C-Store Valuations
IFRS - Part 2
International Financial Reporting Standards, Part 2 
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The Toronto Valuation Accord was held in 2003.  It was agreed that “…the move toward market value in financial reporting is in the best interest of the public, investors, government, and business decision makers.”  The Toronto Accord went on to say that an acceleration can be expected in the market value reporting of fixed and intangible assets.  Fixed assets includes real estate.
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Because all companies are adopting the accounting methods specified in the International Financial Reporting Standards, the appraisal reports you are ordering today should be in compliance with International Valuation Standards as well as International Financial Reporting Standards.  In the future, all real estate assets will be reported at market value.  In this changing financial environment, there is no need to duplicate the need for appraisals.  Appraisal reports that are in compliance with these new standards can be used for better real estate management and well as accounting and financial reporting. 

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The Recognition of Real Estate by the IFRS
Within the International Financial Accounting Standards, there are several sections which relate to real estate depending on the use and function of it within the company. The six real estate relevant sections are IAS 2 Inventories; IAS 11 Construction Contracts; IAS 16 Property, Plant and Equipment; IAS 17 Leases; IAS 36 Impairment of Assets; IAS 40, Investment Property. To help with the classification of the properties and the corresponding IAS section, the IFRS provide a schematic decision tree.

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IAS 16 – Property, Plant and Equipment
This section applies to all properties “…that are held by an enterprise for use in the production or supply of goods and services, for rental to others, or for administrative purpose and that are expected to used during more than one period.”

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GAAP in the US has historically reported real estate value in financial reports at historical cost less accumulated depreciation. This is known as the “Benchmark Treatment”. IFRS allows the value of real estate to be reported at fair market value, which is known as the “Allowed Alternative Treatment”. The principle of the Allowed Alternative Treatment is “true and fair view” and represents a mark-to-market approach. The property “... should be carried at a revalued amount, being its fair value […] less any subsequent accumulated depreciation […] impairment losses.”

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To keep this value up-to-date a “sufficient regularity” of revaluations is required. Any gains or losses through revaluation adjustments have generally no direct impact on the income statement as long as it is possible to show them directly in the stockholder’s equity.
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IAS 16.34 prohibits the revaluation of a single property by requiring the company to use the same measurement methods within an asset class.

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The new 2005 version of the standards will further require a separate depreciation calculation for each part of the property with a significant share of the total costs. This will lead to separate depreciation and cost measurements for the main property parts, such as land, structure, HVAC, fuel service, and site improvements.

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IAS 16 and IAS 40 require a detailed disclosure of the used valuation methods and their underlying assumptions.

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The current version of IFRS states the “the fair value of land and buildings is usually its market value” It is determined by an “appraisal normally undertaken by professional qualified valuers” (IAS 16.30) and represents the “amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction (IAS 16.6).

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The IVS characterizes market value as ”the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after property marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion”. The comparison of the characteristics of market value and fair value shows that the recent version of the IFRS and the IVA have very similar approaches.

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The revised standards now support the value of the highest and best use of all possible uses. This concept dropped the previous “market value for the existing use” and brought IFRS closer to the USPAP in the U.S.

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The impairment test is “value in use”. This value is a non-market assessment and equals the present value of the estimated future cash flows including the property’s disposal.

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According the IFRS, the “best evidence of fair value is normally given by current prices in an active market for similar property” (IAS 40.39). In the U.S. this is referred to as the sales comparison approach. In the absence of current prices in an active market, the IFRS give three alternatives: (1) to adjust the current prices of differing properties to reflect these differences. (2) to adjust the recent prices of similar properties to reflect economic change or (3) to use discounted cash flow projections. 

PetroMARK® is the most innovative development in the downstream petroleum industry to help you implement the market value-based reporting requirements of IFRS.  Nothing is faster or more efficient.  And, this means less cost to you for compliance.

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