Commercial Property: New reporting laws to have cash impact.
New international financial reporting standards are having 'far-reaching' consequences for the property sector - especially those companies involved in cross-border investments, according to a local property valuation specialist.
Peter Clarke, managing partner of property consultancy King Sturge's Birmingham office, and head of the firm's valuation department, said that recently-introduced regulations would have a big impact on corporate balance sheets.
Under the new International Financial Reporting Standards (IFRS), which must be adopted by all European stock exchange listed companies, there will be a fundamental change to the way in which property assets are reported.
'IFRS is not just a technical accounting issue - it could radically change the figures that companies publish for net assets, earnings and return on capital,' said Mr Clarke.
IFRS is intended to harmonise the accounting practices of listed companies across the EU.
One of its most important changes is a move away from the 'historical cost' principle on which company accounts have traditionally being prepared.
Companies are now being given the option to either record their long-term property and other assets at figures based on their original cost or they may include them at 'fair values' - in other words, what they are worth today.
Mr Clarke added: 'The impact of change will largely depend upon where a company is based.
'For example, the use of current market based values is already widespread in the UK, while Spain is rooted in the historical cost tradition - and in Germany revaluations have not previously been permitted.
'However, it is when a company decides, under the new rules, to switch from recording its properties at cost to showing them in its accounts at valuation that the impact on its financial ratios is likely to be at its most significant.'
In most cases, current values will exceed those based on out-dated cost-based figures.
Mr Clarke added that current values naturally conveyed far more useful information than outdated cost figures.
However, companies had been given the 'historical cost or fair value' option for now because so many domestic accounting standards still operated in tandem with the historical cost principle.
'The aim of the new standards is to make the comparison of companies across national boundaries easier,' he said.