The European Public Real Estate Association (EPRA) has teamed up with its international counterparts to influence proposals for uniform accounting standards currently being drawn up by the US Financial Accounting Standards Board (FASB) and the London-based International Accounting Standards Boards (IASB). 'The project has profound implications for the listed real estate industry,' claims Hans Bruggink, director of reporting practices at Epra. '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.' Besides Epra, the coalition comprises NAREIT in the US, APREA in Asia, the BPF in the UK, and Canadian and Australian associations.
The European Public Real Estate Association (EPRA) has teamed up with its international counterparts to influence proposals for uniform accounting standards currently being drawn up by the US Financial Accounting Standards Board (FASB) and the London-based International Accounting Standards Boards (IASB). 'The project has profound implications for the listed real estate industry,' claims Hans Bruggink, director of reporting practices at Epra. '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.' Besides Epra, the coalition comprises NAREIT in the US, APREA in Asia, the BPF in the UK, and Canadian and Australian associations.
The proposed re-writing of Financial Statement Presentation under IFRS (International Financial Reporting Standards) and its convergence with US GAAP, is aimed at moving away from 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. The aim is to give a clearer picture of value in different parts of a company. Under current practices in the real estate industry, current assets and fixed assets, liabilities and equity are clearly listed in a company's accounts, enabling ratios to be calculated at a glance. But under the proposed rules, financing must be put 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. This is one of the key bones of contention for the real estate sector, says Bruggink.
'The income for lessors would become interest on the financing side, not rent on the operational side. Investors wouldn't see rents, they would see a lot of interest paid and a lot of interest received.' He points out that the owner takes the risk and rewards in the real estate investment business while most leasees do not have a financial lease. 'A building asset could be broken down into a receivable and residual value, with both listed under financial assets, instead of fixed assets. We are opposed to 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. The life of bricks and mortar can extend for 50 to 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.’ The new rules are expected to be implemented in the 2009 financial year.
This article appears in Epra special of PropertyEU Magazine. Click on the link below to go to the homepage of www.propertyeu.info to read about Epra's annual conference in Athens this week.