The valuation of a company's investment properties may bring surprises

October 12, 2020

In addition to the financial statements and balance sheet, an investor should also go through the notes and understand their content, says Juha Mäki, M.Sc.(Eng.), M.Sc.(Econ. & Bus. Adm.), who is defending his doctoral dissertation in University of Vaasa.

For example, the valuation of a company's investment properties in the financial statements may bring surprises depending on whether the company has performed the valuation itself or used an external party for it.

According to Mäki's dissertation, an external appraiser provides more conservative, i.e., more careful values for investment properties than when the company prepares the valuation. In this case, the financial statements of companies that value their investment properties themselves may give a more positive impression about the financial situation.

"Indeed, it will be interesting to see measures after the current pandemic, when, as a result of possibly changed buying behaviour, the values of shopping centres and, because of increased recommendations for remote working, the values of office real estate, should be decreased", says Mäki.

In his dissertation, Mäki has reviewed the possibility to select the valuation and reporting of the value of investment properties between the traditional depreciation method or the so-called fair value method.

"When applying the fair value method, the consequences of changes in the valuation of investment properties can be significant, because a decreased value is recorded directly as "expense" in the financial statements and correspondingly, an increase as "income". In the investment property business, there are examples of companies whose result exceeds their turnover", says Mäki.

In the European Union, publicly listed companies prepare their financial statements in accordance with the IFRS standards (International Financial Reporting Standards). The guidelines regulate about the basic principles for preparing financial statements but also provide opportunities for selecting between various reporting methods.

Reporting requirements a compromise between the best and excessive information as well as the expenses incurred

According to Mäki, the easiest solution from the standpoint of stakeholders, such as investors and financers, would be a requirement to only use an external party for determining fair value in the preparation of financial statements and reporting all the relevant information in the notes.

The preparers of the IFRS standards must, however, take into account the amount of reporting costs and readers of annual reports possibly getting tired of excessive information. The key is to identify the most essential information for investors and to present it in a concise way.

The purpose of the balancing is, after all, to increase the ease of adopting IFRS and therefore increase its use globally.

Use of IFRS is the sum of a company's internal and external factors

It was also discovered in Mäki's dissertation that companies tend to select the traditional depreciation method in cases where the annual report does not have a significant impact with regard to communication with stakeholders.

In other words, a company's diversified ownership has a positive impact on selecting the fair value model in the valuation of real estate investments. The same phenomenon is to an extent visible in financial sector companies. On the other hand, companies in Scandinavia and Great Britain use fair value reporting more often compared with the rest of the European Union. The reason for this is likely to be legislation history before the adoption of the IFRS standards.

Development of the guidelines (here, IFRS 13) has, on the other hand improved the quality of financial statements, however, a simple, briefer reporting may be as effective from the standpoint of stakeholders.

"Using external parties for determining fair value seems to also have a positive impact on the amount of information asymmetry, i.e., on how equal a position investors at different levels are as regards the necessary underlying information. Therefore, the impact of external valuators as experts is similar to that of large audit firms (Big 4)", Mäki estimates.
Public examination

A doctoral dissertation in the field of Accounting and Finance of Juha Mäki, M.Sc. (Econ, & Bus. Adm.), "Fair Value Appraisal and Financial Reporting" will be examined on Friday, 16 October 2020 at 12 noon in the University of Vaasa. The public examination will be arranged remotely:

The opponent will be Professor Mervi Niskanen (University of Eastern Finland) the custos will be Professor Teija Laitinen (University of Vaasa).

Doctoral dissertation

Mäki, Juha (2020) Fair Value Appraisal and Financial Reporting. Acta Wasaensia 447 Doctoral dissertation. The University of Vaasa.

Publication in pdf:

University of Vaasa

Related Investors Articles from Brightsurf:

Words matter: Revealing 'how' restaurateurs land investors online
Online crowdfunding is a multibillion dollar industry, but crafting a compelling pitch that stands out among thousands of projects and lands investors is challenging, especially in the restaurant industry.

Tendency to select targeted retirement fund ending in zero may impact wealth
New research shows that selecting a targeted retirement fund that ends in a zero could negatively impact your retirement savings.

Zero rates preferable to negative rates for investors' risk-taking -Ben-Gurion U study
In several lab experiments, the researchers demonstrated that a zero-interest rate policy has the strongest impact on individuals' investment decisions driving their decisions to borrow money and the percentage of risky assets in their portfolios.

Investors punish for social irresponsibility depending on proportion of company execs with law degrees
The extent to which investors punish firms for corporate social irresponsibility is associated with the proportion of top management executives in a firm who have a law degree, according to new research from the University of Notre Dame.

Social banks rely on their motivated investors
The main reason for the existence of social banks is to fund other social enterprises.

Wall Street investors react to climate change
Institutional investors are factoring climate risks into their investment decisions, according to a first-ever survey conducted by the McCombs School of Business at The University of Texas at Austin.

Tiny price gaps cost investors billions
New research shows that, millions of times each day, investors in the US stock market see different prices at the same moment -- and that these differing prices cost investors at least $2 billion dollars each year.

Air travel reduces local investment bias, benefits investors and firms, study shows
Easy access to air travel has not only flattened the world, it also has flattened the bias toward investing locally, according to new research from the University of Notre Dame.

Study finds companies may be wise to share cybersecurity efforts
Research finds that when one company experiences a cybersecurity breach, other companies in the same field also become less attractive to investors.

Study: Want more investors to your startup? Better make an impassioned pitch
The brains of potential investors are wired to pay closer attention to entrepreneurs who pitch with passion, according to new research from Case Western Reserve University.

Read More: Investors News and Investors Current Events is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to