Fair value and investment property in accounting literature: a review

Abstract

Purpose

This study aims to provide a timely review concerning the determinants and economic consequences of fair value reporting in real estate industry, as these topics have been gaining momentum in accounting literature recently.

Design/methodology/approach

Diverse editorial sources (e.g. Elsevier, Emerald, Meridian Allenpress, Springer, Sage, Taylor & Francis and Wiley-Blackwell) were consulted to identify relevant studies for this review. Keywords used to collect studies include “fair value” and “IAS 40” or “investment property” and “fair value or “fair value and real estate.” This search yields 33 studies published between 2009 and 2023.

Findings

The synthesis of reviewed papers suggests that studies were mainly conducted in the European countries after the mandatory adoption of international financial reporting standards (IFRS) in 2005 and the Australian setting. The first stream of research deals with the choice of fair value approach. Reported empirical findings suggest that corporate size and market-to-book ratio are negatively associated with fair value choice, whereas ownership dispersion increases the likelihood of choosing fair value approach. The empirical evidence concerning the determinants of fair value magnitude suggests the type of appraiser represents a key predictor of the extent of fair value use. The second stream of research examines the impact of fair value reporting in real estate industry. Findings suggest that empirical evidence is still limited with respect to creditors, managers and financial analysts; fair value reporting is generally associated with higher level of value relevance for investors; and the use of Level 3 inputs in fair value estimates for investment properties is associated with high degree of estimation uncertainty for external auditors leading to increased audit risk and fees.

Practical implications

With respect to regulators, this review emphasizes that the beneficial impacts of fair value reporting are linked to institutional characteristics (e.g. legal system, the degree of market development), the reliability concerns regarding fair value estimates and the independence of appraiser. Because real estate industry is generally characterized by the lack of active market, regulators may adopt regulations requiring the independence external appraiser.

Originality/value

This literature review represents a historical record and an introduction for accounting scholars, in emerging economies and other settings, where fair value accounting has gained wide acceptance among the investment community. It also offers guidance for future research avenues.

Citation

Khelil, I. and Khlif, H. (2024), "Fair value and investment property in accounting literature: a review", Journal of Financial Management of Property and Construction, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JFMPC-05-2023-0027