The application of fair value accounting to investment property

Abstract

This thesis investigates issues regarding the application of fair value accounting to investment properties. The thesis documents two inter-related studies conducted in the context of accounting for investment properties around the adoption of IAS 40 Investment Property. The first study examines lobbying on exposure drafts regarding the application of fair value accounting to investment properties. I analyse comment letters received by both the IASC and the FASB in response to their exposure drafts, that is, E64 Investment Properties and Topic 973 Investment Property Entities, respectively. I first use a content analysis method to understand attitudes and concerns of interested parties with respect to accounting for investment properties at fair value. Results show that the reliability of fair values and the relevance of unrealised gains and losses are the primary concerns expressed by respondents. I then investigate underlying factors driving interested parties’ preferences. Results show that respondents’ preferences are highly associated with their functional roles in accounting practice, their industries, and their institutionalized accounting practices. Using a sample of European real estate firms, the second study utilises a number of different approaches to investigate the value relevance of historical cost and fair value accounting information for investment properties. Using both a balance sheet model and a returns model, I examine the value relevance of balance sheet and income statement information separately. Results consistently show that balance sheet amounts for investment properties measured at fair value are more value relevant than those measured at depreciated cost. However, results regarding the value relevance of income statement information are mixed. Although fair value-based earnings are relatively more value relevant than historical cost-based earnings, the incremental value relevance of earnings components differs significantly depending on the permissibility of asset revaluations of the sample firms’ domestic GAAP. In particular, realised earnings are incrementally value relevant only for firms whose domestic GAAP strictly require historical cost accounting, whereas unrealised earnings are incrementally value relevant only for firms whose domestic GAAP permit revaluations prior to IFRS. This finding reinforces the argument that economic, cultural, and social forces can impact the value relevance of fair value information at the country-level.