From a small northwestern observatory…

Finance and economics generally focused on real estate

Appraisal and Financial Reporting

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Real estate appraisers are, by and large, behind the curve as far as International Financial Reporting Standards are concerned. IFRS is already the norm in most of the world, and will integrate in the U.S. with our accounting rules in the very near future. The Appraisal Foundation recognizes that many (most?) appraisers lack the knowledge and training to compete in the this new realm, and is taking proactive steps to address the problem.

The “ying and the yang” of this — implementation of the IFRS, particularly following the real estate meltdown, will focus considerable attention on asset values rather than asset costs. This has become known as the “mark to market” phenomenon. In an era when everyone basically THOUGHT that asset values gallopped upward non-stop, reporting historical costs-less-depreciation was the norm, and a conservative one at that. However, in an era when real asset values have actually declined, the conservative approach is to mark these values to market. This necessitates regular appraisals. All well and good for appraisers, right?

Not so fast, bucko. There’s nothing in the IFRS that requires an appraiser, per se, and in fact appraisers are so out-of-touch with financial reporting standards that CPAs (who are ultimately responsible for the reporting) may be loathe to use appraisers for these assignments. At best, CPAs are described as “skeptical” on the contribributions to be made by appraisers.

One change will be the migration from “market value” (as is commonly preached to and by appraisers) to “fair value” which is enculcated in Statement of Financial Accounting Standards NO. 157. IFRS will converge Fair Value guidance with US Generally Accepted Accounting Principals with the pending issuance of IFRS 13.

Other changes include new thinging about “market participants”, “highest and best use”, and a concept totally foreign to appraisers, “levels of valuation input.” This latter creates a hierarchy: Level 1, Level 2, and Level 3.

Yesterday, the Appraisal Foundation sponsored a webinar featuring some great thinkers on this subject. Rather than get “down in the weeds”, they were good enough to keep the topic at 20,000 feet and thus cover a wide array of implications in a very short time. Clearly, there’s a lot of education and re-education needed if appraisers are going to have a role to play in this. In the meantime, appraisers can begin familiarizing themselves with the salient information at the IFRS web site, www.ifrs.org.

Written by johnkilpatrick

March 17, 2011 at 8:32 am

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