EDWARD J. RIEDL
Land Securities Group (A): Choosing Cost or Fair
Value on Adoption of IFRS
In June 2002 the Council of Ministers of the European Union approved a regulation, proposed by the European Commission in early 2001, to require publicly traded companies on European exchanges to use International Financial Reporting Standards (IFRS) as the basis for presenting their financial statements beginning January 1, 2005.1 As many European firms were reporting financial statements using the domestic accounting standards for the country in which they were domiciled, the required adoption of IFRS would have far-reaching implications for the financial reporting of many of the 7,000 firms listed on European exchanges. One of these companies was Land Securities Group (“Land Securities”), an investment property firm based in the United Kingdom. Prior to adoption of IFRS, Land Securities was applying U.K. accounting standards, which required investment properties to be reported using the revaluation model. However, adoption of IFRS would require Land Securities to choose between either the cost or fair value models to report its investment properties.
Land Securities was an investment property firm located in the U.K. Investment property firms invest in property to generate rental income and/or long-term capital appreciation.2 This is
1 The increased globalization of business over the past several decades has brought a concurrent need for more standardized accounting rules to enhance the comparability of companies across countries. With this intent, the initial body to create international accounting standards was formed in 1973 and continues in its current incarnation as the International Accounting Standards Board, or IASB (akin to the Financial Accounting Standards Board, or FASB, in the U.S.). The IASB includes representatives from a number of countries, such as Canada, France, Japan, the U.K., and the U.S. The objectives of the IASB are to publish accounting standards for the presentation of financial statements and to work generally for the improvement and harmonization of accounting standards. This latter objective has often been referred to as the “convergence” of accounting standards across jurisdictions. To both ends, the primary outputs from the IASB are International Financial Reporting Standards, or IFRS. Note that standards issued by the IASB prior to 2002 are designated as International Accounting Standards, or IAS. However, “IAS” and “IFRS” refer to the same body of international accounting standards. 2 Investment property firms are similar to real estate investment trusts (REITs) in the United States, in that both invest in properties. The primary difference relates to the tax treatment: investment property firms generally are required to pay corporate income taxes; however, U.S. REITs generally do not pay taxes (i.e., they are “pass-through entities,” wherein the REIT must pay out the bulk of its earnings annually as dividends, which are taxed when received by the owners of the REIT). ________________________________________________________________________________________________________________ Professor Edward J. Riedl prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2004, 2005, 2008 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.
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