Do you value your property?

How does your business value its property assets in its balance sheet? Accounting guidelines allow a company to account for its freehold real estate assets at either fair value or at cost.

Depending on which method you use, there could be a significant discrepancy between what is stated in your accounts and the true achievable value.

Most companies will account properties at cost, either at which they bought or built them, and then depreciate them down to a residual land value over, say, 30 or 50 years. That may work for other corporate assets, but is it right for real estate which has an established market and is used as collateral for financing? As such, property can be valued reflecting what ‘the market’ would pay for it. Would it be better to assess to ‘fair value’ rather than cost? If so, how regularly, bearing in mind the costs associated with such valuations?

Real estate funds and investment vehicles do account at ‘fair value’ at least annually, following accounting and RICS guidelines. That means to market value, which estimates what the property would fetch on the open market.

The point to be understood is that cost does not equal value, especially in the volatile property market. If you wish to borrow funds, the lender will, amongst other factors, consider your audited accounts and the reported property values. It will take it for granted that those values are accurate, but are they if the real estate is not being considered in line with the market?

Some businesses are now trying to provide better transparency to their shareholders, lenders and others, by holding their real estate on their balance sheet at cost, but also including the fair value of their assets in their financial statements. It can certainly be argued that cost accounting for real estate is not ‘best practice’ and hides the true value of a company’s balance sheet, misleads investors and over or under values the company. Greater transparency would assist everyone.

If you would like to discuss this matter further, please contact me on 01245 453826 or alternatively you can email me at [email protected]