A fair disclosure of fair value? How IFRS 13 affects fair value disclosure quality for investment properties in Europe

Abstract: IFRS 13 had its mandatory implementation in January 1st, 2013. The new accounting standard, which represents one step closer to the harmonization between U.S. GAAP and IFRS, aims to eliminate inconsistencies in fair value measurement and its related disclosures through the introduction of new reporting requirements, specifically for assets and liabilities with no active markets. Although these demands also encompass information concerning financial instruments, our focus laid on the disclosure changes related to the fair value of investment properties, previously regulated solely by IAS 40. As investment properties comprise the majority of assets in the real estate industry, this sector was further examined and a selection of 77 real estate companies in Europe, made to compose our sample. Through a comparative analysis of the sample companies’ annual reports for the periods immediately before and after the implementation of IFRS 13, the purpose of our descripto-explanatory study was to investigate if IFRS 13 affects the disclosure quality for investment properties in real estate companies in Europe. In order to answer this question, we first scrutinized the level of compliance with the new disclosure requirements brought up by the standard and then, intermediated by an adaptation of the model developed by Beretta & Bozzolan (2008), measured the disclosure quality for both periods considered. Lastly, besides comparing the scores for the different reporting years, the sample was further divided according to the legal origin of the countries the companies were registered in, as a way to examine the possible impact legal systems can have on disclosure quality. After data collection and analysis, our findings reveal that IFRS 13 does affect the disclosure quality for investment properties in real estate companies in Europe. The overall compliance is very high while disclosure quality increased since the implementation of IFRS 13. However, significant differences regarding disclosure quality for legal origin countries exist, with Scandinavian origin real estate companies tending to outperform the others. As a way to further broaden the research related to the more extensive disclosure requirements under IFRS 13, we suggest additional studies to be undertaken where the point of view of the real estate companies’ could be explored. Moreover, it would be interesting to investigate whether the increased amount of disclosures, both in relation to quantity and quality, is relevant from an analyst’s standpoint.