratio. The group aims not to exceed an underlying debt to assets ratio of 50 per cent and to maintain interest cover above 160 per cent. During 2007 the underlying debt to assets ratio rose from 36 per cent to its maximum for the period of 40 per cent at 31 December 2007. Over the same period the interest coverage ratio reduced from 170 per cent to 165 per cent at the year end having reached a maximum during the period of 176 per cent.

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Other Issues

Finance costs
Of the companies that disclosed their policy only one company, Fortune, did not adopt the allowed alternative in IAS 23 to capitalise finance costs that are directly attributable to the construction of qualifying assets. As noted in last years survey, whilst in March 2007 the IASB issued a revised version of IAS 23, effective from 1 January 2009, that mandates capitalisation, the revision does not require companies to capitalise interest in respect of assets that are measured at fair value. This includes assets measured at fair value through equity but, as most such properties will be investment properties in the course of construction, this will cease to be an issue when the proposed amendment to IAS 40 requires them to be classified as investment properties.

Accounting for joint arrangements

As noted last year, it is very common for property investors to enter in joint arrangements to facilitate investment in real estate assets. Often these arrangements take the form of an interest in another legal entity and are, therefore, classified by IAS 31 as Jointly Controlled Entities (JCEs). Currently, IAS 31 provides two options of how to account for such JCEs either by proportionate consolidation or the equity method. Our survey continues to show a very mixed approach, eleven companies used equity accounting, whilst nine used proportionate consolidation. Certain national characteristics were again in evidence all of the Australian companies in the survey used equity accounting. The option to proportionately consolidate JCEs might soon be removed by the IASB. The IASB Exposure Draft (ED) 9 is intended to replace the existing requirements of IAS 31 and is another step in the short-term conversion project with the FASB. Therefore, companies that currently account for JCEs using proportionate consolidation will, if ED 9 is adopted as currently drafted, need to change their policies. However, rather than simply switch to equity accounting, the contractual arrangements will need to be examined to ascertain whether the parties have rights or obligations relating to the individual assets and liabilities of the joint arrangement if so, those assets and liabilities will have to be recognised directly in the financial statements.

IFRS for real estate Current issues and financial statements survey

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Leases over land

Land normally has an indefinite economic life. Therefore, unless title is expected to pass to the lessee by the end of the lease term, IAS 17 notes the lessee does not receive substantially all of the risks and rewards incidental to ownership and so requires a lease over land to be classified as an operating lease. Some have questioned whether long leases of land should be classified as finance leases if the lease is so long that its residual value at inception is insignificant, but the IFRIC rejected this argument, based on the current text of the standard. Applying the IAS 17 principles, confirmed by the IFRIC, means the proceeds of issuing a lease over land represent prepaid rental income, and so can only be recognised on a straight line basis over the term of the lease no matter how long the lease. The IFRIC did, however, agree to recommend to the IASB that the special provisions related to the transfer of title on a lease of land should be deleted from IAS 17. Although an amendment to this effect, deleting all references to operating leases over land and retaining only the requirement to consider land and buildings separately for the purposes of lease classification, was included in the exposure draft of the 2008 annual improvements published in October 2007, it was not included in the final version of the Improvements to IFRSs issued in May 2008. Rather, in their December 2008 meeting, the IASB considered comments received on the proposed amendment and reaffirmed its view that the proposed change would be an improvement. To this end the IASB plans to issue an amendment to IAS 17, as part of the Annual Improvements to IFRS, in April 2009. In the meantime, one company in our survey, Aldar, classified leases over land (having a term of 99 years that is renewable at the option of the lessee for an indefinite duration) as finance leases. The financial statements of Aldar disclose that the management consulted independent legal advisors about this accounting issue and formed a view that substantially all risks and rewards of ownership passed to the lessee since the lessee has the practical ability to exercise unilaterally all rights over the land.

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IFRS for real estate Current issues and financial statements survey

Taxation
In our 2007 survey we stated that, in accordance with IAS 12 Income Taxes, deferred tax should be measured by reference to the tax consequences that would follow from the manner in which the entity expects, at the balance sheet date, to recover or settle the asset or liability to which it relates. In determining the expected manner of recovery of an asset for the purposes of IAS 12, an entity should assume that, in the case of an asset accounted for under IAS 16, it will recover the residual value of the asset through sale and the depreciable amount through use. The practical effect of this is that deferred tax relating to that portion of the carrying amount of an investment property that would have been depreciated had it been accounted for under IAS 16 taking into account appropriate management intent should be measured on an in use, not an on sale, basis. This also means that the element of the total carrying amount represented by the land would be considered non-depreciable under IAS 16, and any deferred tax relating to the land element of the property should be measured at the tax rate applicable on sale. Few companies in our survey explicitly explained how this issue was interpreted most companies in the survey use general wording similar to those in the standard in their accounting policies. Westfield for example states that: Deferred tax assets and liabilities are measured at the tax rates that are expected to apply when the asset is realised through continued use or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantially enacted at the balance sheet date. Income taxes related to items recognised directly in equity are recognised in equity and not in the income statement. In fact, accounting for income taxes was, until recently, one of the areas being discussed as part of the short-term convergence project being undertaken by the IASB and the FASB and had been expected to lead to the publication of exposure drafts of standards to replace IAS 12 and FAS 109. However, in August 2008, the FASB announced that its deliberations on income taxes have been suspended indefinitely.

IFRS for real estate Current issues and financial statements survey

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At the time of writing, the IASB still expects to publish, in the first quarter of 2009, an exposure draft of a standard to replace IAS 12, with a view to publishing the new standard in 2010. In respect of the manner of recovery issue discussed above, the new standard is likely to prescribe that an entitys expectation of the manner of recovery of an asset or settlement of a liability does not affect the tax basis, which will be determined by reference to the deductions available on sale of an asset or recovery of a liability. However, an entitys expectations of the manner of recovery or settlement will affect:

Whilst the full implications of this likely proposal are not entirely clear, it is perhaps to be welcomed to the extent that it represents an implicit acknowledgement by the IASB, following its assertions to the contrary during its earlier discussions of the project, that an asset may indeed have more than one tax basis. It will, however, be interesting to see the detail of these proposals as a whole, as we have some concerns as to their overall direction, and how they are to be applied in practice. In its desire to exclude the impact of management intent from accounting for income taxes, the IASB appears to be proposing that the financial statements should presume a course of action (i.e. disposal) that management may not take. Whilst such an approach would bring some clarity, the result could be a standard that requires calculation of taxes based not on the actual manner of recovery or use of assets, but on a deemed manner of recovery that may conflict with, and have very different tax consequences from, the actual manner.

the extent to which any basis difference

is a temporary difference; and deferred tax.

the rate to be used to measure any

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Conclusion and looking forward

The real estate industry continues to be a good example of the differences that can arise from the application and interpretation of apparently straightforward accounting standards. Where diversity in practice is substantial, the users of financial statements rely more than ever on appropriate and concise disclosure of accounting policies and other information. Whilst it does appear that some areas would benefit from improvement in this respect, we recognise that IFRS already requires substantial disclosures. The skill of the preparer and the auditor, therefore, is to ensure that compliance with IFRS does not take attention away from what really matters. Industry organisations (such as EPRA, NAREIT and others) therefore continue to play a key role in maintaining a dialogue with the IASB, moving forward in the industrys attempt to continuously improve transparency and disclosure. They also play a vital role in the continuing convergence of accounting practices within the industry on those topics where IFRS allow choice.

Up to 31 December 2008 preparers of financial statements have benefited from the self imposed IASB moratorium on significant changes to IFRS. However, from 1 January 2009, a swathe of changes will need to be addressed by preparers including, amongst others, the presentation of financial statements, segmental reporting, business combinations, borrowing costs and investment property under construction. In addition, other changes are in the pipeline for joint arrangements and leasing. Perhaps, however, of more immediate relevance is the impact of the credit crunch in 2008, the resultant plunge in the volume of real estate transactions and the consequential difficulty of obtaining market evidence for the fair value of investment property.

IAS 40 sets out that: If an entity has previously measured an investment property at fair value, it shall continue to measure the property at fair value until disposal even if comparable market transactions become less frequent or market prices become less readily available. and also in the absence of current prices in an active market of the kind described in paragraph 45, an entity considers information from a variety of sources, including: (c) discounted cash flow projections based on reliable estimates of future cash flows, supported by the terms of any existing lease and other contracts and (when possible) by external evidence such as current market rents for similar properties in the same location and condition, and using discount rates that reflect current market assessments of the uncertainty in the amount and timing of the cash flows. It will be interesting to see how preparers deal with this.

IFRS for real estate Current issues and financial statements survey

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Appendix
Summary of findings

Investment property

Investment property under construction

Fair Value Cost Cost Cost Cost Cost Cost Cost Cost n/a Cost Cost Cost Cost Cost Cost n/a Cost Fair Value n/a Cost Fair Value Fair Value Fair Value Fair Value Cost Cost

Stated policy for recognising revenue on pre-sold developments

No No No No No No No No No No Yes No No No No Yes No Yes No No No Yes No No No Yes No

Westfield GPT Goodman Stockland Confinimmo Foncire GECINA Unibail-Rodamco Klpierre Deutsche Annington IVG Hong Kong Land Gazit Globe Beni Stabili Corio Globe Fortune Inmobiliaria Castellum Fabege Swiss Property Land Securities British Land Liberty Hammerson Emaar Aldar

Fair Value Fair Value Fair Value Fair Value Fair Value Fair Value Fair Value Fair Value Cost Fair Value Fair Value Fair Value Fair Value Fair Value Fair Value Fair Value Fair Value Fair Value Fair Value Fair Value Fair Value Fair Value Fair Value Fair Value Fair Value Cost Fair Value

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IFRS for real estate Current issues and financial statements survey

Specific numeric target for capital?

Westfield GPT Goodman Stockland Confinimmo Foncire GECINA Unibail-Rodamco Klpierre Deutsche Annington IVG Hong Kong Land Gazit Globe Beni Stabili Corio Globe Fortune Inmobiliaria Castellum Fabege Swiss Property Land Securities British Land Liberty Hammerson Emaar Aldar No Yes Yes Yes No No No No No No Yes No No Yes Yes Yes No Yes Yes Yes Yes No Yes Yes No Yes No

Proportionate Consolidation (%) or Equity for JCEs?

Equity Equity Equity Equity Equity n/a % % % n/a n/a Equity % % % % Equity Equity n/a % n/a Equity Equity n/a % n/a Equity

Capitalisation of interest in qualifying assets?

Yes Yes Yes Yes Yes Yes Yes Yes Yes n/a Yes Yes Yes Yes Yes Yes No Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

Treatment of goodwill

n/a Carried fwd Carried fwd Carried fwd Carried fwd Impaired n/a Carried fwd Carried fwd Negative Carried fwd Carried fwd Carried fwd n/a Carried fwd Carried fwd n/a n/a n/a n/a n/a Carried fwd n/a Carried fwd n/a Carried fwd m/a

IFRS for real estate Current issues and financial statements survey

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IFRS for real estate Current issues and financial statements survey

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