The conversion to IFRS is not only an exercise of reorganization of the account catalogs, nor a technical matter of accounting and financial information, there are important benefits that can be achieved from the transition to these standards.

IFRS can help open the doors to the global marketplace, as their adoption allows access to foreign capital markets, providing confidence to investors through a globally accepted set of accounting standards. Companies themselves can also benefit from being comparable with their competitors.

Here are three actions that can help real estate executives decide whether or not to adopt these standards:

1. Determine how their permanence in the industry will be impacted by the conversion to IFRS. Would reporting under IFRS improve the presentation of your financial performance and balance sheet to your investors and capital providers?
2. Conduct a competitive analysis. Which of your first and second tier competitors are reporting, or will be reporting, under IFRS?
3. Evaluate the scope to be reached. Do you have global operations or do you expect to expand your international presence?

When real estate companies evaluate the potential adoption of IFRS, the most important thing to consider is the selection of accounting policies related to the recognition of investment properties, which under IFRS can be reported at either fair value or historical cost.

Fair value (FV) is: "The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the valuation date", i.e.; it is the market value.

It is recommended, but not required, to determine the RV of investment properties based on the valuation of a professionally qualified and experienced independent expert.

Selecting to report at fair value under IFRS can significantly affect a real estate company's financial statements. The balance sheets will likely be more aligned with the true economics of the company's assets while the income statement will include that effect as a result of each year's mark-to-market and fair value disclosures contained in the financial statements. It is important that these include: information on valuation methods, assumptions (cost of capital, discount rates, capitalization rates, income and expense growth rates, etc.), qualification of the valuation specialist and explanation of the fair value conclusions.

Fair value potentially also impacts tax through asset impairment testing, as well as treasury functions through disclosures and transparency effects.

In addition, legal areas may be affected through debt covenants, partnership or joint venture agreements.

Estimating, supporting and documenting, and reporting fair value requires a thoughtful process and the allocation of appropriate resources to manage this important aspect of IFRS.

Moving to the global financial reporting model can undoubtedly open up access to new sources of capital. Many global lenders, global private equity firms and international stock exchanges require or prefer IFRS reporting due in part to its increased transparency in fair values and comparability with other investments or companies.

However, as can be seen, there is no single answer for all companies; each company or group of companies must analyze and evaluate the convenience according to its specific case, since it is not a decision that only affects accounting, but one that has importance and relevance throughout the company, both internally and externally.

• By Maribel Olivas
• Industrial Real Estate Finance Leader
  American Industries Group

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