A Comparison of the IAS and the Accounting Standards
in Europe and US for the Real Estate Industry
João C. Neves ( Ph.D.)
Professor of Finance & Cont r ol: I SEG School of Econom ics and Managem ent , Port ugal. Visit ing Professor of Account ing & Cont rol: HEC School of Managem ent , France.
Abstract
I n June 2000 t he European Com m ission issued an updat ed st r at egy on account ing har m onisat ion, w hich w as appr oved in June 2002 by t he Eur opean Par liam ent . The r egulat ion 1606/ 2002 st at es t hat by 2005 all list ed com panies in t he European Union, including bank s and insurance com panies should conform t o t he int ernat ional account ing st andards ( I AS) . As a consequence it is im port ant t o analyse nat ional st andards in Europe and ensure t he conv er gence t o int er nat ional st andards in t he best possible m anner for each count r y and indust ry.
There is lit t le aut hor it at iv e lit erat ure regar ding t he pr inciples of account ing for t he real est at e indust ry in Eur ope. Real est at e indust ry is a sect or t hat r aises special account ing issues, such as: t he cost ing of invent or ies, t he t im ing for classifying an inv ent ory as finished goods, t he t im ing for t he recognit ion of cost of sales, t he value and t im ing for recognit ion of revenues and t he account ing of cust om er’s guarant ees.
The Financial Account ing St andard Board ( FASB) and t he Am erican I nst it ut e of Cert ified Public Account ant s ( AI CPA) publishes specific guidelines and pr onouncem ent s dedicat ed t o r eal est at e issues. However t her e is not hing sim ilar in Eur opean Union count ries, or in t he I AS ( w hich apply t o all indust r ies) . As a consequence, t his paper t akes t he point of view of an invest or or a propert y developer , surveys t he I AS t hat r elat e t o real est at e developm ent m aj or account ing issues, and sim ult aneously com par es each of t he issues wit h t he present account ing st andards in t he USA, in t hree m aj or player s in Europe ( France, UK and Ger m any ) and Por t ugal, a sm all count ry t hat is rarely st udied. This w ork aim s t o find out how sat isfact ory t he I AS are for st andardising t he account s of real est at e developer s and how far t he var ious count ries analysed are from t he required new st andards. Therefore, it is appar ent t hat t his research is useful for propert y dev elopers, account ant s, and account ing regulat or s.
We conclude t hat t he im plem ent at ion of t he I AS allow for significant discret ion in t he Real Est at e indust r y and consequent ly , in spit e of som e convergence across nat ions, it is unlik ely t o find unifor m it y of account ing across com panies of t his sect or t hat engage in sim ilar act iv it ies.
Key w ords: I AS - I nt ernat ional Account ing St andards, Propert y Dev elopm ent , Real Est at e Account ing Acknowledgments : I wish to acknowledge the helpful comments of Hervé Stolowy from HEC and the financial support granted by the Fundação para a Ciência e Tecnologia (FCT) and the Programa POCTI. * For cor r espondence w it h t he aut hor : Rua Miguel Lupi, 20. 1200- 078 Lisboa, Por t ugal.
1. Introduction
The adopt ion of I nt ernat ional Financial Report ing St andards ( I FRS) in t he European
Union is an opport unit y for st andardising account ing and financial report ing per
count ry and indust ry. I t is wort h not ing t hat real est at e indust ry has specific
charact erist ics t hat raises special account ing issues. The product ion process is very
long and t he classificat ion of real est at e as an asset m ay differ, depending on t he
purpose of t he invest or and t he developer for producing such propert y:
- I f propert y is t o be explored by t he developer, t hen it should be classified as propert y, plant and equipm ent ;
- I f propert y is developed for earning rent als or capit al appreciat ion, t hen it should be classified as propert y invest m ent ;
- I f it is built for sale, t hen it is an invent ory.
As a consequence, depending on t he account ing st andards used, and t heir
int erpret at ion, cost ing of real est at e m ay differ upon asset classificat ion.
A diversit y of pract ices can also be observed regarding t he capit alizat ion of cost s of
new propert ies but also im provem ent s, replacem ent s, addit ions and t erm s
synonym ous t o t hese such as redevelopm ent s, refurbishm ent s, renovat ions, and
rehabilit at ions. According t o Am erican I nst it ut e of Cert ified Public Account ant s
( AI CPA) w ebsit e t his is “ one of t he m ost prevalent account ing problem s in t he real
est at e indust ry at t his t im e” in t he US.
Anot her charact erist ic of propert y developm ent wit h account ing consequences for
t he recognit ion of sales and t he cost of sales, is t hat propert y can not be replicat ed,
wit h sales agreem ent s negot iat ed and cont ract s designed for specific needs of each
buyer and seller, w hich usually includes a guarant ee or, event ually is enforced by
count ry law.
Addit ionally it is now also com m on t o include, in such cont ract s, a package of free
services or under t he m arket price, for a cert ain period of t im e aft er t he sale dat e
or lease.
Taking int o account t he nat ure of t he indust ry, are of part icular int erest t he
- The st at em ent s of t he Financial Account ing St andard Board ( FASB)
1
and;
- The guidelines and pronouncem ent s published by t he Am erican I nst it ut e of Cert ified Public Account ant s ( AI CPA)2.
As I nt ernat ional Account ing St andards are designed t o serve all indust ries and not
specifically t he real est at e indust ry, t he st andards for t his indust ry are spread over
various I AS and it is also likely t hat som e of t hem m ay not consider t he part icular
charact erist ics of t his indust ry.
I n t his paper we discuss t wo specific account ing issues of t he Real Est at e indust ry –
t he account ing for real est at e cost s and asset values, and t he account ing for real
est at e revenues. We survey t he I AS relat ed t o t hese t wo issues and discuss t heir
adequacy in st andardising t he account s. At t he sam e t im e we analyse t he st andards
in US, in t hree m aj or count ries in Europe ( France, UK and Germ any) and Port ugal,
a sm all European count ry t hat is rarely st udied, t o underst and how far t hey ar e
from t he I AS requirem ent s.
The real est at e cost ing requires a cost capit alisat ion policy for invent ories ( real
est at e for sales) and fixed asset s ( eit her real est at e for explorat ion or for rent
purposes) including cost allocat ion policies, depreciat ion, and im pairm ent . This is
discussed in Sect ion 2. The real est at e revenues require specific crit er ia for
recognit ion of a sale and consequent revenue, and specific accrual account ing
policy, w hich is discussed in Sect ion 3. Sect ions 2 and 3 ends w it h a sum m ary
including a t able w it h t he differences found in t he various account ing st andards
analysed. Finally Sect ion 4 present s t he conclusions.
I t is evident t hat m any ot her real est at e account ing issues could be discussed such
as t he sale of opt ions, environm ent al account ing, incom e t axes, real est at e
vent ures, securit isat ion of t he propert y, et c., however t he decision of select ing
t hese t wo m aj or issues is because t hey are m ost com m on t o any real est at e
developer, and are sufficient t o evidence t he need for bet t er st andardisat ion across
Europe and also wit hin t he I AS.
1 FAS no. 66 Accounting for Sales of Real Estate and FAS no. 67 Accounting for Costs and Initial Rental
Operations of Real Estate Projects.
2
The Statements of Positions (SOP) 75-2 and 78-2 Accounting Practices of Real Estate Investments
2. Accounting for real estate costs and value
This sect ion deals wit h t he account ing policy of cost s incurred on land and real
est at e developm ent up- t o- t he- point of sale or up- t o- t he- point of norm al operat ions
for incom e producing propert ies. For a real est at e com pany, t his m easurem ent
relat es t o t he following t hree it em s:
- I nvent ories – if t he real est at e is for sale;
- Land, propert y, and equipm ent – if t he real est at e is held for use in t he operat ions of t he owner;
- I nvest m ent propert y – if t he real est at e is t o earn rent als, for capit al appreciat ion or bot h.
Inventories
According t o I AS 2 - I nvent ories, t he cost of invent ories should include:
- All cost s of purchase of goods and ot her asset s held for resale, raw m at erials, com ponent s, and supplies used in product ion. For a real est at e developer it
should include t he acquisit ion of land, cost of sit e preparat ion, land
im provem ent , developm ent , and const ruct ion. Also considered as part of t he
purchase price are any dut ies or non- refundable t axes, t ransport and
handling cost s in bringing invent ories t o t heir present locat ion and condit ion,
and ot her cost s at t ribut able t o t he acquisit ion of t he invent ories. Any t rade
discount and rebat es are deduct ed t o det erm ine t he acquisit ion cost ;
- The conversion cost s of finished goods and work- in- progress. These cost s include t he direct cost s such as direct labour, and a syst em at ic allocat ion of
variable and fixed product ion overheads based on t he norm al capacit y of t he
product ion facilit ies. No guidance is given by t he I AS for t he definit ion of
norm al or abnorm al product ion;
- Ot hers cost s incurred in bringing t he invent ories t o t heir present locat ion and condit ion. For a real est at e developer it m ay be appropriat e t o include t he
pre- acquisit ion cost s, professional fees of archit ect s and engineers, et c.
According t o I AS 23 - Borrowing cost s, int erest expenses m ay also be incorporat ed
int o t he cost of invent ories, during t he const ruct ion phase and unt il t he m om ent it
is com plet e, because real est at e proj ect s require a subst ant ial am ount of t im e t o
bring t o a saleable or operat ional condit ion. I t is t he aut hor’s opinion t hat t he sam e
capit alisat ion procedure m ay apply t o propert y t axes and insurances relat ed t o t he
While capit alisat ion of borrow ing cost s is opt ional in I AS and in t he UK, it is
m andat ory in t he US. I n t he US, propert y t axes and insurance cost s on real est at e
should be t reat ed sim ilarly t o borrowing cost s. According t o Port uguese Account ing
St andards ( Plano Oficial de Cont as) it is not perm it t ed t o capit alise int erest int o
invent ories. How ever, it is allow able t o capit alise t hem during t he const ruct ion
phase of Fixed Asset s. I n France ( Plan Com pt able Général) t he borrowing cost s can
be capit alised if t he product ion cycle is longer t han one year. I n Germ any int erest
expenses m ay be included in m anufact uring cost s during t he product ion period.
The I AS 2 excludes t he following it em s from t he cost of invent ories:
- Adm inist rat ive overheads t hat do not cont ribut e t o bringing invent ories t o t heir present locat ion and condit ion;
- Unallocat ed cost s of product ion;
- Wast ed m at erial, labour cost s and ot her product ion cost in excess of t he norm al;
- St orage cost s and int erest expenses aft er com plet ion;
- Cost of dist ribut ion t o cust om ers and selling expenses.
However, in US, som e of t he selling cost s of real est at e should be account ed for in
t he sam e m anner as t he const ruct ion cost s ( e.g. cost of m odel unit s, relat ed
furnishings, sales facilit ies, legal fees for preparing prospect us, sem i- perm anent
signs) . Moreover, cert ain prepaid expenses such as sales com m issions on specific
fut ure incom e should be charged t o operat ions in t he period w here revenue occurs.
I n t he US, only cost s incurred t o sell real est at e t hat do not m eet t he crit eria of
proj ect cost s or prepaid expenses should be charged t o t he period in which t hey are
incurred.
There are ot her issues in t he account ing for real est at e cost s discussed in t he US
t hat we were unable t o find eit her in t he account ing st andards of t he European
count ries analysed or in t he I AS, such as, am enit ies, donat ions capit alised cost s of
abandoned real est at e, change int ended use of real est at e, exist ence of incident al
operat ions and rent al operat ion of real est at e.
The m et hod of account ing am enit ies is cert ainly dependent upon t he plans of t he
m anagem ent . I f t he plans are for t ransferring t hem w it h sales unit s t he US
account ing st andards classify t he am enit y as a com m on cost and allocat e it t o each
unit sold. I f t he plan is t o sell t he am enit y separat ely, or ret ent ion by t he
developer, t he US st andard is t hat capit alised cost s of t he am enit y t hat exceed t he
est im at ed fair value should be allocat ed as com m on cost s t o each unit . The US
Donat ions of real est at e t o m unicipalit ies or ot her governm ent al agencies for uses
t hat w ill benefit t he proj ect is a frequent sit uat ion for a real est at e developer. For
t he US st andards, t his should be considered as a com m on cost of t he unit s.
Capit alised cost s of abandoned real est at e ar e writ t en- off as a current expense by
t he US real est at e account ing st andards.
Change in int ended use m ay happen in real est at e businesses aft er t he developer
has incurred significant developm ent and const ruct ion cost s. According t o US
st andards, t hese cost s should be charged t o t he period t o t he ext ent t hat
capit alised incurred cost s and t he cost s t o be incurred for t he new proj ect exceed
t he net realisable value of t he proj ect revised. How ever, if t here is no form al plan of
use, t he incurred cost should be charged t o t he period t o t he ext ent t hey exceed
t he est im at ed realisable value of t he propert y as it is, assum ing it w ould be sold in
t he m arket .
I ncident al operat ions occur when t he developer engages in revenue- producing
act ivit ies during t he holding or developm ent period. Exam ples of t hese sit uat ions
are rest aurant s, and ot her am enit ies t hat are m anaged by t he developer during a
t ransit ion period. According t o US real est at e account ing st andards, t he profit
generat ed from t hese incident al act ivit ies should be account ed as a reduct ion of
capit alised proj ect cost s.
Rent al operat ions raise a num ber of issues such as t he definit ion of act ivit y
init iat ion, and t he associat ed revenues and cost s. I n t he US all cost s incurred by
rent al oper at ions should be deferr ed and charged t o fut ure periods, independent ly
of being product ion, com m ercial or adm inist rat ive. Exam ples of such cost s include
com m issions, legal fees, cost of credit invest igat ion, cost s for preparing
docum ent at ion, cost s of unit m odels and relat ed furnishings, rent al facilit ies, sem
i-perm anent signs, grand openings and brochures.
Property, Plant and Equipment
I f t he real est at e is for explorat ion by t he real est at e developer, it should be
regist ered as “ Propert y, Plant , and Equipm ent ” ( PPE) . According t o I AS 16 –
Propert y, Plant and Equipm ent , t his it em is r ecognised init ially at cost using t he
sam e cost ing principles as invent ories. Subsequent ly t he it em of PPE should be
m easured at cost or fair value, less accum ulat ed depreciat ion and any w rit e- down
for im pairm ent . Upward revaluat ions are perm it t ed as long as are m ade at fair
value for all it em s in t he sam e class and kept in t he balance sheet not differing
high volat ilit y should be valued annually, for ot hers a regularit y of t hree or five
years m ay be sufficient . The variat ion in value result ed from t he revaluat ion should
be credit ed direct ly t o t he equit y under t he heading “ revaluat ion surplus” .
While I AS 16 uses t he t erm “ fair value” and st at es t hat it m ust be det erm ined on
t he basis of exist ing use, t he I nt ernat ional Valuat ion St andard no. 1 ( I VS 1) defines
t he t erm “ m arket value” rat her t han “ fair value” and, aft er it s revision in 1998, it
requires t hat t he m arket value of an asset t o be based on it s highest and best use.
I VS 2 also uses t he concept of depreciat ed replacem ent cost t o be used for t hose
propert ies t hat “ are rarely if ever sold on t he open m ar ket except as part of t he
sale of t he business in occupat ion” ( I VS 2) .
We m ay conclude t hat bot h com m it t ees ( account ant s and valuat ors) should work
t oget her m ore in order t o have com m on concept s. However t he valuat ors approach
is probably consist ent w it h I ASC int ent ion, as it is consist ent for t he plant and
equipm ent it em . The I AS 16 clearly suggest s t hat fair value of plant and equipm ent
is t he m ar ket value, and if t here is no ev idence of m arket value because of
specialised nat ure of t he plant and equipm ent , t hey are valued at depreciat ed
replacem ent cost . I AS 16 also put s em phasises on addit ional disclosures when PPE
are st at ed at revalued am ount s, such as t he basis of revaluat ion, t he dat e of
revaluat ion, whet her an ext ernal qualified valuer w as involved, et c.
The t radit ional account ing in t he US does not perm it recording appreciat ion of real
est at e eit her as PPE or invest m ent propert y. However, t he FASB encourages t he
disclosure of current values applying t he FASB St at em ent no. 89 - Financial
Report ing and Changing Prices. There is, however, lit t le guidance for real est at e
com panies on t he present at ion of current value inform at ion. Firm s m ay follow a
com prehensive approach where current values of all t heir asset s and liabilit ies ar e
displayed in conj unct ion w it h t he hist orical cost , or a piecem eal approach, which
involves t he present at ion of t he current values of cert ain asset s and liabilit ies in t he
not es t o t he financial st at em ent s.
Unlike ot her European count ries, French t ax law requires a capit al gain t ax if a gain
in value is recognised in t he account s, except for t he revaluat ion under governm ent
order t hat happens from t im e t o t im e during highly inflat ionary periods. Alt hough
t he revalued asset can be depreciat ed for t ax purposes it is obvious t hat only loss
m aking com panies m ight find revaluat ion at t ract ive.
I n Germ any, t angible fixed asset s m ust not exceed acquisit ion. As a consequence
Unt il t he im plem ent at ion t he FRS 15 in March 2000, t he UK did not have proper
account ing st andards for t angible fixed asset s, except for it s am ort isat ion ( t he
SSAP 12 Account ing for Depreciat ion) . However, Eccles and Holt ( 2000) report
t hat : “ 65 per cent of com panies included in t he survey dat abase of Com pany
Report ing in February 1997 carried revalued asset s in t heir account s” , but
valuat ions w ere not carried out regularly as half of t he com panies t hat had t heir
asset s revalued, “ do not have any valuat ions t hat w ere m ore recent t han five years
old” . Market value was already an accept ed pract ice, but wit h m uch discret ion for
creat ive account ing. FRS 15 has already brought t he UK PPE account ing closer t o
t he I AS 16.
Port ugal also published an account ing st andard in 1995 ( DC 16) t hat is in
accordance wit h I AS. However, for cult ural reasons m ost of t he com panies cont inue
t o use t he hist orical cost m et hods. Only firm s w it h w eak capit al st ruct ure t end t o
use t he current value approach, as it w ill reinforce t heir report ed equit y value.
The I AS 16 allow s com panies t o revalue som e of t he PPE classes and leave ot hers
at t heir hist orical cost . Each com pany m ay adopt different pract ices across different
classes, and as a consequence t he required consist ency across com panies is not
m et for financial analysis com parison.
Investment properties
The I AS 40 - I nvest m ent propert y defines invest m ent propert y as an invest m ent in
land, a building or part of a building held t o earn rent als or for capit al appreciat ion
or bot h ( I AS 40) .
The invest m ent propert y is init ially m easured at cost , which includes t he acquisit ion
price and any direct ly at t ribut able expendit ure such as legal fees, unrecoverable
t axes, and ot her t ransact ion cost s. I f t he invest m ent propert y is self- const ruct ed
t he cost is m easured according t o I AS 16. Subsequent ly t he invest m ent propert y
should be m easured at eit her cost less depreciat ion and any accum ulat ed
im pairm ent sim ilar ly t o I AS 16, or preferably at fair value w it h changes in value
recognised in t he incom e st at em ent .
This account ing st andard ( as t he one on PPE) is clearly a com prom ise bet ween t he
“ hist orical cost approach” and t he “ current value approach” . The problem is t hat
such a hybrid syst em favours t he perpet uat ion of exist ing pract ices in each count ry
and com pany, which does not at t ain t he desired aim of int ernat ional com parabilit y
Most account ing st andards of cont inent al European Union count ries ( Port ugal,
France and Germ any) are based on t he hist orical cost principle and invest m ent
propert ies are t reat ed as any ot her propert y in PPE for cost ing, depreciat ion and
revaluat ion, but som e have already changed t heir st andards t o conform wit h an
opt ion for current value.
What I AS 40 changes clear ly is t he pract ice of m ost count ries in t erm s of
account ing t reat m ent of revaluat ion because revaluat ion surplus is usually included
direct ly in t he equit y and not in t he incom e st at em ent as required by t he I AS 40.
Bot h I AS ( 16 and 40) recognise valuat ion and depreciat ion of PPE and invest m ent
propert y sim ilarly, which is also t he pract ice in t he US and t he European cont inent al
count ries analysed. I n cont rast wit h t his, t he UK recognises PPE and invest m ent
propert y different ly. The t rue and fair view is invoked in t he UK by SSAP 19 –
Account ing for invest m ent propert ies not only t o include t he invest m ent propert ies
in t he balance sheet , com pulsorily at t heir current m arket value, but also for not
am ort ising t hem . As in t he ot her European count ries analysed, any change in value
of t he invest m ent propert y in t he UK is also t aken t o t he equit y at t he heading
“ revaluat ion reserve” .
Account ing all gains or losses arising from m ovem ent s of m arket values w ill have a
subst ant ial im pact on t he volat ilit y of earnings report s by real est at e com panies and
com panies t hat hold a large port folio of invest m ent propert ies.
What w as said in PPE for t he US prevails also for invest m ent propert y. The only
addit ion is t hat all com panies are required t o disclose t he fair value of t heir financial
inst rum ent s, including com m ercial m ort gages ( FASB St at em ent no. 107 –
Disclosures about Fair Value of Financial I nst rum ent s) .
I t is wort h not ing t hat we do not address here t he propert y held under operat ing
leases, where t he lessor, based on t he I AS 17 – Account ing for leases, should
recognise it as a receivable and allocat e t he financial incom e over t he period.
Cost Allocation
For t he purpose of int ernal report ing and decision- m aking, m anagem ent uses
various cost ing m et hods. Any of t hese m et hods m ay be used for financial report ing,
but t o apply t he I AS 2 properly, t he real est at e developer should use t he absorpt ion
cost ing in order t o incorporat e an allocat ion of t he fixed product ion cost t o real
Absorpt ion cost ing is a t ypical m et hod adopt ed by financial account ant s t o m easure
invent ories. As a consequence it is a st andard m et hod used by t he four European
count ries analysed. As a general r ule, invent ories and PPE are init ially m easured at
acquisit ion or m anufact uring cost . I n Germ any, how ever, int erest expenses m ay be
included in m anufact uring cost if incurred for t he product ion of real est at e, during
t he product ion per iod. Moreover, t he full- cost is an opt ional syst em in Ger m any,
while t he st andard in t he ot her count ries is t he m anufact uring cost .
Cost flow for inventories
I AS 2 allows t he use of four m et hods for t he cost of goods ( real est at e) sold:
- Specific ident ificat ion, w hich are specific cost s at t ribut ed t o ident ified it em s of invent ories.
- FI FO – First in first out
- WAC – Weight ed average cost
- LI FO – Last in first out
While t he FI FO and t he WAC are t he recom m end m et hods by I AS, t he specific
ident ificat ion is w ell adapt ed for t he real est at e indust ry as it s invent ories are not
ordinarily int erchangeable, and m ost of t he goods and services are relat ed t o
specific proj ect s. As a consequence it is a com m only accept ed m et hod for real
est at e proj ect s.
I t is also observed t hat t he t hree t ypical cost flow m et hods for invent ories – FI FO,
LI FO and weight ed average cost – t end t o be used in t he various count ries
analysed. However, while LI FO is not allowed in France and UK ( Law rence, 1996) , it
is t he preferred m et hod used in US, as a basis for t ax purposes.
Amortisation
Under I AS 16 t he depreciat ion is based on cost or fair value, depending t he opt ion
used by t he com pany. I t is calculat ed in a sim ilar w ay for bot h m et hods, requiring
an est im at ion of t he depreciable asset ’s useful life and a select ion of a depreciat ion
m et hod.
According t o I AS 16 useful life is eit her t he period of t im e over w hich it is expect ed
an asset w ill be used by t he ow ner, or t he num ber of product ion or sim ilar unit s
t hat are expect ed t o be obt ained from t he asset by t he owner. On t he ot her hand
consum m at ed by t he firm and t he allowed m et hods are: t he st raight - line m et hod,
dim inishing balance m et hod, t he sum - of- t he- digit unit s or any ot her m et hod t hat is
found t o be adequat e from an econom ic point of view.
I n cont inent al Europe ( Port ugal, France and Germ any) est im at ed useful life is
com m only t aken from legal or t ax t ables available for various indust ries and asset
it em s and t he m ost com m on m et hod used is t he st raight - line. I n Port ugal t his is t he
only m et hod direct ly accept ed by t ax aut horit ies, and any ot her m et hod requires
special per m ission t o be applied for t ax purposes.
Provisions
According t o I AS 37 – Provisions, Cont ingent Liabilit ies and Cont ingent Asset s, a
provision should be recognised w hen:
- The firm has a present legal or const ruct ive obligat ion, as a result of a past event ;
- I t is probable t hat an out flow m ay occur t o set t le t he obligat ion;
- The am ount of t he obligat ion can be reliably est im at ed.
This is a reflect ion of t he principle of prudence t hat is reflect ed in all European
count ries’ account ing st andards.
I n Germ any, France and Port ugal som e provisions m ay be accept ed as a cost for
t ax purposes and consequent ly are used whenever perm issible. I n Port ugal t he
m axim um accept ance of provisions is est ablished by law .
Impairment
Long- st anding pract ice in all t he count ries under analysis is t o include real est at e
held for sale or for developm ent and sale, in t he balance sheet , at t he low er of cost
or net realisable value. For operat ing asset s it is also com m on account ing pract ice
in all t he count ries analysed t hat asset s should not be carried in excess of it s
recoverable am ount . As a consequence t he im plem ent at ion of I AS 36 - I m pairm ent
of Asset s w ill not have any im pact for t hese count ries’ account ing pract ice.
Accrual basis
All I FRSs, except I AS 7 - Cash Flow St at em ent s, follow t he accrual basis, t hat is,
t he effect s of t ransact ions and ot her event s are recognised in t he financial account s
account ing is t he basis for all t hese count ries in t he st udy. As a consequence, when
sales of real est at e are recorded it m ay be necessary t o accrue som e est im at ed
cost s not yet incurred. No divergence exist s wit h I AS.
Summary of the accounting for real estate costs and value
I n general w e m ay conclude from t he I AS t hat real est at e developers should init ially
use t he sam e m et hod of cost ing independent ly if t he asset is an invent ory for sale,
a propert y for m anaging operat ions or an invest m ent propert y for earning rent s.
Subsequent ly, t he m easurem ent of t he asset m ay differ, because depreciat ion
m et hods and m arket value approaches are different for invent ories, for operat ing
propert ies or for invest m ent propert ies. Moreover im pair m ent is applied t o all t ypes
of asset s, but revaluat ion is not applied t o invent ories, as t hey should kept in t he
balance sheet at t he low er cost and net realisable value.
The I AS and t he account ing st andards of t he count ries analysed evidence som e
differences for cost ing t he real est at e eit her as invent ories or as propert y.
I t is apparent t hat for I AS, and m ost European account ing st andards, m odel- unit s
and respect ive furnit ure m ay classify as selling expenses, however from a
developer point of view it is clearly a cost associat ed w it h t he proj ect t o be
recovered wit h t he sale of propert y or wit h t he propert y rent als. As a consequence
t he US st andards follow a m ore business- point - of- view in capit alising t hem in t he
invent ory ( propert y for sale) or in t he fixed asset ( propert y for explorat ion or for
rent al purposes) .
Anot her issue t hat is unclear in t he I AS is t he t reat m ent of prepaid expenses such
as advert ising, sales brochures and com m issions advances, provided t hese cost s
are associat ed wit h t he real est at e proj ect and t heir recovery is expect ed from t he
sales t ransact ions, explorat ion or rent s t hat occur in t he fut ure. Using t he accrual
m et hod it is logical t hat t hese cost s should be deferred and charged t o operat ions
in t he period in which t he sales revenue are earned, as m ent ioned in US st andards.
Sim ilar ly, it is rat ional t hat cost s incurred t o rent real est at e should be deferred and
charged t o fut ure periods, when t heir recovery is reasonable expect ed from
operat ions. However t he I AS’s appear not t o accept t his, except if t hey are
product ion cost s or int erest expenses during t he const ruct ion phase. Exam ples of
such cost s include legal expenses, com m issions, credit invest igat ions, m odel unit s
and relat ed furnishing, et c.
The following t able sum m arises t he I AS for real est at e cost s, and t he pract ice in
Ta ble 1 – Su m m a r y of a ccou n t in g for r e a l e st a t e cost s
Description IAS USA UK France Germany Portugal
Costing real estate:
Product ion cost s Yes Yes Yes Yes Yes Yes
Borrowing cost s Opt ional Yes Opt ional Opt ional2 Opt ional No/ Opt ional3
Propert y t axes and insurance Yes Yes Yes Yes Yes Yes
Am enit ies and donat ions ? Yes Yes ? ? ?
I ncident al oper at ions, r educt ion of cost s ? Yes ? ? ? ?
Adm inist rat ive overhead cost s No Yes No No Opt ional No
Dist r ibut ion cost s No Yes1 No No No No
Selling cost s No Yes1 No No No No
Absorpt ion cost ing, based on norm al act iv it y Yes Yes1 Yes Yes Yes4 Yes Low er of cost and net realisable value Yes Yes Yes Yes Yes Yes
Cost flow s of in v e n t or y a cce pt e d:
Specific ident ificat ion Yes Yes Yes Yes Yes Yes
Average cost Yes Yes Yes Yes Yes Yes
FI FO Yes Yes Yes Yes Yes Yes
LI FO Yes Yes, Tax No No5 Yes Yes
Fix e d a sse t :
PPE at cost , I nit ially Yes Yes Yes Yes Yes Yes
Policy t o carry PPE at curr ent value Opt ional No, but Opt ional No No Opt ional
Am ort isat ion reflect s fiscal policy No No No Yes Yes Yes
Revaluat ions allowed Yes No Yes Yes, but No Yes
I nvest m ent pr opert y carr ied at curr ent value Opt ional No, but Yes No No Opt ional
I nvest m ent pr opert y is am or t ised Yes Yes No Yes Yes Yes
Capit al t ax gain on account ing revaluat ions No No No Yes No No
Ot h e r issu e s:
Provisions reflect fiscal policy No No No Yes No Yes
I m pairm ent Yes Yes Yes Yes Yes Yes
Accrual basis Yes Yes Yes Yes Yes Yes
1 Ot her t han pr oduct ion cost s, if relat ed t o t he real est at e proj ect 2 Opt ional, if t he product ion cycle is longer t han one y ear 3 No for invent or ies. Opt ional for fixed asset s.
4 Opt ionally, adm inist rat iv e and int er est expenses m ay be incorporat ed in real est at e. 5 Available only for group account s
I t is apparent t hat capit alisat ion and allocat ion cost s of real est at e v ary great ly in
t he four European count ries, especially t he borrowing cost s and allocat ion of
adm inist rat ive overhead cost s. The US pract ice is significant ly different from I AS
and Europe, as dist ribut ion cost s and selling cost s m ay also be incorporat ed in real
est at e. I t is also apparent t hat US st andards for account ing real est at e cost s are
m uch m ore det ailed t han t he I AS or t he nat ional st andards in Europe.
Account ing for invest m ent propert y in m ost count ries is also significant ly divergent
from t he I AS. I t is usually carried out at cost less depreciat ion in all count ries
( except t he UK) while t he preferred m et hod of t he I AS is t he m arket value. All
count ries accept , however, revaluat ion in order t hat t he balance sheet carries t he
real est at e ( as a fixed asset ) at m arket value. But t he only count ry t hat em phasises
t o I AS because of t he consequent t axat ion on t he surplus recognised in t he
account ing. Moreover, t he revaluat ion surplus is recognised in t he equit y by all
count ries w hile t he I AS recognises it in t he incom e st at em ent . I t is perhaps
appropriat e for an inst ant t o m ent ion t hat probably t he I AS, “ t he public in general
and t he financial w orld in part icular have far t oo m uch fait h is propert y valuat ions”
( Bret t , 2002) . I t is wort h not ing t hat in t he I AS, real est at e valuat ion t urns out t o
be a vit al concept for financial st at em ent analysis, w hich requires a proper reading
of t he foot not es and underst anding of t he lim it at ions of such valuat ions from t he
financial analyst s.
Significant divergence w as also found bet ween I AS crit eria for am ort isat ion and
invent ory provisions in t he t hree cont inent al Europe count ries analysed, wher e
fiscal policies st ill det er m ine t he pract ice.
3. Accounting for real estate sales
While in t he US, t he St at em ent of Financial Account ing St andard ( SFAS) no. 66 -
Account ing for Sales of Real Est at e - cat egorises sales of real est at e for account ing
purposes as eit her r et ail land sales ( sales of lot s) and all ot her sales, t here is no
I AS specifically dedicat ed t o real est at e sales.
I ndependent ly of t he exist ence of specific st andards for real est at e, it is necessary
t o t ake int o account t hat in assessing proper account ing t reat m ent for real est at e, it
is necessary t o define clearly t he following aspect s:
- The dat e of t he consum m at ion of t he sale, in order t o apply t he m at ching principle, recognising t he sale and t he cost sim ult aneously ( i.e. t he profit ) ;
- Det erm ine t he sales value and t he respect ive cost .
The lack of UK account ing st andards on revenue recognit ion led t o a num ber of
inconsist ent pract ices across real est at e developers as well as across ot her
indust ries ( Holt and Eccles, 2003) . As a consequence t he Account ing St andard
Board ( ASB) issued a discussion paper in July 2001, which failed, according t o Holt
and Eccles ( 2003) t o uncover any new insight s int o revenue recognit ion in t he
propert y and const ruct ion sect or.
Criteria for recording a sale
According t o I AS 18 – Revenue, t he revenue from rendering services is recognised
as services are r endered and t he revenue from t he sale of goods should be
- The seller has t ransferred t o t he buyer t he significant risks and rewards of ow nership;
- The seller no longer has m anagerial involvem ent in, or effect ive cont rol over t he goods;
- The am ount of revenue can be reliably m easured;
- I t is probable t hat t he econom ic benefit s w ill flow t o t he seller;
- The cost s incurred and t o be incurred in respect t o t he t ransact ion can be reliably m easured.
For m ost indust ries, it is com m on t hat :
- The fair value of t he considerat ion coincides wit h t he invoice, m aking t he recognit ion of t he revenue easy; and
- All t he crit eria m ent ioned above are m et at t he sam e t im e, so t here is lit t le doubt about t he t im ing for recognising t he revenue.
How ever, real est at e sales have special condit ions w here various m om ent s of t he
t ransact ion, such as t he signat ure of t he cont ract , t he advances of paym ent , t he
inst alm ent sales, t he t ransfer of t he right s t o use t he propert y and t he legal
t ransfer of t he propert y, m ake t he t ransact ions com plex and som et im es difficult t o
define t he consum m at ion dat e of t he sale.
The I AS 18 recom m ends for real est at e sales t hat t he revenue should be recognised
when t he asset is t ransferred t o t he buyer or when t he risks and rewards of
ownership are t ransferred. As t he law in each count ry det erm ines t he point in t im e
at w hich t he significant risks and rew ards of propert y ownership occurs, a sale
m ight be recognised earlier or lat er from one count ry t o anot her.
I n general t he t ransfer of risks and rewards occurs at one of t he following point s:
- Legal t it le of t he propert y is t ransferred t o t he buyer;
- The seller gives t he buyer t he possession of t he propert y before legal t it le is t ransm it t ed.
I f t he second case occurs it is necessary t o det erm ine if t he buyer capt ures
significant risks and rewards of t he propert y ow nership, w hich depends on t he
nat ional law. Hist orical pract ices and t he influence of fiscal policies also t end t o
m ake t he account ing pract ice in som e count ries m ore caut ious t han in ot hers.
I AS 18 also m ent ions t hat revenue is recognised only w hen it is pr obable t hat t he
seller will r eceive t he considerat ion. I t is com m on for t he real est at e developer t o
st ruct ure t he sale in order t hat t he t it le only passes t o t he buyer aft er all t he
see t hat t he sale occurs at t he t ransfer of t he t it le of t he propert y, which coincides
w it h t he receiving of t he rest of t he considerat ion.
However ot her real est at e t ransact ions and t he specificit y of each t ransact ion m ay
m ake it difficult som et im es t o define t he exact m om ent of t he sale consum m at ion,
such as t he following exam ples:
- The seller finances t he acquisit ion. As a consequence t he seller m ay st ruct ure t he sale as a cont ract for deed because of concern at being unable t o collect
t he full sales price;
- Som e sales agreem ent m ay also cont ain som e requirem ent s or condit ions t hat need t o be m et by t he seller, such as regulat ory approval of building
plans, required zoning changes, et c., which m ay in any case creat e som e
uncert aint y about t he cost s t o be incurred, and which m ay also post pone t he
t im ing of revenue;
- A land developer m ay sell a num ber of lot s t o a builder agreeing a receivable subordinat ed t o a const ruct ion loan. As a consequence t he builder can st art
const ruct ing w it hout paying off t he debt t o t he developer;
- Depending on t he com m ercial law of each count ry t he sale m ay be
consum m at ed before or aft er t he building is cert ified for occupancy. I f t he
t it le cannot legally be passed t o t he buyer he m ay not pay t he rest of t he
considerat ion and som e risk is st ill on t he part of t he seller .
Port ugal issued an account ing st andard in 1999, which is sim ilar t o t he I AS 18.
Even wit h t he im plem ent at ion of t he I AS in all European count ries, t he com plexit y
of real est at e sales m ay result in real est at e developers int erpret ing different ly t he
t im e of sale consum m at ion defined by t he account ing st andard. This is an issue
t hat can be em pirically t est ed aft er t he applicat ion of t he st andard, but t he m ost
conservat ive pract ice will t end t o recognise t he revenue only wit h t he legal t it le of
t he propert y aft er t he exchange of all considerat ion. How ever, from t he broad
definit ion of I AS 18 it is likely t hat w e w ill cont inue t o observe a variet y of pract ices
am ong real est at e developers in Europe.
While t he I AS 18 is ver y generic, t he US SFAS no. 66 – Account ing for Sales of Real
Est at e, is indust ry specific and m uch det ailed. Consum m at ing a sale requires
m eet ing t he follow ing four crit eria:
- The part ies are bound by t he t erm s of a cont ract ;
- Any perm anent financing for w hich t he seller is responsible has been arranged;
- Addit ionally t o t he t hree condit ions, t he building is cert ified for occupancy. The SFAS 66 defines t he full- accrual m et hod as t he basis for account ing real est at e
sales. I t also provides guidance on t he appropriat e account ing when t he four
crit eria are not m et ,t hereby inhibit ing use of t he full- accrual m et hod. I n t hat case,
it defines ot her m et hods of account ing, such as:
- The inst alm ent m et hod – when t he subst ance of a real est at e t ransact ion indicat es t hat a sale has occurred for account ing purposes t he collect ion of
t he sales price cannot be reasonably est im at ed. This m et hod apport ions each
principal collect ion bet ween cost recovered and profit recognising t he sam e
rat io as cost and profit are presum ed t o const it ut e sales value;
- Cost recovery m et hod – when t he subst ance of real est at e t ransact ion is subj ect t o fut ure subordinat ion, or t here is uncert aint y t hat all cost s will be
recovered or uncert aint y on t he proceeds, t hen no profit should be
recognised unt il all cost s are recouped;
- Reduced- profit m et hod – is used if t he buyer’s down paym ent is adequat e for full accrual profit recognit ion but cont inuing invest m ent crit er ia is not m et .
- Financing m et hod – is applied w hen t he real est at e t ransact ion is in subst ance a financing arrangem ent rat her t han a sale.
While I AS use a syst em of general principles, w hich m ay be crit icised for being t oo
generic, t he US real est at e account ing for sales has t oo m uch det ailed prescript ive
account ing rules, w hich is som et im es confused and cont radict ory.
Determining the sales value
According t o I AS 18 t he revenue should be m easured at fair value of t he
considerat ion received or receivable, w it h deduct ion of t rade discount s and volum e
rebat es and net of t axes t hat are collect ed and passed t o governm ent aut horit ies.
I n m ost cases t he considerat ion is cash or cash equivalent s, but in real est at e
t ransact ions ot her form s of paym ent s m ay occur and st ruct ure of paym ent s m ay
include several it em s. Besides t he price of t he propert y, t he developer m ay also
invoice, for exam ple, m anagem ent fees, guarant ees for t he accom plishm ent of t he
agreem ent , prepaid int erest , fees t hat are required t o be paid in advance and
com m it t o perform cert ain services wit hout any com pensat ion or wit h a m inim um
com pensat ion. The I AS predict s t he following cases:
- Exchange of propert y, where I AS 18 does not regard an exchange of goods or services of sim ilar nat ure as a revenue generat ing act ivit y. Revenue m ay
be recognised only on t ransact ions for dissim ilar goods and services;
- Deferred paym ent s, which are in subst ance a financing arrangem ent : I n such cases t he considerat ion is t he present value of all fut ure receipt s.
According t o I AS 18 t he nom inal am ount of t he considerat ion consist s of t wo
com ponent s – revenue from t he sale of t he real est at e and int erest revenue.
The discount rat e t o be used is t he prevailing int erest rat e for a sim ilar
inst rum ent of an issuer wit h a sim ilar credit rat ing.
- Com binat ion of sales of propert y w it h separat ely ident ified services. For exam ple t he sale of t he propert y includes t he m aint enance services for a
cert ain period ( e.g. 3 years) . I n such cases t he considerat ion m ust be split
bet ween t he t wo com ponent s where t he service m ust be m easure at t he
expect ed cost plus a reasonable profit on t hat service. The revenue from t he
sale of t he propert y is, as a consequence, t he difference for t he t ot al
considerat ion.
The I AS 18 is clear in det erm ining t he real est at e revenue. However, t he int erest
rat e for discount ing services rendered in fut ure could be defined m ore accurat ely.
Recognition of profit in real estate development under construction contracts
I f a sale of undeveloped or part ially developed land includes an agreem ent w it h t he
purchaser, requiring t he seller t o perform fut ure developm ent and const ruct ion, it is
t hen under t he I AS 11 - Const ruct ion Cont act s, w hich applies t o t he financial
st at em ent of t he cont ract or, who carries out t he cont ract on behalf of t he cust om er.
Bot h I AS 11 and I AS 18 require t he sam e approach for t he sale of goods ( real
est at e) based on t he percent age- of- com plet ion m et hod. The principal change,
which occurred t o I AS 11 aft er it s revision in Novem ber 1993, was t he elim inat ion
of t he com plet ed- cont ract m et hod.
The percent age- of- com plet ion m et hod requires t hat revenue, cost s, and profit s t o
be report ed are according t o t he proport ion of t he work com plet ed. The cost s of t he
cont ract are t he product ion cost s com prising:
- Direct cost s of t he specific cont ract , such as cost s of t he const ruct ion sit e, sit e labour cost s, sit e supervision cost s, m at erials, depreciat ion of plant and
and personnel t o and from t he sit e, cost of hiring plant and equipm ent used
by t he cont ract , cost s of design and t echnical assist ance use on t he cont ract ,
est im at ed cost s of rect ificat ion and guarant ee work and claim s from t hird
part ies;
- Cost s t hat are at t ribut able t o t he cont ract such as insurance, cost s of design and t echnical assist ance not direct ly relat ed t o t he cont ract , const ruct ion
overheads such as t he preparat ion and processing of personnel payroll
involved in t he cont ract , borrowing cost s if t he cont ract or adopt s t he opt ion
given by I AS 23 – Borrowing Cost s, as it is a real est at e it em .
The I AS 11 allows for t hree m et hods t o det erm ine t he st age of com plet ion or t he
percent age- of- com plet ion:
- The proport ion t hat cont ract cost s incurred for work perform ed bear t o t he est im at ed t ot al cont ract cost s ( incurred plus t o be incurred) ;
- Surveys of t he work perform ed; or
- Com plet ion of a physical proport ion of t he cont ract work.
I n our opinion, it w ould be preferable for t he I AS t o elim inat e alt ernat ive m et hods
of calculat ing t he percent age- of- com plet ion, as t he exist ence of alt ernat ives w ill
lead t o a variet y of pract ices across com panies, and reduces t he desirable qualit y of
t he account ing inform at ion, which is t he com parabilit y bet w een com panies.
The US account ing for long- t erm cont ract s ( Account ing Release Bullet in no. 45
Long- t erm const ruct ion- t ype cont ract s) allows for t he use of bot h m et hods - t he
com plet ed- cont ract and t he percent age- of- com plet ion. However t he SFAS no. 66 -
Account ing for Real Est at e Sales should be also t aken int o account and t he four
condit ions previously m ent ioned should be m et t o recognise a sale.
I n France and Port ugal bot h account ing m et hods are also accept ed. I n Port ugal, t he
I nst it ut e of Audit ors recom m ends t he applicat ion of t he percent age- of- com plet ion
m et hod. This m eans t hat all public firm s and lim it ed liabilit y firm s w it h t w o of t he
t hree indicat ors higher t han 1,5 m illion euros of asset s, 3,0 m illion euros of
revenues and/ or 50 em ployees should com ply w it h t his rule. As a consequence, a
large num ber of com panies in t his count ry alr eady com ply w it h t he I AS 11.
I ndependent ly of t he account ing m et hod used, incom e t ax in Port ugal is based on
t he inst alm ent m et hod. This m et hod apport ions each principal collect ion bet w een
cost s recovered and profit recognised in t he sam e rat io as cost and profit , which are
assum ed t o const it ut e t he sales value. This m et hod is also used in US when t he
account ing purposes but t he collect ed t ot al sales price cannot be reasonably
est im at ed ( Cam m arano and Klink, 1995, p. 115) .
I n t he UK, t he profit of work- in- progress under long- t erm cont ract s should reflect
t he proport ion of t he work carried out t o dat e, but if t he out com e cannot be
foreseen wit h reasonable cert aint y, t he firm should not recognise any profit ( SSAP
9 – St ocks and long t erm cont ract s and FRED 28 – I nvent ories: const ruct ion and
service cont ract s) . Moreover, if a loss is expect ed, t he whole loss should be
im m ediat ely recognised ( Lawrence, 1996, p. 180) . As discussed earlier, borrowing
cost s are opt ionally included in t he cost of t he work- in- progress under long- t erm
cont ract s. According t o Holt and Eccles ( 2003) in spit e of t he fact t hat revenue
recognit ion can be done in accordance wit h t he percent age- of- com plet ion, t he m ost
popular m et hod in UK is t he proport ion of cost s incurred t o t he t ot al cont ract value.
I n France t he Règlem ent no. 99- 08 of 24 Novem ber 1999 m odified t he st andards of
t he Plan Com pt able Général and bot h m et hods of account ing – com plet ed cont ract
and percent age- of- com plet ion cont ract - are accept ed, but it is usual t o em ploy t he
com plet ed- cont ract m et hod.
I n Germ any a general rule is t o recognise t he incom e when t he product or service is
alm ost com plet ely rendered, as it is a m et hod accept able for t ax purposes.
However, for long- t erm proj ect s, in order t o avoid high fluct uat ion on profit s, t he
percent age- of- com plet ion m et hod can be opt ionally used. I n spit e of t he absence of
specific nat ional rules, t he incom e recognit ion principles of I AS 11 are w idely
accept ed by Germ an firm s ( Laurence, 1996) .
Accounting for real estate sales summary
The definit ion of t he consum m at ion dat e of a sale in real est at e is not an easy
issue. The definit ion under I AS 18 m ay result in different pract ices for sim ilar real
est at e developers. As a consequence it m ay require a m ore det ailed st andard for
real est at e sales, ot herw ise financial st at em ent s w ill not be adequat ely com parable.
The sales value defined by I AS 18 is clear ly st andardised. However, when t here
exist fut ure services and revenues, t he ut ilisat ion of t he discount rat e could be
som ehow arbit rarily based on t he definit ion of t he int erest rat e.
The I AS 11 elim inat ed t he com plet ed- cont ract m et hod, which is t he m ost
com m only used in France and Germ any, however t his is a clear ly definit ion for a
bet t er st andardisat ion. Nonet heless, t he t hree opt ions for t he definit ion of
I n Port ugal t he firm s t hat are obliged t o have t heir account s audit ed already com ply
wit h t he I AS 11, but ot hers m ay use t he com plet ed cont ract m et hod. Sim ilarly t o
t he I AS, in t he UK t he percent age- of- com plet ion is t he only m et hod accept ed.
Ta ble 2 – Lon g t e r m a n d con st r u ct ion con t r a ct s a ccou n t in g m e t h ods
Description IAS USA UK France Germany Portugal
Con st r u ct ion or lon g t e r m con t r a ct s:
Com plet ed cont ract m et hod No Yes No Yes Yes Yes
Percent age- of- com plet ion m et hod Yes Yes Yes Yes, but .. Yes, but .. Yes
4. Conclusions
Financial st at em ent s are art ificial const ruct s of realit y at t em pt ing t o describe t he
financial sit uat ion and econom ics of com panies. I n t his cont ext , cost ing real est at e
as invent ories or fixed asset s ( for explorat ion or invest m ent ) and recognising
revenue and cost of sales are v it al concept s for t he real est at e indust ry, however,
t he adopt ion of one or anot her st andard w ill alw ays generat e cont roversy.
This paper observes t he differences bet ween account ing st andards am ong four
European Union count ries, t he USA and t he I AS, but also discusses and highlight s
som e propert y- relat ed issues w here doubt of best pract ices st ill exist s.
This st udy raises t he follow ing crit icism s at t he I AS, concerning real est at e
account ing:
- The t im ing for recognising revenue in t he I AS is som ehow problem at ic, because definit ions which are t oo generalised m ay lead t o different
int erpret at ions and real est at e developers m ay apply different t im ings for
sim ilar sit uat ions, im plying different levels of profit s, which is not t he
obj ect ive of an account ing st andardisat ion policy;
- I t is obvious t hat t he opt ion t o account t he current value on invest m ent propert y and PPE relies heavily on independent valuers who are appoint ed by
t he com pany it self, and real est at e valuat ions have t heir ow n lim it at ions as
predict ors of m arket value. Moreover, invest m ent propert y and PPE have t he
opt ion for using eit her hist orical cost or t heir revalued am ount s, for each
class of asset s. I t is apparent t hat cult ural differences in account ing across
t he world m ight have im peded t he I ASB on opt ing for one of t he approaches.
Hist orical cost is for som e m ore reliable and easier t o audit , while fair value is
m ore relevant for ot her users of account ing. Giving t he opport unit y of opt ing
for one or anot her m et hod across each class of asset s will result in various
pract ices across com panies in t he sam e indust ry, and consequent ly, t he
- I AS also leaves a num ber of opt ions for invent ory cost flow , which is also a source of het erogeneit y in t he account s;
- The opt ion for capit alising int erest on real est at e ( eit her as invent ory or as fixed asset ) is anot her weak point for account ing st andardisat ion, as financial
analyst s require com parable financial st at em ent s am ong firm s in t he sam e
indust ry for t heir analysis, ot herwise com parisons across firm s are
m isleading.
This st udy concludes t hat t he I AS allow for significant discret ion in t heir applicat ion
in t he real est at e indust ry. As a consequence it is unlikely t o find uniform it y of
account ing across nat ions and com panies in t his sect or t hat engage in sim ilar
act ivit ies.
The paper also concludes t hat account ing st andards in cont inent al Europe differ
m ore t han t he UK st andards from t he I AS. I n Germ any, France and Port ugal,
account ing is clearly influenced by Rom an law syst em w hile in t he US and UK,
com m on law prevails. Maj or differ ences are found in areas where t ax regulat ions
st ill play vit al role in t he cont inent al European count ries in est ablishing account ing
st andards and pract ice, such as depreciat ion and revaluat ion of asset s, account ing
for provisions, and recognit ion of revenues and t he consequent cost s and profit s. As
a consequence, it is apparent t hat t he im plem ent at ion of t he I AS will dem and a
conversion of nat ional pract ices, requiring in som e cases a change of apt it ude and
cult ure in t he account ing profession. I t is also clear t hat governm ent s of count ries
under t he so- called Rom an law syst em , w ill have a crucial role in disconnect ing t he
t axat ion and account ing syst em s.
I n spit e of t he cult ural divergences across count ries, and t he flexibilit y exhibit ed in
t he I AS, t heir im plem ent at ion will in som eway approxim at e t he account ing and
report ing of t he various count ries, m aking t he financial st at em ent s of real est at e
indust ries m ore com parable across count ries, which is one of t he assum pt ions for
im proving t he efficiency of global capit al m ark et s.
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