Information provision in the IFRS financial statements regarding inputs into real estate valuation models under IFRS 13

For companies with a substantial volume of investment property on their balance sheet, such as Belgian regulated real estate investment companies (SIR/GVV), the fair value of these investments is a key determinant of the company’s value. It goes without saying that the information about how fair value is determined is considered important information for users of the annual financial statements.

In what follows, the FSMA sets out its expectations regarding the disclosures on this topic in the IFRS financial statements. These expectations are based on the principles of IFRS 13.

For investment property measured at fair value, the disclosures must first of all contain a description of the valuation technique(s) and the inputs used in the fair value measurement. Furthermore – and this is important – quantitative information must be provided about the significant unobservable inputs used in the fair value measurement (IFRS 13.93(d)). This information should help users of financial statements to assess the valuation techniques and inputs used to develop those measurements (IFRS 13.91). This information must be provided for each class of assets and liabilities measured at fair value (see IFRS 13.94 for information on determining appropriate classes of assets and liabilities).

To meet the objectives set out in IFRS 13.91, an entity must also evaluate whether users of the financial statements need additional information to evaluate the quantitative information disclosed (IFRS 13.92). Such additional information may, for example, be a description of the most important characteristics of the assets in question (including quantitative characteristics).

In interim financial statements prepared in accordance with IAS 34, the above information must be updated if, since the end of the annual reporting period, there have been events and transactions that are significant for the financial position and performance of the entity (IAS 34.15)^[1].

1. General principle

   In what follows, we set out the information that may be expected in the notes accompanying the IFRS financial statements for companies with a substantial volume of investment property on their balance sheet, including SIR/GVV.

   It is reasonable to expect that a table be included indicating the requisite quantitative information about the significant unobservable inputs used in the fair value measurement (as required by IFRS 13.93(d)). The information that should appear in the table:

   1. inputs for both the numerator and the denominator;
   2. at least a range and weighted average for each input; and
   3. comparable figures for the previous year.

   If the range for certain inputs is very broad, the reason for this must be explained. This information must be included for each asset class (IFRS 13.93, 1st paragraph and IFRS 13.94). If necessary, the classes may need to be further disaggregated.

   In what follows, we set out the information that may reasonably be expected about the two most commonly used valuation methods for real estate held by Belgian companies with a substantial volume of investment property (including SIR/GVV)^[2], namely, the discounted cash flow method (DCF) and the rental value capitalization method^[3]. 

2. Discounted cash flow method (DCF)

   Specifically, the disclosures about the assumptions used (including the additional elements as required under IFRS 13.92) for the DCF are expected to contain the following quantitative information, per asset class:

   • estimated rental value (ERV)
   • operational margin
   • vacancy expectations (vacancy based on the current lease agreement and long-term vacancy)
   • discount rate
   • expected rent increase (inflation)
   • remaining period of the current lease agreement
   • remaining economic life
   • number of m² (if the estimated rental value is expressed in euro per m²) / number of units (for example, the number of student residence units/hotel rooms if the estimated rental value is stated per student residence unit/hotel room)
   • If applicable, information about the residual value: if, for example, at the end of the calculation period the residual value of the investment property is calculated using a capitalization rate on the final rental value that takes into account the expected state of the building at the end of the planning period, the capitalization rate used for the final net ERV must also be included (a price range and weighted average per asset class) as well as the length of the original planning period. If a different method is used to calculate the residual value, that method must be explained and the significant inputs used must be included (for example, the unit price /m² where the residual value of the land is determined separately using the unit price method, etc.).

   If, at the asset class level, there is a significant difference between the current rent based on the lease agreements in force and the estimated rental value, this is also significant information that should be included in the aforementioned disclosures.

3. Rental value capitalization method

   Specifically, the disclosures about the assumptions used (including the additional elements as required under IFRS 13.92) concerning the rental value capitalization method are expected to contain the following information, per asset class):

   • estimated rental value (ERV)
   • vacancy expectations (vacancy based on the current lease agreement and long-term vacancy)
   • capitalization rate
   • remaining period of the current lease agreement
   • remaining economic life
   • number of m² (if the estimated rental value is expressed in euro per m²) / number of units (for example, the number of student residence units/hotel rooms if the estimated rental value is stated per student residence unit/hotel room)

   If, at the asset class level, there is a significant difference between the current rent based on the lease agreements in force and the estimated rental value, this is also significant information that should be included in the aforementioned disclosures.

4. Ongoing project developments

   In addition to a description of the valuation technique(s) and the inputs used to determine the fair value of project developments, the following quantitative information may reasonably be expected:

   1. If the expected investment value is determined using a DCF method:

      • estimated rental value (ERV)
      • operational margin
      • long-term vacancy
      • discount rate
      • expected rent increase (inflation)
      • estimated economic life
      • number of m² (if the estimated rental value is expressed in euro per m²) / number of units (for example, the number of student residence units/hotel rooms if the estimated rental value is stated per student residence unit/hotel room)
      • where applicable, information about the residual value at the end of the building’s economic life (e.g. the plot of land).

      As the date of completion of the development approaches, the part that has been rented out in advance and the length of the lease agreement can also be considered significant information that must be included in the explanation in question.

   2. where the expected investment value is determined by means of the rental value capitalization method,

      • estimated rental value (ERV)
      • long-term vacancy
      • capitalization rate
      • estimated economic life
      • number of m² (if the estimated rental value is expressed in euro per m²) / number of units (for example, the number of student residence units/hotel rooms where the estimated rental value is stated per student residence unit/hotel room)

      As the date of completion of the development approaches, the part that has been rented out in advance and the length of the lease agreement can also be considered significant information that must be included in the explanation in question.

   3. construction cost/m² of the works that remain to be completed before the delivery of the building
   4. estimated construction period

5. Sustainability

   Given the impact of climate change on our society and its increasing impact on the real estate industry, property valuation should adequately take into account the extent to which sustainability and ESG-related factors affect market behaviour.

   Transparency is needed on how and to what extent these factors have specifically influenced the (judgements made for the) determination of the fair value of investment properties.