1MDB's annual land assessments set a precedent

PETALING JAYA: 1Malaysia Development Bhd’s (1MDB) yearly revaluation of its land meant for development is not an exercise that other property developers adopt because it can lead to complexities if there is a downturn in the sector, according to accountants and property consultants.

A property consultant said only companies such as real estate investment trusts (REITs) constantly revalue land, as the main intention of their business was to hold land and receive rental income.

“Not many property developers revalue their land held for development. The land is usually booked in as cost or book value,” said the property consultant.

An accountant said that under the new accounting standards, which is the Malaysian Financial Reporting Standards (MFRS), assets could be classified as investment property under MFRS 140, or property, plant and equipment that falls under MFRS 116.

Under MFRS 140, the company can opt to revalue the land or state it at cost.

He said 1MDB seemed to have provided conflicting statements about the treatment of its land.

According to documents sighted by StarBiz, the directors of 1MDB classified the Tun Razak Exchange (TRX) and Bandar Malaysia lands under MFRS 140 citing reason being the detailed blueprints of the projects have yet to be firmed up and approved.

However, the purpose of the land has already been determined because 1MDB has said it intended to be the master planner and developer for the TRX and 495-acre Bandar Malaysia project.

“On one hand it re-values the land because it is classified as an investment. But on the other hand, it has already determined the usage of the land which typically other property developers would not revalue.

“A yearly revaluation is not the norm because it is a costly exercise and most companies do not adopt the model because the profits can be more volatile,” said the accountant, who declined to be named.

The issue of property revaluation came to the fore because the government-owned 1MDB has, for the third year running, revalued its land that has been earmarked for development.

It posted revaluation gains of RM826mil, RM569mil and RM2.7bil for the respective financial years ending March 31, 2011, 2012 and 2013.

Prior to March 31, 2012, 1MDB only revalued the land based on its market price based on the Financial Reporting Standards (FRS).

However, since April 1, 2012, it adopted the MFRS and also included the cost of preparing the land for development as part of its revaluation exercise.

In its notes, 1MDB said the reason was because the cost incurred was integral to enhancing the value of the vacant land.

“The change results in an increase in value of investment property in 2012 by RM77.5mil,” 1MDB said.

A partner of an accounting firm said: “While technically it isn’t wrong for the company to classify it as investment property, it is more appropriate for it be called inventory as it is the intention of the company to develop the land as noted in their disclosure.”

The same applies for costs spent towards the development of the land.

“It is important to look at the nature of the business. In 1MDB’s case, the land they hold are to be developed, and not held for capital appreciation or rental income.

By classifying their land for development as investment property, it just seems that 1MDB is riding on the transition to MFRS,” the partner added.