Accounting information and investment properties:
economic and financial stakes for listed groups
Aurélien DECAMPS
KEDGE Business School
aurelien.decamps@kedgebs.com
Stéphane OUVRARD
KEDGE Business School
stephane.ouvrard@kedgebs.com
Research Question
Does accounting choice for corporate
investment property have an impact on
economic and financial disclosures for
listed companies ?
Aim
• Understand accounting
companies concerning
property
choice of listed
their investment
• Estimate the impact of this choice on their
consolidated financial statement
Presentation
• Background
– Investment property in a corporate context
– Accounting choice for investment property
• Empirical study
– Investment property of listed groups (SBF 120)
• Method
• Results
• Conclusion
Background
Investment property in a corporate context
• Financialization of corporate property in the
french context
– Value creation from corporate property (NappiChoulet et al., 2009)
• Outsourcing / sale and leaseback: core business and
debt reduction strategies from firms
• Fast development of french REITs (SIIC since 2002)
– Financial approach and asset management
applied to corporate property (Simon, Malle,
2009)
Background
Investment property in a corporate context
• IFRS Standards (January 1st 2005)
– Owner-occupied property (IAS 16) vs. Investment
Property (IAS 40)
– Measurement at the Fair Value: financial approach
based on actuarial assumptions
Background
Investment property in a corporate context
Investment Property according to IAS 40:
"Property (land or a building or part of a
building or both) held (by the owner or by the
lessee under a finance lease) to earn rentals or
for capital appreciation or both"
Fair Value according to IAS 40:
“The amount for which the property could be
exchanged between knowledgeable, willing
parties in an arm's length transaction"
Background
Accounting choice for investment property
IAS 40 : Choice between two accounting methods
o Historical Cost
 Referring to accumulated depreciation
o Fair Value
 Mark to Market referring to market value
 Mark to Model referring to appraisal methods such
as capitalization rate or discounted cash flow
Background
Accounting choice for investment property
Initial
measurement
(acquisition of the
property)
• Historical cost
• Acquisition cost = purchase price + costs
directely allocated to the real estate asset
Further
measurement
(reporting date)
• Choice (option): historical cost or fair value
• The accounting option chosen must be
implemented to all the investment
properties in a same category
Consequences
(fair value as an
option)
• The fair value changes (gains or losses) are
recorded in the Income Statement (profit
or loss)
• This fair value change is shown in the
« other operating income & expenses "
item
Background
Accounting choice for investment property
Pros & Cons of Fair Value
Pros
Cons
o Give a further information to
reduce agency costs.
o Source of volatility and of shortterm vision (Bloomfield, Nelson,
Smith, 2006).
o Protect against the excess of
Creative Accounting (Casta and
Colasse, 2001).
o Step closer Accounting and
Corporate Finance.
o Procyclical
phenomenon
amplifying the changes in the
assets/liabilities values at the same
pace as the economic cycle
(Escaffre, Foulquier, Touron, 2008).
oProcyclical
and
self-fulfilling
feature of fair value (Morand and
Marteau, 2010).
Background
Accounting choice for investment property
Historical Cost vs. Fair Value
o Two opposed models (historical cost / fair value) that raise the question
of relevance vs reliability of financial information.
o The historical cost model is relatively reliable insofar as under this
accounting method the cost of an asset/liability is verifiable and as there
are few risks of estimation error.
o That is not the case for the value in use (IFRS 13, level 3) that is based on
calculation coming from actuarial assumptions.
o Conversely, the relevance of fair-value accounting is generally better than
when the accounts are valued on a historical cost basis (Scott, 2009).
Two main hypothesis
 Hypothesis 1: As investment property is the core business of REITs,
they should adopt a financial approach and choose the Fair Value
Model to measure investment properties. Whereas companies not
primarily in the real estate business should adopt the cost model to
measure their investment property in order to avoid the procyclical
effect of fair value.
 Hypothesis 2: Fair Value may have a pro-cyclical effect, allowing better
KPIs (Key Performance Indicators) through profitability, rentability and
solvency ratios in the context of an increasing cycle of the market.
Whereas, it may deteriorate KPIs when the market is in a decreasing
cycle.
Empirical Study
SBF 120 listed companies
-Sample:
20 companies listed on SBF 120 which own investment properties
-Method:
-Analysing financial annual statement of each company
- Activity sector
- Accounting choice for investment property
- Weigt of investment properties in the total capital
- KPIs (Key Performance Indicators)
-MCA (Multiple Correspondance Analysis) to map correlations
between these quantitative and qualitative dimensions.
-Variance analysis to estimate the impact of the accounting choice
on the financial KPIs of REITs.
Empirical Study
SBF 120 listed companies
Table 2: Depiction of the quantitative variables
Variable
Definition
Total capital
Total capital = Total assets = total equity & liabilities
% Total capital
Weight of property investments in the total capital
SA
Sales
NPM
Net Profit Margin = Net Income (part of the group) / Sales
AT
ROA
ROE
Assets Turnover = Sales / Total capital
Return on Assets = Net Income (part of the group) / Total
capital
Return on Equity = Net Income (part of the group) /
Shareholders' Equity
Average
Standard
deviation
3895,147
6741,041
0,314
0,408
13691,947
22652,167
15,334
29,192
45,542
51,405
3,049
5,059
7,857
10,572
141,360
159,764
Gearing
Gearing = Net Financial Debts* / Shareholders' Equity
ER
Equity ratio = Shareholders' Equity / Total capital
28,799
17,018
OPM
Operating Profit Margin = Operating Profit** / Sales
37,016
45,534
4,651
3,960
0,791
46,681
39,850
3,957
10756,000
9076,739
73,380
39,376
0,408
7,860
17,625
10,141
7,125
6,664
ICR
ICF % SA
Interest Coverage ratio = Financial expenses / EBITDA***
Investing cash flow / Sales
Spécifiques aux sociétés foncières
LTV
RP
EPRA ANAV
EPRA ANAV
change
Return on
investment
Loan to Value = Net Financial Debts/ Properties Fair value
Reevalued Property****
Adjusted Net Asset Value (EPRA model)
Change of EPRA ANAV (2012/2011)
Number of references in the annual report / registration
document
Number of references in the annual report / registration
Vacancy rate
document
*Total financial debts – Cash & cash equivalents.
**EBIT: Earnings Before Interests and Taxes.
***Earnings Before Interests Depreciation and Amortization.
****Fair value of the property assets.
3ème partie - Etude empirique: les groupes cotés du SBF 120
Empirical Study
SBF 120 listed companies
Table 3: Influence of the accounting choice on the quantitative variables.
Financial
Performance
Banking
Covenants
Property
investments
Asset Turnover
Gearing
Equity ratio
Operating profit margin
Reevalued property
EPRA ANAV
Fair value
Return on investment
Vacancy rate
Contribution of the inter- Correlation
groups variance to the total (/1)
variance (%)
37,58
0,61
19,35
0,44
31,18
0,56
39,5
0,63
33,93
0,58
34,18
0,58
43,68
0,66
27,64
0,53
63,35
0,80
Conclusion
This explanatory study highlights two main results:
• The Fair Value model is a way to improve financial
statement as it influences KPIs. However, the value of
investment property is closely linked to market cycle
generating procyclical effects.
• The accounting choice of REITs in our sample is
balanced between historical cost and fair value. It may
be interpreted as a prudential behaviour due to this
procyclical effect.
Research Perspectives
A wider sample of REITs should improve our
results:
• Confirm the impact of the Fair Value model
on financial KPIs
• Link the accounting choice of investment
property to the REITs’ business model
Thank you for your attention