IAS 40: fair value or cost? An empirical analysis of the European real estate industry

Purpose\r\nThis study aims at investigating managerial decisions between fair value and cost for investment property (IP) under IAS 40 in Europe, a decade after the first adoption of IAS 40. Adopting a multi-motivation approach, I hypothesize that, although managers have probably gained more experience with the fair value method compared to the first IFRS adoption, there are categories of incentives that still influence their choice, i.e. contractual efficiency motives, asset pricing incentives, and institutional country factors.\r\n\r\nDesign/methodology/approach\r\nI tested these hypotheses on a sample of 212 listed European real estate firms from 2014 to 2023. I conduct a logistic regression analysis to understand the impact of the identified explanatory variables on the firms’ choice between fair value and cost.\r\n\r\nFindings\r\nThe results indicate that firms with higher IP are more likely to use fair value, as it better reflects performance variations tied to this core asset. Larger firms also tend to choose fair value, possibly because in liquid real estate markets fair value estimates are more reliable, which mitigates political costs. Firms with higher levels of debt tend to prefer historical cost, as it is likely perceived to reduce agency costs and to better protect their interests. Moreover, the market-to-book value, a proxy for information asymmetries, is negatively associated with the fair value selection. Finally, institutional factors significantly affect the choice.\r\n\r\nPractical implications\r\nThis research provides valuable insights for standard setters and for financial statement users, offering an updated perspective on the ongoing learning process associated with the use of fair value accounting within European real estate firms. This knowledge is critical for informing future regulatory decisions that could enhance the transparency and comparability of financial reporting in the real estate sector.\r\n\r\nOriginality/value\r\nTo the best of my knowledge, this paper is the first to provide insight into the choice between fair value and cost for IP in the real estate industry 10 years after the IFRS’s first adoption and up to 2023, therefore demonstrating the consistency of actual firms’ choices with the IASB’s onward shift towards fair value accounting.