The application of IFRS 13 to investment properties and the classification of the values of these assets as either 'Level 2' or 'Level 3' within the IFRS 13 fair value hierarchy has been a subject of intense discussion. The classification of different inputs as 'observable' and assessment of whether adjustments to observable inputs are 'significant' is an are of judgement and there was significant concern within the industry that these judgements would not be made on a consistent basis by different companies.  In particular, there was concern that the classification of a property valuation as level 1, 2 or 3 could be interpreted as a reflection of the quality of the valuation, or the liquidity of the asset concerned.

To address this problem, EPRA formed an industry working group to develop guidance for the industry in this area and avoid a lack of transparency.  This group has developed a position paper which has the aim of assisting preparers, auditors and valuers in implementing IFRS 13 with a consistent approach and achieving disclosures that are ultimately useful to users of financial statements.

The paper concludes that it is likely that the vast majority of property valuations will fall within level 3 of the IFRS 13 fair value hierarchy, as the valuers will need to rely on one or more significant unobservable inputs or make at least one significant adjustment to an observable input in developing their valuation.  This will trigger a requirement to make significant additional disclosures in the financial statements of the company holding this property.  Accordingly, the paper also includes illustrative dislosures setting out how a company could meet the requirements of IFRS 13 while providing a sensible and useful level of detail.

Click here for a copy of the EPRA position paper (link to EPRA website).