The Reliability of Investment Property Fair Values Under IFRS

24 Pages Posted: 18 May 2010 Last revised: 30 Jul 2010

See all articles by Henning Zülch

Henning Zülch

HHL Leipzig Graduate School of Management

Thomas Nellessen

Handelshochschule Leipzig (HHL)

Date Written: May 17, 2010

Abstract

The valuation of property companies and fair value accounting for investment properties under IFRS are closely affiliated with each other. This is because property companies are commonly valued using net asset value as a valuation technique. The term net asset value represents the fair value of a property company’s assets less its liabilities and therefore can easily be determined, as under IFRS investment property is reported using a fair value approach. This paper examines the perception of fair value estimates for many companies’ main asset: investment properties. For that purpose we investigate the association between the net asset values of European listed property companies and their market prices. We find that net asset value usually departs from the market capitalization of European property companies. We think that those deviations are a result of insufficient accuracy of fair value estimates of investment properties because of the limitations of appraisals, the diversity of applied approaches in appraising investment properties and the reliability problem for mark-to-model approaches usually applied in determining the fair value of investment properties.

Keywords: Investment Properties, Fair Value, Net Asset Value, Reliability, IAS 40, IFRS, NAV

JEL Classification: M44, M41, M47

Suggested Citation

Zülch, Henning and Nellessen, Thomas, The Reliability of Investment Property Fair Values Under IFRS (May 17, 2010). Available at SSRN: https://ssrn.com/abstract=1609702 or http://dx.doi.org/10.2139/ssrn.1609702

Henning Zülch

HHL Leipzig Graduate School of Management ( email )

Jahnallee 59
Leipzig, Saxony D-04109
Germany
+49(341)9851701 (Phone)
+49(341)9851702 (Fax)

HOME PAGE: http://www.hhl.de/faculty-research/faculty/accounting-auditing/

Thomas Nellessen (Contact Author)

Handelshochschule Leipzig (HHL) ( email )

Jahnallee 59
Leipzig, D-04109
Germany
+49 (0) 341 6404660 (Phone)
+49 (0) 341 9851702 (Fax)

HOME PAGE: http://www.hhl.de/faculty-research/faculty/accounting-auditing/

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