Property Businesses May Be Reprieved From Unhelpful Accounting Standard

by Robin Pilgrim, LawAndTax-News.com, London

27 January 2010

Proposed changes to accounting rules that would have seen property values and rental income figures removed from the balance sheets of property companies are close to being thrown out by the International Accountancy Standards Board (IASB).

At a recent IASB meeting held in London, a “tentative” decision was taken to exclude landlords of investment property from the proposed reforms – a change which would have sent shockwaves through the industry, according to the European Public Real Estate Association (EPRA).

Gareth Lewis, Director of Finance at EPRA, said: “We are very encouraged by the decision taken this week. It shows that the IASB have listened to the views expressed by the industry and recognized that the European real estate sector already has an accounting standard (IAS 40) that is well supported across the world.”

The new leasing model, had it continued to apply to lessors of investment property, would have seen the reclassification of this real estate as a financial asset, with the result that property companies would no longer have either rental income in their income statements or property held on the balance sheet – despite these being the very things used to measure value and compare businesses.

The reform is still expected to affect occupiers, however. They will have to record leases as if they were bank loans, with rental obligations during the remaining period of the contract shown as a liability.

How the change will influence the way businesses approach their property requirements remains to be seen; the EPRA, in cooperation with other organizations such as NAREIT in the US and REESA, have been lobbying hard to persuade the IASB, and the US Financial Accounting Standards board, to exclude lessors or investment properties.

They urged the regulatory bodies to take into account the fact that the proposed new leasing model would not provide useful information to investors and adversely affect the ability of investors to assess the performance of property and real estate companies.

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