ARE LISTED PROPERTY COMPANIES IN SWEDEN READY FOR …

1 Department of Infrastructure Division of Building and Real Estate Economics Royal Institute of Technology, Stockholm, SWEDEN Master of Science Thesis no. 178 ARE LISTED PROPERTY COMPANIES IN SWEDEN READY FOR FAIR VALUE ACCOUNTING? By: Henry Muyingo Supervisors: Hans Lind Christina Gustafsson Stockholm 2003 Are LISTED PROPERTY COMPANIES in SWEDEN READY for fair value accounting? Acknowledgements This thesis was written in partial fulfilment of the requirements for the award of the MSc degree in Real Estate and Construction Management at the Royal Institute of Technology in Stockholm. I would like to thank my supervisors Hans Lind and Christina Gustafsson who have been of tremendous help during the course of this work as well as Professor Stellan Lundstr m and all the staff in the Section of Real Estate and Construction Management. I gratefully acknowledge the assistance received from the board of directors of Sveriges Fastighets gares n ringslivsfond, that granted me a scholarship to carry out the study, as well as Ernst & Young Real Estate Group Stockholm for sponsoring this study.

2 As this study was to a great extent based on interviews I am indebted to all of you in SWEDEN , the UK and in the Netherlands that agreed to help me in my work by sharing your experiences and knowledge of the subject matter. A special thanks goes to my daughters Marion and Matilda for their patience, as well as to Helena Fenn , Sylvia Namagga, Mathius Sendawula, Julia Finkielsztajn, and Joris Bongenaar. Without you, things would have been tougher than they were. Stockholm 2003-01-24 Henry Muyingo 2 Are LISTED PROPERTY COMPANIES in SWEDEN READY for fair value accounting? Abstract Title: ARE LISTED SWEDISH PROPERTY COMPANIES IN SWEDEN READY FOR FAIR VALUE ACCOUNTING? Author: Henry Muyingo Department: Building and Real Estate Economics The Royal Institute of Technology, Stockholm Master thesis number: 178 Supervisors: Hans Lind Assoc.

3 Professor, Royal Institute of Technology Christina Gustafsson, Managing Director, Swedish PROPERTY Index Keywords: Accounting standards, ias 40 , Swedish Real Estate COMPANIES , Fair value model, PROPERTY Valuation. The aim of this Masters thesis has been to find out if, and how, LISTED Swedish PROPERTY COMPANIES have prepared themselves for the regulation passed by the European Parliament that requires all EU COMPANIES LISTED in a regulated market as well as COMPANIES preparing admission to trading, at the latest from 2005 onwards, to prepare their consolidated financial statements in accordance with a single set of accounting standards, International Accounting Standards (IAS). The thesis work has been concentrated on the analysis of the fair value model in ias 40 , investment PROPERTY and how COMPANIES will measure the fair value of their PROPERTY .

4 The data and results for this study were collected through interviewing various actors in the real estate market in SWEDEN , the UK and the Netherlands on the use of fair value accounting for investment properties. Results from the study show that: 57% of the LISTED Swedish PROPERTY COMPANIES have started preparations to apply IAS by the year 2005 but it is not likely that any of the COMPANIES will change before 2005. Currently there is significant divergence between some of the IAS and the RRs, which is causing some problems in the conversion process. However there is a general misconception that Swedish laws will need to be revised before the EU regulation can come into effect. Changes in accounting principles will not affect the underlying cash flows and financial analysts will probably not take much notice of the new IAS profits . Unlike in the UK and the Netherlands, use of the fair value model will not affect the dividend payouts or remuneration policies in SWEDEN .

5 But it will affect the accounting for long leasehold PROPERTY investments in all of the three countries. The fair value model was considered to have a lot of advantages over the cost model. LISTED Swedish PROPERTY COMPANIES , unlike the English and Dutch COMPANIES , are not READY to adopt the use of the fair value model mainly due to the uncertainty surrounding the measurement of the fair values. Measurement of the fair values will be based mainly on the discounted cash flow method. In contrast to the COMPANIES studied in the UK and the Netherlands, Swedish PROPERTY managers were distrustful of the exclusive use of external valuers. 3 Are LISTED PROPERTY COMPANIES in SWEDEN READY for fair value accounting? Sammanfattning Titel: r b rsnoterade Svenska fastighetsbolagen redo att redovisa enligt verkligt v rde? F rfattare: Henry Muyingo Institution: Bygg- och fastighetsekonomi Kungliga Tekniska H gskolan, Stockholm Examensarbete nr: 178 Handledare: Hans Lind, KTH Christina Gustafsson, VD Svenskfastighetsindex S kord: Redovisningsnormer, ias 40 , Fastighetsbolag, Verkligt v rde, Fastighetsv rdering, Enligt ett beslut i EU-parlamentet ska bolag vars aktier eller skuldebrev r noterade p en b rs, uppr tta sin externa redovisning enligt International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS)1 senast r 2005.

6 Syftet med detta examensarbete har varit att unders ka om och hur svenska b rsnoterade fastighetsbolagen har f rebrett sig f r kravet om IAS som i praktiken kommer att medf r redovisning enligt verkligt v rde. Arbetet har koncentrerats till att analysera verkligt v rde modellen i ias 40 och hur fastighetsbolagen kommer att verkligt v rdera sina fastigheter. F r att f r en uppfattning av hur redovisning av fastigheter enligt verkligt v rde fungerar i praktiken gjordes ett antal intervjuer hos noterade fastighetsbolag och andra akt rer p fastighetsmarknaden i Storbritannien och Nederl nderna innan intervjuerna i Sverige. Unders kningen visar att: 57 % av de b rsnoterade fastighetsbolagen i Sverige har kommit i g ng med f rberedelserna att redovisa enligt IAS/IFRS senaste r 2005 men det r osannolikt att noterade fastighetsbolagen verg r till IAS/IFRS tidigare n r 2005.

7 Det finns ett antal v sentliga skillnader mellan n gra IAS och RR vilket komplicerar konverteringsarbetet. Emellertid finns det en missuppfattning att det beh vs n gra lag ndringar innan beslutet om IAS/IFRS kan vara till mplig i Sverige. ndringar i redovisningsnormer kommer inte att p verka f retagets kassafl de och finansanalytikerna troligen kommer inte att bry sig s mycket om de nya IAS vinsterna . I motsats till policyn i de engelska och nederl ndska fastighetsbolagen kommer till mpning av den verkligt v rde modellen inte att p verka utdelningspolicy eller ers ttningar i de studerade svenska fastighetsbolagen. Men det kommer att ha en stor betydelse i fr gan om leasingavtal. Den verkligt v rde modellen i ias 40 ans gs att ha m nga f rdelar ver den kostnadsmodellen. 1 IAS har bytt namn till International Financial Reporting Standards (IFRS) 4 Are LISTED PROPERTY COMPANIES in SWEDEN READY for fair value accounting?

8 De unders kta svenska b rsnoterade fastighetsbolagen, i motsats till de i UK och Nederl nderna, r inte redo att v lja verkligt v rde modellen i ias 40 mest p grund av os kerheten kring v rderingsprocessen och metoderna. Unders kningen visar ocks p att bed mning av det verkliga v rdet kommer, f r det mesta, att baseras p kassafl desmetoden. I motsats till fastighetsbolagschefer i Storbritannien och Nederl nderna r de svenska fastighetsbolagscheferna mycket negativa till att ha enbart externa v rderare. Den gemensamma till mpningen av IAS/IFRS i Europa kommer att underl tta j mf relsen av noterade bolags finansiella rapporter och leda till mer fokus p bolagsledning och dess effektivitet. Men n s l nge till mpas inte gemensamma v rderingsnormer i alla l nder, eller ens i samma land, och d rf r rekommenderas fortsatt f rsiktighet g llande rapporterna.

9 5 Are LISTED PROPERTY COMPANIES in SWEDEN READY for fair value accounting? TABLE OF CONTENTS PART I. Literature Objectives of the Limitations of the METHODOLOGY OF THE Study s Conceptual Research Research Data Analysis of the methodology PART II. 16 ACCOUNTING Concepts of accounting 16 Principles of accounting 17 Financial Financial Fair value accounting in Harmonization of accounting Advantages of harmonization .. 20 Disadvantages of Interested Harmonization of accounting standards in the ACCOUNTING FOR investment PROPERTY :IAS Transfers to / from investment Frequency and basis of The fair value The cost Consequences of the fair value Effect of the uncertainty in the measurement of the fair VALUE THEORY AND THE PRINCIPLES OF Value Principles of PROPERTY valuation: approaches and The market (sales) comparison The income PART III.

10 RESULTS AND FAIR VALUE ACCOUNTING IN Principles and practise of financial reporting in the Effects of applying ias 40 in the Principles and practise of financial reporting in the Effects of applying ias 40 in the 6 Are LISTED PROPERTY COMPANIES in SWEDEN READY for fair value accounting? European Public Real Estate Association (EPRA)..33 IMPLEMENTATION OF IAS/IFRS BY SWEDISH PROPERTY Principles and practise of financial reporting in the Differences between IAS and Effect of the harmonized accounting standards on the PROPERTY Interview Preparedness for IAS/IFRS by LISTED Swedish PROPERTY Effects of fair value 41 Measurement of the fair value of investment Preparedness for IAS/IFRS by LISTED Swedish PROPERTY Use of fair value Measurement of the fair 48 Closing Suggestions for further Appendix 1: LISTED PROPERTY Appendix 2: Interview Appendix 3: IAS/IFRS and their corresponding Appendix 4: Decision tree for investment Appendix 5: PROPERTY COMPANIES and Financial analysts contacted.