There has been some confusion and debate among corporate occupiers and across the property industry about what these changes will mean.
For example, the property manager of one of the UK's biggest retailers has been under the impression that the IAS would require corporate occupiers to have their portfolios revalued, creating a bonanza for valuation surveyors. This is not the case.
Such confusion is hardly surprising, given the jargon that surrounds accounting and valuation. In addition, some of the rules of the IAS are still being debated and in some cases, revised.
There are two ways to report property assets in company accounts. The historic cost approach records the original purchase price and depreciation year on year. Alternatively, properties can be regularly revalued to show changes in the value of the asset over time.
Property companies use the latter approach, revaluing their properties every year to show shareholders how the assets are performing. But most corporate occupiers, whose main business is not property, use historic cost.
In the UK, corporate occupiers use 'existing use value' as the basis for revaluations. This is based on what a property would cost to replace. This is not necessarily the same as its market value. For example, a manufacturer may occupy a factory that could be replaced by a smaller and more efficient building on a cheaper site. Therefore the existing use value of the current building is less than its market value for development.
Under IAS, property valuations by 'existing use value' will no longer be permitted because they are deemed to be difficult to verify and cannot be realised in a sale of assets. Quoted companies will have only two choices: to list property by its historic cost, or by 'fair value' valuations, which translates as market value.
Owner-occupiers that have reported existing use values and kept those assessments up to date will be inclined to switch to market valuations. This will result in a change of practice for the valuers but not an increase in the amount of work available.
A second important change arising from IAS is that companies opting to use market valuations must keep them up to date and must apply them across the entire portfolio. This is clearly not a problem for property companies, which already do this.
But under the UK system, corporate occupiers have long been allowed to report market valuations of different parts of their portfolio at different times and to present those various figures in the same annual report.
Should they choose to report property assets by market valuation under IAS, they will have to use external valuers to update those valuations at least every five years. The valuation must also apply to all of their property at the same time.
The latest IAS rules will mean listed companies won’t have to revalue their property
Naturally, many listed occupiers will be reluctant to undertake all this. It seems likely that most will simply list property at historic cost and make annual deductions for depreciation.
Until last month, it was unclear how companies with a mix of valuations would transfer to the historic cost system.
For one thing, the occupier may no longer have an auditable record of the original cost of the building and its subsequent depreciation, with the cost of alterations and subsequent improvements factored in. This may have led some occupiers to believe that a complete revaluation would be necessary. But the IAS has provided a get-out clause.
In its latest rules, titled First Time Adoption of International Reporting Standards and published on 19 June, the IAS board says corporate occupiers will be allowed to use their existing property valuations as a starting point for historic cost.
'It means corporate occupiers don't have to revalue,' confirms Stanley Booton, valuation partner at surveyor Gerald Eve and a member of the RICS Valuation for Financial Statements group. 'I suppose it shows that the more things change, the more things stay the same.'
The news will disappoint valuers but will come as a relief to some occupiers, although Booton personally questions whether the shareholders would not be better served by more up-to-date information on property values.
In June, high street retail group Debenhams commissioned Colliers CRE to value up to 50 properties in its portfolio, to establish whether a £1.5bn takeover bid from venture capitalist Permira had undervalued the company. The portfolio had not been revalued since 1995. In the last nine months supermarket groups Safeway and Somerfield have also sought updated valuations of their property portfolios in response to takeover bids.
The latest valuations may not necessarily be incorporated into those companies' annual accounts. But Debenhams, Safeway and Somerfield will have to decide whether to go on revaluing their portfolios in their entirety on a regular basis, or to move to historic cost accounting with regular depreciation. If they take the latter option, they will have to settle on a value to use as their starting point.
One major area of confusion that remains about the IAS is the treatment of long leaseholds. As the rules currently stand, leasehold properties may not be treated as assets, regardless of how long the leases are, so no capital value can be reported for them.
This is serious news for property companies that own a lot of long leases. The implication is that quoted property companies would have to remove large chunks of capital value from their balance sheets when transferring to IAS.
The RICS is currently debating several possible solutions with the IAS Board. These range from a simple change in the rules to allow long leasehold property to be held as an asset, to more complex ideas whereby land and buildings are treated as separate items.