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Artis Reit - Accounting For Investment Properties Under Ifrs
Artis Reit - Accounting For Investment Properties Under Ifrs
Artis Reit - Accounting For Investment Properties Under Ifrs
SITUATION
Reporting strategy to best reflect the financial position and operations of the trust
Provide the best information to financial statement users
Wanted Artis’s accounting treatments to be consistent with the industry’s peer group in order to achieve comparability
across the sector
o Belived there was an overall preference to adopt the fair value model
Investment properties: properties held for the purpose to earn rentals or for capital appreciation
Under GAAP, there was no distinction between investment properties and PP&E properties were recognized at
historical cost on the BS and amortized over the useful life
IFRS allowed companies to make a decision regarding their investment properties, they could record it at:
o Fair value
Differences in fair value from one period to the next would be recognized as net income
Once a company chose to adopt the fair value mode, it could not switch back to the historical
model
o Historical cost
Fair value of investment properties still has to be disclosed in the notes to financial statements
If a company chose to adopt the historical cost model, it would have the option to switch to the fair
value model at a later date
For companies adopting IFRS for the first time, additional alternative allowed them to record certain assets at fair value
on adoption, regardless of accounting policy choices made regarding following treatment
o Would allow Artis to record investment properties at fair value on adoption of IFRS, and then use either the
fair value model or historical cost model going forward
Income under Canadian GAAP not often viewed as a relevant measure due to inclusion of depreciation expense
As long as the property was properly maintained, the useful life could me indefinite, make depreciation expense
irrelevant
Analysts commonly valued real estate by assessing operating cash flows generated by properties/appropriate discount
rate
o Discount rate: “cap rate”
o Assumed cash flows generated by the properties were a growing perpetuity
Analysts could calculate the intrinsic value (perceived value w/o reference to stock value) by projecting cash flows and
applying an estimated cap rate = net asset value per unit after deducting debt
EPS was not viewed as useful for evaluating operating performance, therefore the real estate sector endorsed the use
of funds from operations’ (FFO)
o Similar to cash flow from operations with some minor adjustments
Analysts commonly valued firms based on FFO multiples and adjusted funds from operations (AFFO)
o AFFO took into account maintenance capital expenditures
IAS 40
Requires entities to disclose the extent to which the fair value of investment property was based on a valuation by an
independent valuator who held a recognized and relevant professional qualification and had recent experience in the
location and category of the investment property being valued
Companies also had to disclose if no such valuation had been performed
Had to decide whether to hire an external valuator or to have valuations performed in-house
o Wondered if the decision would have an impact on the financial statement users or on trust’s audit fees
o External valuator is costly; some companies used external valuators to appraise a portion of their properties
each year on a rolling basis and then extrapolated the results across similar properties
had to decide how the valuations would be done
o IAS stated entities were required to disclose the methods and significant assumptions used in determining
fair value, did not prescribe any particular valuation model
o ‘Cap rate’ approach was widely used in the industry, could also use a DCF