Fair Value Accounting In The European Real Estate Industry

Since January 1, 2005 all European companies are required to apply International Financial Reporting Standards (IFRS) in their consolidated accounts. One major decision of real estate companies adopting IFRS is whether to apply the cost model or the revaluation model for measuring their investment property. For a sample of European real estate companies, we investigate (1) the determinants of applying the cost model versus the fair value model and (2) the impact of applying these models on the stock market value and performance. The preliminary results of the first analysis indicate that in particular company characteristics like ownership structure, market-to-book ratio, size, profitability and the relative value of investment property influence the propensity to apply the fair value model. In the second analysis we use a value relevance approach to examine whether the decision to apply one of these models for measuring the value of investment property i nfluences the market valuation of companies and what factors have an impact on this influences. Our study contributes to the literature by exploring the revaluation of fixed assets by real estate companies across different countries applying the same accounting regime. Moreover, we provide evidence on the interaction between the determinants and consequences of applying fair value accounting.