International Financial Reporting Standards (IFRS)
Have for the Real Estate Sector?
A transition towards the IFRS implies more than just reorganizing account catalogs and technical accounting and financial information matters. Their adoption in Mexico’s real estate sector could bring significant benefits.
The use of the IFRS gives investors greater confidence, opening more doors to international foreign capital markets. Companies themselves will have the added benefit of being more easily comparable with their competitors.
Here are three actions executives in the real estate sector can carry out to help them decide if it is in their best interest to adopt the IFRS:
Determine how their longevity in the industry will be impacted by converting to the IFRS. Will IFRS reporting improve the presentation of its financial performance and balance statements with investors and capital providers?
Carry out an analysis of its competitors. Are its first and second-level competitors using, or planning to use, IFRS for reporting?
Assess the reach it would like to have. Does the company have global operations or want to expand its international presence?
Analyze if adopting the IFRS aligns with and could be leveraged to support the company’s strategy.
When companies in the real estate sector consider the potential benefits of adopting the IFRS, the most crucial factor is selecting which accounting policies it will use to report the value of investment properties. According to the IFRS, these can be reported either at a fair market value or historical cost.
IFRS 13 defines fair value (FV) “as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” (an exit price).
It is recommended (but not mandatory) that the FV for investment properties be calculated based on a qualified and experienced independent expert’s appraisal.
Choosing the fair value method for reporting under the IFRS can significantly impact the financial statements of companies in the real estate sector. This means that its balance statements will likely be more aligned with the actual status of the company’s assets, meaning that its income statements will also reflect this. Each year, the fair market value price will be assessed and disclosed in its financial statements. These reports should include information on valuation methods, cost of capital, discount rates, capitalization rates, rental and expense growth rates, the appraiser’s qualifications, and explanations of fair value conclusions, among other information.
Fair market value could also potentially impact tax payments by providing proof of a decrease in the value of assets and treasury functions through these insights and the transparency they bring.
In addition, legal areas may be affected through debt covenants and partnership or joint venture agreements.
The appraisal, collection of supporting evidence and documentation, and filing fair market value reports require a reflective process and adequate resources for managing this critical aspect of the IFRS.
Converting to a global financial reporting model may open up access to new sources of capital. Many international lenders, global private equity firms, and international transactions require or prefer IFRS reporting. This is partly due to the increased transparency of fair value reporting and ease of comparison to other investments or companies. Consequently, these sources potentially provide new avenues for capital funding.
However, as you can see, there is no one-size-fits-all answer. Each corporation or group of companies must consider if adopting the IFRS is in its best interests depending on their specific circumstances, as this decision will affect not only accounting but also the company internally and externally.
By Maribel Olivas | Real Estate Finance Leader | American Industries Group®
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