Implications of new IFRS concepts on the information policy in the European real estate sector

Alexander Mueller



The main purpose of this paper is to analyze the implications that the initial application of the highest and best use concept (IFRS 13) means for the information policy of listed European property companies with regard to the fair value determination of their property investments. Within this scope we aim to reply the question if these companies have changed their valuation policy, as a consequence of the first mandatory application of this concept and we also test the existence of national disparities.



Research work starts with the analysis of the question “how the highest and best use concept has been accepted and applied in a cross-national sample of listed European property companies?” To do this, we examine their financial statements and we quantify the impact of this concept on the fair value of their property investments. Afterwards, empirical analysis is done by applying some novel approaches which focus the valuation procedure of their real estate assets. The following regression models are used to test the two hypotheses that focus the questions “which part of the annual variation of the fair value of property investments can be explained by the application of the highest and best use concept” and “which part of them can be explained by national valuation habits”.


The survey of the financial statements gives evidence that the interpretation and application of this concept in practice varies a lot from company to company, but also from country to country.  Explanatory power of the applied models is reduced, without taking into account the national location of the company, but increases significantly by the aggregation of a variable which includes the information about geographical factors. Depending on the national location of each property company, we found evidence that the application of the highest and best use concept contributes significantly to explain the changes in fair value of their investment properties.

The theoretical contribution.

Initial results suggest the existence of significant cultural differences among European property companies with regard to the initial application of the highest and best use concept. The highest and best use concept must be taken into account from now on as a new factor to determine the fair value of investment properties.  The complexity in fair value measurement of non-financial assets has increased by the introduction of this concept and fair value has now a higher fictitious component. On the other hand, the consideration of the prudence principle has become even less important in the context of this new IFRS rule.

Practical implications (if applicable).

The results of this research paper contribute to achieve a better understanding of the complexity that the highest and best use concept means for the accounting based valuation of property investments. This information also can be used by companies or appraisers to improve the valuation procedure of these assets.

Keywords: IFRS 13, highest and best use concept, fair value, property companies

Paper type: Research paper.


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