FAIR VALUE AND REAL STATE INVESTMENT TRUST

Fair Value and Real State Investment Trust

Abstract

We investigate the reliability of mandatory annual fair value estimates for UK RSIT. We find that appraisal estimates understate actual selling prices and are considerably less biased and more accurate measures of selling price than respective historical costs. Investigations of managerial discretion over fair value reporting reveal that managers select among permissible accounting methods to report higher earnings, time asset sales to smooth reported earnings changes, smooth reported net asset changes and boost fair values prior to raising new debt. Finally, we find that the reliability of appraisal estimates increases when monitored by external appraisers and Big 6 auditors.

Table of Content

ABSTRACTII

CHAPTER 01: INTRODUCTION1

Background of the Research1

Purpose1

Problem Statement1

Hypothesis2

CHAPTER 03: METHODOLOGY4

3.1. Sample selection5

3.2. Descriptive statistics5

CHAPTER 04: DISCUSSION7

4.0 Bias and accuracy of fair value and historical cost measures7

4.1. Descriptive tests of the bias and accuracy of fair value and historical cost measures7

4.2. Appraiser accuracy as property values diverge from historical cost10

CHAPTER 05: ANALYSIS12

5.0 Managerial manipulation using UK GAAP for RSIT12

5.1. Systematic reporting of higher earnings by choice of accounting method12

5.2. Smoothing reported earnings using gains and losses from property sales14

5.3. Manipulation of reported net asset value changes using fair value estimates of RSIT18

5.4 Effects of external monitoring on fair value amounts21

CHAPTER 06: RESULT27

CHAPTER 07: CONCLUSION29

REFERENCES32

CHAPTER 01: INTRODUCTION

Background of the Research

Debate on the adoption of current value accounting revolves around the potential increase in relevance versus the potential decrease in reliability. Relative to historical costs, fair value estimates are more likely to be relevant but less likely to be reliable. Prior research examining fair value estimates for tangible assets in the United Kingdom and Australia has documented a positive association between these estimates and stock prices or returns (e.g., Barth and Clinch, 2008). Sloan (2008) comments that this association provides evidence that investors find fair value estimates to be relevant, but that inferences regarding reliability are indirect and limited by the fact that stock prices reflect many factors other than the fair value estimates. This study provides direct evidence on the reliability of fair value estimates for UK RSIT firms.

Purpose

We investigate the reliability of mandatory annual fair value estimates for UK RSIT.

Problem Statement

Sloan (2008, p. 200) recommends that in future research “the ex post realizations that are used should correspond more closely to the attributes being estimated.” In addition, he suggests that research investigating the impact of contracting cost incentives on the measurement of current value estimates has the greatest potential to be of interest to standard setters. Consistent with these suggestions, we first investigate the reliability (i.e., bias and accuracy) of reported fair value estimates for investment properties in the UK using realized selling price as the benchmark, 1 and, for comparison, corresponding historical cost amounts. We then investigate managerial manipulation of fair value estimates reported in the financial statements of UK RSIT companies. We also investigate whether the reliability of fair value estimates for RSIT varies according to the relation between the appraiser and the firm (internal versus external appraiser) and ...