The market for real estate investments is a market, which has experienced strong growth through a longer period of time. It has been desirable to place excess liquidity and obtain profitable prices. The rising real estate prices have additionally opened the possibility for increasing the mortgage to expand investment activities or for other purposes. Therefore, many real estate companies have been established in Europe over the years. As a consequence of the financial crisis companies in this industry have had tough times and some even gone bankrupt because of the lack of liquidity for financing the running of real estate. The companies have in the period of growth taken advantage of the possibility to take account of the fair value of the real estate, in order for the profit of the company to show the most likely level of yield of the real estate. The financial crisis however, has brought up criticism of the way of stating asset value through fair value of the real estate and the companies have been criticized for being too optimistic. The existing accounting standard by IFRS gives the opportunity to either take account of the cost price of the real estate (IAS 16) or the fair value (IAS 40). The choice of value has to live up to the objective for the annual report to give an accurate picture of the company’s financial state. Moreover, an assessment of the relevance and faithful representation of the information has to be the foundation for the choice of value used. Taking account of the cost price is base on historical data and the real estate is taken in at the initial cost with the deduction of systematic depreciation. The value of the cost price model gives an indication of whether the real estate value has gone up in the time of ownership. When taking account of the fair value of real estate, the market value has to be assessed in accordance with the capital-oriented-theory. The fair value is most accurately confirmed by applying the mark-to-market model, where the comparison of the prices for equal real estate traded is the basis for the value assessment. Alternatively, in case of lack of comparison, the mark-to-model is applied. The mark-to-model contains a variety of mathematic models of valuation, where the fair value is found by an assessment of the specific real estate conditions and general market relations. The assessment of specific real estate conditions and the general market relations are based on a number of assumptions, which can have a somewhat subjective character. These conditions are the reason why the fair value model is criticized for being less credible and the cost-price-model is to be preferred as measuring the value of the real estate. This thesis therefore contains interviews with chosen users of the above-mentioned models to clarify if this is the opinion in praxis. The respondents in the analysis of this thesis are all of the perception, that the fair value model gives the most accurate picture. The model is assessed to be both relevant and credible. The riscs of the assumptions made in this model, is the ability of the management, the board of directors as well as the accountant to assess and apply these factors. An annual report reported without reservations or additional comments on valuation, which is approved by the board of the company, should all things being equal be an expression of that the fair value model is credible. The disadvantage by taking account of the fair value is that the value becomes obsolete as the market is not constant. Therefore, the users of this model can not use the annual report as a foundation for decision alone. There is an ongoing debate internationally regarding the concept of fair value, as IASB is working on an uniform standard for assets and liabilities, which can be measured at fair value. The debate fx focuses on when to apply fair value (financial/non-financial assets) and if markets are active or no longer active. The respondents of our analysis are of the perception that fair value is to be used when valuating real estate. There will always be a market for real estate and there are no arguments, that the number of trades, the demand, liquidity etc are the crucial factors to decide whether the market is active or not. Our analyses in the thesis have all concluded that the use of the fair value model is to be preferred before the cost-price-model. We think that taking account of the fair value is a concept that has to be of ongoing debate and discussion, in order for the concept to develop. The development will have the advantage that both the management and the users of the model, will improve in their application and make a more uniform valuation. Ongoing debate will additionally promote the understanding of the different opinions and hence lessen the subjectivity in the understanding and application of the fair value model.
|Educations||MSc in Auditing, (Graduate Programme) Final Thesis|
|Number of pages||166|