AN INTERNATIONAL accounting standard on the treatment of investment properties that Singapore may adopt is giving property developers some sleepless nights.
Their fear is that the rule may inject too much volatility into their companies' bottom line and affect their ability to pay dividends, the Singapore Business Times reported yesterday.
This stems from the fact that International Accounting Standard 40, or IAS 40, requires firms to reflect – in their profit and loss account – all market fluctuations in property values. This, significantly, means they would not be able – as under existing rules – to use the revaluation reserve in their balance sheets to cushion a revaluation deficit.
The Council for Corporate Disclosure and Governance (CCDG), which sets accounting standards in Singapore, is still considering whether to adopt IAS 40.
Under the current system, any surplus or deficit resulting from the revaluation of a property portfolio goes to increase or decrease the revaluation reserve in the balance sheet - which means it won't show up in the P&L account.
It is only when the reserve in the books is insufficient to cover a valuation deficit that the shortfall is charged to the P&L account and shows up in the bottom line. A surplus from revaluation, on the other hand, flows through to the P&L only upon the sale of the property in question.
Take United Industrial Corp (UIC). For fiscal 2002, the fall in the value of the company's investment properties resulted in a revaluation deficit of S$207mil that had to be charged to its P&L account because its asset revaluation reserve was already fully depleted at end-2001. As a result, it had to report an overall loss of S$134mil. Excluding this revaluation deficit, it would have made a profit of S$73mil.
Proponents of IAS 40 dismissed concerns about volatile income statements and companies' ability to pay dividends. They say the IAS 40 approach would result in a more accurate reflection of a company's health without an investor having to pore through the balance sheet to unearth the actual state of affairs.
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