Accounting and Auditing Management of Investment Properties

Abstract

Investment properties at fair value in the external financial statements of companies is subject to uncertainty regarding the accounting estimates that form the basis for it. This uncertainty should be addressed in the companies' accounts by both describing it and by disclosing the underlying assumptions used by the management in making these accounting estimates.
These assumptions are influenced by external factors, which is why the valuation of investment properties at fair value will vary depending on how the market and the world economy evolve. Feedback from authorities, however, suggests that companies have not been able to adequately disclose these assumptions in their external annual reports. This problem has been addressed partly through changes to the law over the years, but also by updating the international auditing standards in this area.
In February 2022, a war broke out between Russia and Ukraine because of the former's invasion of Ukraine. The war has brought a series of economic challenges impacting the market and causing uncertainty. In addition, rising interest rates have contributed to a downturn in the market.
The purpose of this thesis is to clarify the impact of the ongoing war on the assumptions companies use for their fair value assessments, including the actual effect on fair values and how it affects the auditor's work. Furthermore, it aims to determine whether changes to the law and updates to auditing standards have had the desired effect regarding the information in the annual reports.
The thesis concludes that the market developments due to the war in Ukraine have had a negative impact on the fair values of investment properties. This can primarily be attributed to rising interest rates, leading to increased return requirements for investors, and rising operating costs due to the energy crisis. In addition, the analysis of the accounting information shows an increasing level of detail over the years, indicating that the measures taken in this regard have been effective. The developments also affect the auditor's work in the sense that impairments can be expected at the planning stage, and the auditor should therefore pay special attention to this, including a focus on any indications of lack of neutrality in the management's exercise of accounting estimates.