Current Value Reporting for Real Estate: An Industry Perspective
Searfoss, D. Gerald, Weis, Judith Fellner, Journal of Accountancy
Current value reporting provides users with information about financial resources that may be available to an entity either through their use or sale. In addition, it reflects changes in those amounts from one reporting period to another. Current value reporting has been discussed by the accounting profession many times over the years, usually in the context of changes in general price levels. Recently, there has been a growing interest by companies that invest in and operate real estate properties in presenting supplementary current value information. This information, along with historical cost financial statements, would give users (such as investors and lenders) more useful information for decision making.
Real estate assets traditionally have tended to fluctuate widely in value. Since inflation is currently under control, the increased interest in current value reporting is not due to changes in general price levels. Instead this interest reflects a perceived need for better information about a real estate entity's assets and liabilities as well as the capacity of these assets to benefit the entity economically.
Over the years, the accounting profession has tried to deal with changing values in financial statements by using various methods to account for the effects of inflation (see sidebar on page 71). Supporters of supplementary current value reporting for real estate companies believe it is time for the profession to take a look at the issues outside the context of inflation. They recognize that information based on historical cost generally is more reliable and objective than current value information. However, they point out that even staunch supporters of historical cost information admit the recorded amounts of nonmonetary assets (for example, buildings and property) in real estate companies' historical cost financial statements generally do not provide relevant information about the values of these assets. Therefore, they suggest that historical cost financial statements alone are not a sufficiently informative basis on which to make sound management and investment decisions.
Supplementary reporting about the current values of assets and liabilities can provide this necessary financial information. The American Institute of CPAs real estate committee has established a task force to develop guidance for the real estate industry on the presentation of supplementary current value information. This initiative is a follow-up to the AICPA report Guidance for an Experiment on Reporting Current Value Information for Real Estate issued in 1984.
In addition, an issues paper titled The Changing Significance of Financial Statements--The Relative Disparity Between Content and Need, developed by the AICPA future issues committee, explores the committee's view that "financial statements are of decreasing relative importance within the context of the total range of information available" and calls on the AICPA to take a leadership role in addressing this problem. The accounting standards executive committee agreed to create a task force to deal with the quality of financial reporting issues. Current value reporting most likely will be one of the issues considered by the task force.
CHARACTERISTICS OF ASSETS
As stated in Financial Accounting Standards Board Financial Accounting Concepts Statement no. 6, Elements of Financial Statements, one of the characteristics of an asset is that "it embodies a probable future benefit that involves a capacity, singly or in coordination with other assets, to contribute directly or indirectly to future net cash inflows." Historical cost financial statements do not provide users with the most relevant information about the possible economic benefits of assets because real estate assets have unique characteristics. First, the values of well-maintained properties usually appreciate rather than depreciate. …