GERMANY - The German Financial Reporting Enforcement Panel (FREP) has called on the International Accounting Standards Board (IASB) to reduce the use of "fair-value accounting" for real estate under International Financial Reporting Standards (IFRS).
The German accounting body filed its request in a comment letter (CL80) as part of the consultation process on the IASB's agenda, launched in July.
According to the FREP, the step-by-step expansion of fair-value accounting in cases where there are no observable market values "inevitably" leads to a stronger reliance on subjective amounts.
It also argued that the practice generated "an almost limitless range of valuation alternatives" for compilers of financial statements and produced information for the capital markets that was of "minimal use".
The German accounting board also believes the practice can be a contributing factor in values that are "apparently intentionally incorrect".
The FREP pointed out that, when valuing a property based on future cash-flow planning, even minor changes - in vacancy rate, maintenance ratio or rental adjustments, for example - can lead to substantial changes in value.
"The resulting balance-sheet amounts often do not provide an adequate level of reliability and comparability," it added.
The association has therefore recommended reducing the use of fair-value for assets such as real estate.
"Eliminating the fair-value option and returning solely to the cost model corresponds with the objective to provide inter-subjective, verifiable amounts where possible and to limit the use of subjective assumptions to a minimum, such as for determining impairment losses," it said.
By the 30 November deadline, the IASB had received almost 180 comment letters on various issues regarding IFRS accounting that are now under consideration.
