Accounting for property investment: an examination of the value relevance of unrealised gains and losses recognised under IAS 40

The main objective of this study is to examine the relevance of fair value accounting for investment property permitted under IAS 40. This will be achieved by examining the value relevance of unrealised gains and losses reported in the income statement in explaining stock prices for real estate companies listed in Kuwait stock exchange. The study examines further the impact of unrealised gains and losses on the incremental explanatory power of earnings and compares the explanatory power of book value of equity to that of earnings. The results indicate that unrealised gains and losses recognised under IAS 40 have no incremental information content over net income before unrealised gains and losses and that the inclusion of unrealised gains and losses in income numbers decreases the explanatory power of the valuation model and decreases the incremental explanatory power of earnings relative to that of book value. The results indicate further that the incremental explanatory power of earnings exceeds the incremental explanatory power of the book value of equity when unrealised gains and losses are excluded from the earnings measure. These results question the fair value method permitted under IAS 40.