IFRS: A new frame of reference (EUR)

European listed property companies are required to comply with International Financial Reporting Standards (IFRS) as from 2005. For the property sector that traditionally markets itself on transparency and predictability of results, IFRS will introduce complexity and volatility of earnings. Although IFRS should increase comparability, important differences across the sector coninue to exist, according to Merchant Bank Kempen & Co.

• IFRS introduces complexityIFRS sets a single standard for 7,000 listed European companies in many different industries. Because ´one size should fit all´, some complex standards will shift accounting for property companies away from their basically straightforward business model. This report provides a comprehensive and manageable overview of the nine most important accounting changes for 29 European property companies.
  
• IFRS increases volatility of earnings IFRS could considerably impact property company´s reported net income, especially for Bail Investissement, Beni Stabili, Deutsche EuroShop and Sponda who will start reporting investment property at fair value. Changes in fair value of investment property and financial instruments will be included in the income statement, making EPS a more volatile figure.
  
• IFRS will impact market value (N)NNAVs Property companies should retrospectively adjust their financial statements to IFRS. Any historical difference between IFRS and local GAAP could impact financial statements and market value (N)NNAVs at first time adoption of IFRS.
  
• IFRS could change company and investor behaviour The conversion to IFRS seems to be simply an accounting issue. Nevertheless, IFRS could change managers´ behaviour (e.g. deal structures and lease agreements) and could increase overhead costs (e.g. accounting systems and staff), affecting real cash flows.
  
• The sector should strive for a single presentation standard In order to retain transparency and improve comparability, Kempen & Co endorses the viewpoint that the property sector should strive for a single presentation standard, including a split between recurring results and changes in fair value.