Consensus building

EPRA sees a global real estate coalition emerging over accounting rules, as Steve Hays reports

Proposals "that could mark one of the most drastic changes in international accounting and financial reporting rules since the 19th century's industrial revolution" (Wall Street Journal May 12, 2007) are drawing together the international listed real estate industry in an unprecedented coalition to influence their outcome, and mark the real globalisation of the sector, the European Public Real Estate Association (EPRA) says.

"The project being managed jointly by the US Financial Accounting Standards Board (FASB) and the London-based International Accounting Standards Board (IASB) has profound implications for the listed real estate industry and unless we move now to shape the process we will be landed with completely different financial reporting statements from those we have been used to," says Hans Bruggink, director of reporting practices at EPRA.

The proposed rewriting of financial statement presentation under IFRS (International Financial Reporting Standards)  and its convergence with US GAAP, is aimed at moving away from the focus on a single bottom line profit figure in company income statements and balance sheets, showing what is left after expenses and taxes, towards better reflecting how businesses are actually run to give a clearer picture of value in different parts of a company.

"At the moment you can see current assets and fixed assets, liabilities and equity clearly in a listed real estate company's accounts so you can calculate your ratios at one glance. Under the ‘cohesive principle' in the new proposed rules you have to put financing in the financing part of the balance sheet and the industry's present practice of putting funds from operation and its financing in the business part would not be allowed," Bruggink says."The income for lessors would become interest in the financing side not rent in the operational side. People who want to invest in real estate wouldn't see rents, they would see a lot of interest paid and a lot of interest received."
With the owner taking the risk and rewards in the real estate investment business and most lessees not having a financial lease, a building asset could be broken down into a receivable and residual value, with both under financial assets, instead of fixed assets.

"We absolutely do not want this because the value of real estate companies is all based on the visible net asset value of the real estate properties. This property is not like a leased car, machinery or aircraft rental contact with a life of five, 10 or 15 years, bricks and mortar can extend for 50 to a 100 years and the residual value would be higher than the net present value of the receivable, based on a five- or 10-year term," Bruggink says. The implications of the accounting boards' proposals have fired up the representative bodies for listed real estate around the world to form a united coalition, which will lobby the FASB and IASB to adopt standards that best match the operational realities of the real estate industry.

Alongside EPRA, NAREIT in the US, APREA in Asia, the BPF in the UK,  and Canadian and Australian associations are all represented in the coalition.
"We are working right now to get out a global profit and loss model in which the industry can focus on a metric that is very close to the adjusted EPRA earnings per share model, but at the same time equals funds from operations as they know it in the US and Canada.  It's a P&L that looks a bit different from the present standards of IFRS, but we're going to the accounting boards in the autumn of this year to see if we can get some recognition of this way of presenting performance," Bruggink says.
It is important the FASB and IASB realise the huge influence that the real estate industry has in the global economic system in terms of investments by pension funds,  insurance companies and public and private investors in the direct form, or indirectly via funds, equities and real estate bonds, as an alternative for shares, bonds and other securities, he adds.

The British Property Federation estimates that the UK's real estate industry, for example, is six times larger than its agricultural sector, more than twice the size of the oil industry and larger than each of the banking, leisure, transport and communication sectors.

EPRA is currently evaluating the results of its industry Best Practices Survey, on the work of the association's committee in this area. Early responses indicate that fair value measurement and financial statement presentation are at the top of the list of priorities for European listed property companies, with chief financial officers only able to follow the plans of the international accounting bodies from a distance.

The global listed real estate industry still has time to make its voice heard and influence the outcome of the next round of IFRS, as there is an interregnum while the changes implemented in 2005 are still working their way through the corporate world. The new rules are intended to come into force at the earliest in the 2009 financial year, but the boards' secretariats continue to issue IFRS exposure drafts for discussion.
"We have to use the time now to exert our influence. I think we've got about 18 months, until the end of 2008, to make a difference," Bruggink concludes.

Steve Hays is a founding director of Bellier Financial based in Amsterdam