Commercial property investor Slough Estates has admitted that the switch to international financial reporting standards will have a major impact on its financial results, a move that could prompt others in the sector to raise similar concerns.
Property companies have largely appeared to be unconcerned about the transition, despite the substantial changes to property valuations and lease classifications.
Sue Harding, European chief accountant at rating agency Standard & Poor’s, said that ‘not much has been made’ of the issue so far, but ‘more lease obligations will appear on balance sheets’.
Slough Estates pulled no punches last week, when it disclosed the effects of new accounting standards.
Reporting a pre-tax profit of £209.1m for 2004, the FD of Slough Estates, Dick Kingston, admitted that IFRS would ‘have a major impact on the group’s accounts’.
Kingston cited the reforms to property valuations and leases as the standards that would be especially challenging to implement.
Under IFRS, the company will have to take any surpluses or deficits that arise from the revaluation of investment properties through its profit and loss account, rather than the statement of total gains and losses, which is the current practice.
‘This will add considerably to the volatility of the group’s results,’ Kingston said.
Slough Estates will also have to treat its finance leases differently, which will impact on profit and loss account figures. Income earned from interest will replace rental income. ‘Although this is not expected to have much of an effect on income or net asset value,’ Kingston said, ‘it has the potential to greatly confuse property companies’ accounts.’
Kingston said the international property group would also incur a ‘significant liability’ to the group’s balance sheet as it would have to provide a deferred tax charge for asset revaluation movements.
Under UK GAAP, the business was not required to do this, and the new obligation ‘will increase the volatility of deferred tax charges’.
On top of the property-specific changes that will have to be managed, Slough Estates will also have to incorporate the standards that have affected most companies.
The company’s £136m convertible preference shares will now be viewed as a form of debt, and the value of the shares will have to be split between a financial liability shown under creditors and an equity element shown within shareholders’ funds. Slough Estates did not release any restated figures under IFRS, but will provide its first IFRS numbers and required restatements when it announces its interim results at the end of June.
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