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A fair disclosure of fair value? How IFRS 13 affects fair value disclosure quality for investment properties in Europe

Written by Camila C. Holanda, Lisa Magnusson

Paper category

Master Thesis


Business Administration>Accounting




Master Thesis: 3.1. IFRS 13 The introduction of IFRS 13 means that when companies use fair value to evaluate their investment properties, the introduction of IFRS 13 means a shift from using one standard to now using two standards, namely IAS 40 and IFRS 13. As will be discussed in the following sections, the new disclosure requirements include the biggest changes, and for assets and liabilities that do not have an active market, these requirements are even more extensive. 3.1.1. IAS 40&Target and IFRS 13 On January 1, 2013, the IASB implemented new accounting standards. A standard that contains all the guidance on how an entity should conduct an asset or liability measurement at fair value. This means that all the guidelines previously established in several different IFRSs will now be transformed into a set of guidelines (BDO, 2013, p. 7). When considering IFRS 13, the IASB, the body that developed them, took into account several objectives, as there were many inconsistencies before implementation (European Commission, 2012, p. 5). According to the IASB (2011), this includes a step in the right direction of convergence between US GAAP and IFRS. The Financial Accounting Standards Board (FASB) is an institution equivalent to the IASB in the formulation of accounting standards in the United States. It issued a similar standard in 2007, which contains most of the same information as IFRS 13, but there are indeed some differences (Johnson Et al., 2010). Another wish of the IASB (2011) is to increase the transparency of fair value measurement and provide external parties with more information about the methods and assumptions adopted by the company. It is in this case that broader disclosure has played a huge role. Before the issuance of IFRS 13, as mentioned earlier, different standards have their own guidance on how to measure fair value. Some guidance is very limited, and some guidance is very extensive (BDO, 2013, p. 7). This can become very confusing at some point, so the purpose of the new standard is to prepare a single set of guidelines, thereby reducing complexity and promoting comprehensibility and improving consistency (IASB, 2011). The IASB can also provide a clearer definition of actual fair value, which will facilitate the communication of fair value measurement. Before the issuance of IFRS 13, another standard was dedicated to investment real estate, namely IAS 40. The standard became effective when IFRS/IAS was first used in 2005. The guidelines to supervise these are imperfect and are limited to the methods and important assumptions used in the valuation process, as well as the adjustment between the opening and closing balances of fair value measurement (IAS 40, 2012). 3.1.2. Changes and impacts of IFRS 13 The new standard will always have some impact, but for IFRS 13, Grant Thornton (2012) stated that in the case of fair value, many entities are likely not to be affected that much. The impact will instead result from the broader disclosures that entities must now provide. Nevertheless, several factors must be considered. In the next section, we will briefly discuss the most important changes, and then focus our attention on the new disclosure requirements. One of the main changes in IFRS 13 includes considering the highest and best use of non-financial assets, and whether current use can maximize their value, or if changes in use can increase their value (Ernst & Young, 2011, p. 3). When determining the best use under IFRS 13 (page 28), multiple factors must be checked. It must be practicable, legally permissible and financially feasible. For investment real estate, factors such as location or real estate size need to be considered (IFRS 13, p. 28a). Legal restrictions and whether the use under consideration can generate sufficient returns are also important factors that require careful review (IFRS 13, 28b, c). In order to be acceptable for a particular use, all these factors must be reviewed and evaluated. In addition, this assessment of the highest and best use also includes assessing whether the maximum value can be achieved through individual assets or in the form of groups (Ernst & Young, 2011, p. 5). This requires evaluating non-financial assets and assessing whether the value of an asset can be maximized by evaluating an asset individually, or whether multiple assets can be aggregated to replace the value. However, according to Ernst & Young (2011, p. 5), for investment real estate, it is usually not common and appropriate to carry out a combined valuation of these types of real estate. Prior to the formulation and issuance of IFRS 13, fair value classes existed only in financial instruments. The new standard is accompanied by a new hierarchical structure and is now also used in non-financial items (BDO, 2013, p. 50). This level is based on three different levels, Level 1, Level 2, and Level 3, which use different input data to determine fair value (IFRS 13, page 72). Level 1 is the highest priority level, and the input value used here is a direct quote that can be retrieved from an active market (IFRS 13, page 76). Due to the active stock market, this level is usually used for financial instruments, but for many assets and liabilities, identifying these types of inputs can be extremely difficult or even impossible, so levels 2 and 3 are used. Read Less