The Occurrence of Earnings Management in Swedish Real Estate Companies – a quantitative study

Abstract: Background and aim: All of the publicly listed companies in the EU have since January 2005 been required to implement the new international accounting standard IAS/IFRS in their financial statements. One of the new regulations that were included in the standard was the IAS 40 – Investment Property, which regulates the valuation and reporting of a company’s investment properties. IAS 40 introduced two different approaches to valuate investment properties; the cost method and the fair value method. The latter one created debate and controversy because of concerns regarding its applicability on assets not traded on an efficient market. The foundation of the fair value method is to value an asset to its fair value, which is the amount that can be expected to be received if the asset would have been sold the time of the valuation. If an asset is regularly traded on an efficient market the information of the value can be retrieved directly from recent market transactions. However, if the asset is not traded on an efficient market the management needs to make own assumptions when assessing the value, which is thus subject to bias. This creates opportunities for the management to manipulate the earnings. The purpose of this study is to determine whether Swedish real estate companies use the fair value method as a tool to manipulate earnings by implementing earnings management techniques. Methodology: Two hypotheses were developed to answer the research question. They were tested by conducting a statistical analysis. Hypothesis 1 was tested by performing a linear regression analysis and the second hypothesis was tested by a chi-square-test. Result and conclusion: The results from statistical analysis were ambiguous. Although a specific earnings management technique could not be proven to be used it was not possible to eliminate the possibility of real estate companies performing some kind of earnings management technique to manipulate the earnings.