Company Valuation Under IFRS : Interpreting and Forecasting ...

Chapter Six – The awkward squad
This analysis still does not take into account the impact of a decline in long term
investment returns, for instance bond yields, on the value of in force business and
on new business value. If those two elements were explicitly modelled, then the
sensitivity would be even greater. In its accounts L&G shows the impact of
higher than predicted, but not of lower than predicted, returns on investments, so
we have not augmented our calculations here, though it would be possible to use
it to estimate the sensitivity to lower expected returns.
As the presentation of sensitivities by the companies becomes fuller and more
sophisticated, it is becoming more feasible to produce stochastic valuation models
based on probability weighted ranges of variance experiences and changes in
assumptions, hence the growing popularity of ‘enhanced embedded value’ and
‘market consistent embedded value’ calculations for life insurance businesses.
5. Property companies
5.1 Accounting for property companies
Most of the core IFRS standards are as relevant to property companies, otherwise
known as real estate companies, as they are to other sectors. The crucial aspect
of accounting in a real estate context is how the property portfolio is reflected in
the financial statements. In this regard the key standards are IAS 40 Investment
property, and if the company is constructing its own fixed assets then either IAS
16 on property, plant and equipment or IAS 11 Accounting for long term
contracts would be relevant (the latter if the construction is for a third party).
Here we shall concentrate on the accounting in IAS 40.
IAS 40 – Investment property
What is investment property?
Investment property is land and/or buildings a company holds to earn rentals or
for capital appreciation. If a company uses the asset for its own operations then
the part used cannot be an investment property and must be separated out.
How are investment properties valued?
For financial statement purposes the initial recognition shall be at cost, including
incidental costs of acquiring the property.
Subsequently, two different models exist within IAS 40 to determine the ongoing
valuation:
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