Glossary IAS / IFRS:

MatthiasKirchner | Office on real estate appraisal | Portfolio evaluation & Due Diligence

- Definition of IFRS / IAS
- Renaming of IAS to IFRS
- Who has to account according to IFRS / IAS ?
- BASEL I and II, consequences on the real estate management

• Definition of IFRS / IAS
  
  In order to make the accounting internationally comparable, already in 1973 the International Accounting Standards Committee (IASC) was founded. This committee under private law, initiated by national accounting companies, was built up in London. Over a long period of time, the IASC was hardly noticed, since in 2000, the EU decided, to work together with the IASC in the field of accounting regulations. On 1 April 2001, the restructuring of the IASC and the change of name to IASB (International Accounting Standards Board) was implemented.

• When starting its activities, the IASB adopted the IAS standards, published by the predecessor IASC. New accounting standards, developed by the IASB, were the so- called „IFRS”, which will be numbered consecutively. The first new IFRS standard by the IASB was published in June 2003 and deals with „The first application of IFRS“.
  
  On 6 April 2004, the European Commission took over IFRS 1, which meant that all companies, quoted on the stock exchange, adapting their accounting according to IAS/IAFR, had to follow this standard when doing their annual statement of accounts. Although the IAS/IFRS is only valid for companies, quoted on the stock exchange, it is conceivable, that in the near future medium-sized companies and all companies, making up the balance, have to follow this standard (cit. Prof. Schulte, well-known real estate economist, founder of the European Business School in Östrich-Winkel, FAZ 13. August 2004 and most experts).
  
  The most considerable changes, which may occur when adapting to IAS/IFRS, may be clarified when observing the different aims of German business law and IAS/IFRS. The German business law is historically characterized by the „principle of prudence“. A main point is the maintenance of capital and the protection of the creditors. The focus of the IAS/IFRS lies on the information function of accounting ("information, relevant for decisions“) which means information especially for shareholders. In this case, the typical shareholder is not the managing director of a medium-sized company, but an anonymous participant (for example as shareholder or bondholder) of the organized capital markets, or, in the future, the creditors, primarily the banks. As far as Basel II and the tightening of credit conditions as well as the duty of ratings are concerned, the banks have a great interest in unitary standards, in order to judge the creditworthiness of their debtors.

• Therefore, an important requirement to the annual statement of accounts is the „fair presentation“, which should not be limited by aspects of prudence or protection against risks. Often, the use of IAS/IFRS leads to higher shareholders’ funds by avoiding hidden reserves and early profit-taking. In 2002, the German standardising council (DSR) effected a field study, which found out, that the capital increased by 34% when changing from HGB to IAS/IFRS.

• Renaming of IAS to IFRS
  
  The “Renaming” of IAS to IFRS caused confusion. The new full-time board decided to call its standards IFRS. To sum it up:
  
  • IAS are the still valid standards, published by the IASC
  • IFRS are the new standards, published by the IASB
  
• Who has to account according to IFRS / IAS ?
  
  Since 2005, companies, being orientated to the capital market (some exceptions may exist), are bound by the EU regulation 1606/2002 to account according to IFRS / IAS and to publish it. As far as companies, not being orientated to the capital market, are concerned, the EU member states optionally accept or prescribe IFRS statements.
  
• On 15 December 2003, the German Federal Ministry of Justice introduced a draft of the Accounting Law Reform Act (BilReG) – which should be put into national legislation. This enables companies, not acting as issuers on the capital market, to account according to IFRS. This could be interesting for those companies, preparing their initial public offering or their banks, needing the accounting according to IFRS for their ratings. In cases of individual financial statements, the draft offers the possibility to replace the traditional HGB statement by the individual IFRS statement.

• This enables the companies to provide their business partners with an informative, internationally „legible“ financial statement. The HGB statement remains valid for the assessment of the dividend distribution and all fiscal matters.
  For the real estate appraisal, the IAS standards will be of importance in the future as they will help to gain a clear and precise overview of the property asset in the balance sheet.
  

• Basel I and II - Consequences on the real estate management
  
  Basel I
  
  In 1988, the new equity regulation Basel 1 was introduced. A main reason for this regulation was the equity reduction of banks to an alarming low level. Therefore, the target of Basel 1 was the preservation of a reasonable equity in the international banking and the introduction of standardized competitive conditions. These aims were achieved and internationally recognized.

• Basel II – New equity regulations
  
  Basel II is in continuation of Basel I. It mainly comprises the aspect of the economic risk when granting loans and the consideration of new developments on the financial markets as well as the risk managment. Further on, it comprises the introduction of so-called ratings, in order to evaluate credits and the creditworthiness of debtors. Accordingly, the creditworthiness has consequences on the credit conditions.
  Commercial property as collateral security
  
  Commercial property can be taken as collateral security, if the debtor can offer other sources of capital to repay the loan. The bank supervision forces the banks, to effect appropriate and realtime appraisals which means, that a substantial knowledge of real estate experts is required, too. The appraisal must be close to the market!
  Valuation methods
  
  The following requirements must be fulfilled:
  • The fair market value and collateral value must be found out.
  • The collateral vaule must be verified every third year and possibly corrected.
  • As an alternative to the fair market value, an approved valuation method can be taken. In this case, the Federal Banking Supervisory Office and the appropriate Federal State Central BankAlternativ must be informed.
  • The expert must have a long-time experience and a substantial knowledge.
  Commercial property
  The following requirements must be fulfilled:
  • More than 50% of office space or commercially used space which must be separated from possible residential uses.
  • Situated in the home country or an in another EU member state, also having the 50 % standard
  • Used by the owner or rented by the owner.

• The expert
  The expert must fulfil the following criteria:• Professionality and independence
  • A substantial knowledge of the property market and all types of property which are concerned. This will be regularly supervised by the banks and confirmed by exterior parties.