Proposed changes to international accountancy rules on leased assets could see two fundamental sources of information for investors, property values and rental income figures, removed from the balance sheets of listed real estate companies, and result in a significant reduction in the usefulness of property company accounts, the European Public Real Estate Association (EPRA) has warned.
The International Accountancy Standards Board (IASB), the body responsible for International Accounting Standards, wants to rewrite current accountancy arrangements for all leased assets, whether that is machinery, aircraft or property and instead record these in a similar way to a bank loan, with rental obligations during the remaining period of the contract shown as a liability.
If lessors of 'bricks and mortar' investment property are included in these changes, then analysts and investors will no longer be able to directly identify the value of a property portfolio or the rental income that it generates from the financial statements a move that EPRA believes would reduce the quality of information provided to investors.
REESA, an international alliance of property organizations representing the industry worldwide, and which includes EPRA, has responded to the public consultation on the proposals and is calling for backing from investors in a bid to ensure the IASB leaves investment property out of its overhaul of lease accounting.
Gareth Lewis, EPRA Director of Finance, said: "The current standard for investment property accounting (IAS 40) is well supported by the industry. It shows a property's value on the balance sheet and full rental income in the profit and loss account. These two metrics (market value and rent) are fundamental to the way property investment businesses are both managed and analyzed by the market, removing them would have damaging consequences for investors and preparers."
The proposed changes relate to how a lease is shown in a company's accounts. For tenants, the effect would be to show every leased asset as a financial liability in the same way that a bank loan is recorded, together with a corresponding asset reflecting the 'right to use' the leased asset.
For lessors of investment property, the balance sheet would show two artificially constructed figures: a financial asset (representing an estimate of the value of the rents receivable during the life of the lease) and a residual value asset (reflecting the assumed value of the property at lease expiry). Management would have to calculate those two figures and the balance sheet would no longer show the market valuation of the relevant property.
Furthermore, rent would be reported as a combination of repayment of a notional loan and payment of a notional interest rate charge by the tenant. A move which, according to Lewis, would involve imposing onerous reporting requirements on management which serve no purpose for analysts and investors, who are interested in rental income.
Philip Charls, EPRA CEO said: "There is a real risk here and it couldn't have come at a worse time. We need backing from all stakeholders, including major investors, in delivering a clear message that investment property accounted for under IAS 40 should be excluded from these changes. Changes that may be appropriate for lessees and for lessors of other assets, like cars or photocopiers, would wreak havoc with the accounts of property landlords and must be resisted at all costs."
This is an issue in which property company management and the investor community appear to be united across the globe.
Harm Meijer, real estate investment analyst at JP Morgan in London, said: "The accounting change to represent investment property as a financial and nonfinancial asset is not welcome. My biggest worry is that the transparency in the sector will decrease significantly. Real estate is about investments one can see, one can touch, and it should stay that way. In addition, there should always be a clear link between the language the valuers and agents speak (rents a