IFRS proposals that could mark a sea change in international accounting and financial reporting rules are drawing together the international listed real estate industry in an unprecedented coalition to influence their outcome and marks the real globalization of the sector, the European Public Real Estate Association (EPRA) says during the 8th annual EPRA conference, held on 6-7 September, 2007 in Athens, Greece.
"The project being managed jointly by the U.S. Financial Accounting Standards Board (FASB) and the London-based International Accounting Standards Boards (IASB) has profound implications for the listed real estate industry. Unless we move now into a global coalition to influence the process we will be landed with completely different financial reporting statements from those we have been used to," Hans Bruggink, Director of Reporting Practices at EPRA, said.
The proposed re-writing of Financial Statement Presentation under IFRS (International Financial Reporting Standards) and its convergence with U.S. GAAP, is aimed at moving away from the focus on a single bottom line profit figure in company income statements and balance sheets, showing what is left after expenses and taxes. It is shifting towards reflecting how businesses are actually run in the eye of IASB/FASB to give a clearer picture of value in different parts of a company.
"At the moment you can see current assets and fixed assets, liabilities and equity clearly in a listed real estate company's accounts so you can calculate your ratios at one glance. Under the 'cohesive principle' in the new proposed rules you have to put financing 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. Commercial real estate properties that are rented to clients for say 5 or 10 years would be considered financial assets in their entirety and rents would be presented as interest and amortization of the lease contract," Bruggink said.
The industry absolutely does not want this because the value of real estate companies is all based on the visible net asset value of the real estate properties. These are not like a leased car, machinery or aircraft rental contact with a life of five, 10 or 15 years, bricks and mortar can extend for 50 to a 100 years.
The implications of the accounting boards' proposals have fired up the representative bodies for listed real estate around the world to form a united coalition, which will lobby the FASB and IASB to adopt standards that best match the operational realities of the real estate industry.
Alongside EPRA, NAREIT in the U.S., APREA in Asia, the BPF in the UK, and Canadian and Australian associations are all represented in the coalition.
"We are working right now to get out a global profit and loss model in which our industry can focus on a metric that is very close to the adjusted EPRA Earnings Per Share model, but at the same time equals Funds From Operations as they know it in the U.S. and Canada. It's a P&L that looks a bit different from the present standards of IFRS, but we're going to the accounting boards in the autumn of this year to see if we can get some recognition of this way of presenting performance," Bruggink said.
It is important the FASB and IASB realise the huge influence the real estate industry has in the global economic system in terms of investments by pension funds, insurance companies and public and private investors in the direct form, or indirectly via funds, equities and real estate bonds, as an alternative for shares, bonds and other securities.
"We have to use the time now to exert our influence. I think we've got until the end of 2008, to make a difference," Bruggink concluded.