Hvor pålidelige er de bogførte værdier af investeringsejendomme i danske årsrapporter? Case study og analyse

Charlotte Fischer Larsen

Student thesis: Master thesis

Abstract

This master’s thesis investigates the reliability of measurements for investment properties. Theoretically, it is assumed that fair value is more relevant, but less reliable than historical cost prices. The analysis is based on 101 Danish annual reports from the real estate industry over the period 2006-2010. The five methods for valuating investment properties are: 1) the discounted cash flow model 2) the return based model, 3) external appraisers, 4) directors’ valuations and 5) the historical cost accounting model. The most used methods for valuating an investment property are the return based model (34 %), directors’ valuations (28 %) and the discounted cash flow model (26 %). Most accounting users prefer fair value estimates of investment properties to respective historical cost amounts due to relevance. However, historical cost prices are not intended for measuring fair value and should not be used as a benchmark for the reliability of fair value estimates of investment property. The conclusions of the analysis indicate that the reliability of fair value estimates of investment properties are accurate 58 % of the time, if you accept a 25 % deviation of the estimated value below or above market value. The deviation constitutes the difference between calculated book value and calculated selling price. It is assumed that a calculated realised selling price is an acceptable measure of fair value. The accounting user is interested in how good the valuation of an investment property is. Naturally there will be errors in the measurements of each variable in the capital-based valuation methods and in the assumptions made by an external appraiser and directors’ valuations. With 95 % certainty, the average deviation between the market value and estimated value of an investment property is between 18 % and 35 %, using a 95 % confidence interval. In worst case the estimated value deviates with 35 % from the market value. The best method for valuating an investment property at fair value is using an external appraiser; in this connection the average deviation from market value is 8 %. The second-best method is the discounted cash flow model with an average deviation of 15 %. The return based model and directors’ valuations all deviate with more than the acceptable 25 %, namely with 37 % and 27 %, respectively. In addition, the results indicate that valuations of fair value tend to understate selling prices. 33 % of the reports were underestimated and 9 % were overestimated. The final conclusion of this master’s thesis indicates a high level of uncertainty with regard to fair value estimates based on the fact that 42 % of the annual reports reveal a deviation that exceeds the acceptable level. Therefore, investment property measurements do not seem to be reliable.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2012
Number of pages119