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Fair value implications for the

real estate sector and exampledisclosures for real estate

entities

January 2013

Applying IFRS in Real Estate

IFRS 13 Fair Value Measurement


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1 Fair value implications for the real estate sector and example disclosures for real estate entities

Contents

Introduction ...................................................................................................................................... 2

Section A IFRS 13 Fair Value Measurement: implications for the real estate sector ............................... 3

A1. Background.............................................................................................................................. 3

A2. Principal impacts ...................................................................................................................... 3

A3. The definition of fair value......................................................................................................... 4

A4. The concept of highest and best use........................................................................................... 5

A4.1 Assessment ........................................................................................................................ 5

A4.2 Valuing the highest and best use alternative use and asset modifications .............................. 6

A4.3 Highest and best use and impairment testing ......................................................................... 6

A5. The valuation premise for property interests .............................................................................. 7

A6. Assessing whether an appraisal complies with IFRS 13 ................................................................ 8

A7. Appropriate valuation techniques .............................................................................................. 8A8. Applying the fair value hierarchy to real estate appraisals .......................................................... 10

A9. Expanded disclosure requirements ........................................................................................... 12

A9.1 General ............................................................................................................................ 12

A9.2 Asset classes .................................................................................................................... 12

A10. Final thoughts ...................................................................................................................... 15

Section B Illustrative set of disclosures required under IFRS 13 for a real estate entity with investment

properties ....................................................................................................................................... 16

B1. Introduction ........................................................................................................................... 16

B2. Illustrative disclosures Overview ............................................................................................ 16

B3. Illustrative disclosure Early adoption ...................................................................................... 17

B4. Illustrative disclosure Classes of investment property .............................................................. 17

B5. Illustrative disclosure Fair value measurement, valuation techniques, changes in valuation

techniques, inputs and other key information .................................................................................. 19

B6. Illustrative disclosure Reconciliation of balances of classes of investment property .................... 26

B7. Illustrative disclosure Valuation process ................................................................................. 31

B8. Illustrative disclosure Sensitivity information .......................................................................... 32

B9. Illustrative disclosure Highest and best use ............................................................................. 35


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Fair value implications for the real estate sector and example disclosures for real estate entities 2

Introduction

IFRS 13 Fair Value Measurement is effective for annual periods on or after 1 January 2013. IFRS 13 establishes a single

framework for fair value measurement when it is required or permitted by IFRS.

In Section A, we focus on a number of the implications of IFRS 13 for the real estate sector. This section includes recent

discussions on critical issues on fair value measurement of real property and supersedes our previous publication,

IFRS 13 Fair value measurement 21st century real estate values Implications for the real estate and construction

industries issued in 2011. In Section B, we provide selected illustrative disclosures of a real estate entity, which hasinvestment properties measured at fair value, in its first set of financial statements after adoption of IFRS 13. This

publication should be read in conjunction with Good Real Estate Group (International) Limited Illustrative financial

statements for the year ended 31 December 2012 (Good Real Estate).1

IFRS 13 prescribes the minimum disclosures required. It is often necessary to provide additional disclosures to explain

significant transactions or unusual circumstances. In addition, accounting policy choices need to be disclosed to help the

user understand the financial statements.

The challenge for any entity is to produce financial statements with disclosures that are useful for decision-making. This

publication focuses on IFRS 13 disclosures, which rely heavily on the judgement of management. While the disclosures

that are included in Section B are for illustrative purposes only, we believe that they are a good example of how the

disclosure objectives of IFRS 13 can be met by a real estate entity.2

IFRS 13 at a glance IFRS 13 does not change when an entity is required to use fair value. Instead, IFRS 13 describes how to measure

fair value under IFRS when it is required or permitted by IFRS.

The current requirements in IAS 40 Investment Property relating to fair value determination will be replaced by

the requirements in IFRS 13.

The definition of fair value in IFRS 13 is consistent with market value as defined in International Valuation

Standards (IVS). But, perhaps confusingly, it differs from the IVS definition of fair value.

IFRS 13 includes concepts of highest and best use, valuation premise and requires application of a fair value

hierarchy.

Whilst, in most cases, IFRS 13 does not differ from existing practice, management does need to be aware of the

conceptual differences between IFRS 13 and IVS to ensure any values used for financial reporting that are

obtained from appraisals, whether external or internal, are consistent with the objective of fair value

measurement in accordance with IFRS 13.

A challenge for any entity is to produce financial statements with disclosures that are useful for decision-making.

IFRS 13 significantly expands disclosure requirements and the extent and nature of IFRS 13 disclosures will rely

heavily on the judgement of management.

IFRS 13 is effective for annual periods commencing on or after 1 January 2013.

1 This publication is available at www.ey.com/ifrs.2 For a more complete discussion of the implications of IFRS 13, refer toApplying IFRS: IFRS 13 Fair value measurement (November, 2012),which is available at www.ey.com/IFRS.


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Section A IFRS 13 Fair Value Measurement: implications for the real estate

sector

A1. Background

IFRS 13 was issued by the IASB3 in May 2011. IFRS 13 describes how to measure fair value under IFRS when it is

required or permitted by IFRS. The standard does not change when an entity is required to use fair value. It also sets out

certain requirements for disclosures related to fair value. As a result of the consequential amendments to other

standards upon the adoption of IFRS 13, the current requirements in IAS 40 for determining fair value will be replacedby the requirements in IFRS 13.

A2. Principal impacts

For real estate entities, the adoption of IFRS 13 could result in significant changes to processes and procedures for

determining fair value and providing the required disclosures. While the requirement to determine fair value by

reference to market participants is not new, the definition of fair value in IFRS 13 differs from that proposed by IVS,

which are the generally accepted standards for professional appraisal practice in valuing real estate internationally. The

fair value framework set out in IFRS 13 contains specific requirements relating to highest and best use, valuation

premise, and principal (or most advantageous) market. This may require entities and their appraisers to re-evaluate and

reconsider their methods, assumptions, processes and procedures for determining fair value.

The use of external appraisers, as is common for property interests (including investment property interests), does not

reduce managements ultimate responsibility for the fair value measurements and related disclosures in the entitys

financial statements. Therefore, regardless of whether valuations are performed externally or internally, management

must understand the methodologies and assumptions used in the valuations and determine whether the assumptions

are reasonable and consistent with the requirements of IFRS 13.

Real estate entities may be affected by IFRS 13 in various aspects of their business when:

Measuring property interests at fair value

Testing property interests for impairment

Determining the fair value of identifiable assets and liabilities as part of the purchase price allocation applied in a

business combination

Measuring an interest in a real estate joint venture or associate at fair value using the exception under IAS 28Investments in Associates and Joint Ventures

Compiling and disclosing information on the fair values of property interests, including but not limited to significant

assumptions, adjustments to unobservable inputs and qualitative and quantitative sensitivity analysis.

The principal elements of IFRS 13 that affect real estate entities are dealt with in the following sections.

3 International Accounting Standard Board.


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A3. The definition of fair value

In IFRS 13, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an

orderly transaction between market participants at the measurement date.4 Accordingly, this price is an exit price. The

definition of fair value in IFRS 13 includes the assumption that fair value is measured based on a hypothetical and

orderly transaction and, until IFRS 13 was published, these concepts were not explicitly stated in IFRS.

IFRS 13 states, The price in the principal (or most advantageous) market used to measure the fair value of the asset or

liability shall not be adjusted for transaction costs.5 Transaction costs are defined as the costs to sell an asset (or

transfer a liability) that are directly attributable to the disposal of an asset (or the transfer of the liability), i.e., the costs

the seller would incur. However, IFRS 13 discusses transaction costs only from the perspective of the holder of the asset

(i.e., the seller). It does not discuss the costs that might be incurred by a potential buyer of the asset or whether such

costs might influence the price a buyer would be willing to pay to acquire the asset.

The definition in IFRS 13 differs from IVS, which states in its revised IVS Framework6:

Fair value is the estimated price for the transfer of an asset or liability between identified knowledgeable and willing

parties that reflects the respective interests of those parties.

And:

For purposes other than use in financial statements, fair value can be distinguished from market value. Fair value

requires the assessment of the price that is fair between two identified parties taking into account the respective

advantages or disadvantages that each will gain from the transaction. It is commonly applied in judicial contexts. In

contrast, market value requires any advantages that would not be available to market participants generally to be

disregarded.

How we see itIFRS requires any advantages that would not be available to market participants generally to be disregarded. This is

different from IVS. Management needs to be aware of this conceptual difference to ensure any values used for

financial reporting that are obtained from appraisals, whether external or internal, are consistent with the objective

of a fair value measurement in accordance with IFRS 13.

4 IFRS 13, Appendix A5 IFRS 13, paragraph 256 International Valuation Standards Council (IVSC), International Valuation Standards, July 2011, paragraphs 39-43


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A4. The concept of highest and best use

A4.1 Assessment

Under IFRS 13, an entitys current use of an asset is generally taken to be its highest and best use, unless market or

other factors suggest that a different use of that asset by market participants would maximise its value. If such factors

exist, management is required to consider all relevant information in determining whether the highest and best use of a

property is different from its current use at the measurement date. IFRS 13 states7:

A fair value measurement of a non-financial asset takes into account a market participants ability to generateeconomic benefits by using the asset in its highest and best use or by selling it to another market participant that

would use the asset in its highest and best use.

The highest and best use of a non-financial asset takes into account the use of the asset that is physically possible,

legally permissible and financially feasible, as follows:

(a) A use that is physically possible takes into account the physical characteristics of the asset that market

participants would take into account when pricing the asset (eg the location or size of a property).

(b) A use that is legally permissible takes into account any legal restrictions on the use of the asset that market

participants would take into account when pricing the asset (eg the zoning regulations applicable to a property).

(c) A use that is financially feasible takes into account whether a use of the asset that is physically possible and

legally permissible generates adequate income or cash flows (taking into account the costs of converting theasset to that use) to produce an investment return that market participants would require from an investment in

that asset put to that use.

The IASB states that to be taken into account to determine the fair value, the use of an asset does not need to be legal

at the measurement date, but it must not be legally prohibited in the jurisdiction.8 For example, if the government of a

particular country has prohibited building or development in a protected area, the highest and best use of the land in

that area cannot be to develop it for industrial use.

The Royal Institute of Chartered Surveyors (RICS) does not make any reference to the IFRS 13 concept of highest and

best use in its definition of fair value. Instead, its valuation concepts state:

...where the price offered by prospective buyers generally in the market would reflect an expectation of a change in

the circumstances of the property in the future, this element of hope value is reflected in market value.

Examples of hope value include:

The prospect of development when there is no current permission for development

The prospect of synergistic value arising from a merger with another property

The European Group of Valuers Association (TEGoVA) followed the RICS methodology in its European Valuation

Standards 2012 (EVS 2012). EVS 2012 emphasises that the market value of a property reflects the full potential of that

property so far as it is recognised by others in the market. As the full potential of a property may reflect possible uses

that are not legally permissible at the valuation date, but may become so in the future, the TEGoVAs market value

seems to include an element of hope value.

For over 30 years, the real estate valuation profession has sought to harmonise its standards and methodologies, asevident in the development of a common definition for market value that is now endorsed by the IVSC, TEGoVA and

RICS. Unfortunately, a common definition has not led to a common interpretation. The problem has been further

complicated by the introduction of a new definition of fair value in IFRS 13. At least two of the recognised international

valuation standard setters, RICS and TEGoVA, advocate that the hope value should be considered in the assessment of

market value. However, it is unclear whether or to what extent including the hope value would be in line with the

concept of highest and best use set out in IFRS 13.

7 IFRS 13, paragraphs 27 and 288 IFRS 13, Basis for Conclusions, paragraph 69


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How we see itConsiderable judgement may have to be applied in determining when an anticipated change in use is legally

permissible. For example, if approval is required for re-zoning land or for an alternative use of existing property

interests, it may be necessary to assess whether such approval is perfunctory or not. Entities should document the

evidence to support their view on market participants assumptions about the ability to obtain the required

approvals. In particular, caution should be given to any legal restrictions.

A4.2 Valuing the highest and best use alternative use and asset modifications

When management has determined that the highest and best use of an asset is something other than its current use, certain

valuation matters must be considered. Appraisals that reflect the effect of a reasonably anticipated change in what is legally

permissible should be carefully evaluated. If the appraised value assumes that a change in use can be obtained, the valuation

should be reduced to reflect market participant assumptions regarding the cost and profit margin associated with obtaining

approval for the change in use and transforming the asset, in addition to capturing the risk that the approval might not be

granted (i.e., uncertainty regarding the probability and timing of the approval). An entity should also evaluate inputs used in

the valuation of similar assets that do not have similar uncertainties, for example, uncertainty related to obtaining a permit.

Refer to Section A6 for considerations in assessing whether an appraisal complies with IFRS 13.

Expectations about future improvements or modifications to be made to the property interest to reflect its highest and best

use may be considered in the appraisal, e.g., the renovation of the property interest or the conversion of an office into

condominiums, but only if and when other market participants would also consider making these investments. The cash

flows used should reflect only the cash flows that market participants would take into account when assessing fair value.

This includes both the type of cash flows (e.g., future capital expenditure) and the estimated amount of cash flows. Only if

this hurdle is met would the fair value of the property interest be determined on the basis of the expected future cash flows

of the renovated or transformed asset. However, as noted above, when this is the case, the fair value measurement needs

to also capture the cost and profit margin that market participants would demand for transforming the asset.

The fair value measurement assumes that the asset is sold in its current condition with any renovation or transformation

being performed by the market participants who acquire the asset. Accordingly, management should evaluate whether

transformation costs and any associated profits resulting from the transformation process have been included in the

appraised value and if the inclusion of such amounts is appropriate.

A4.3 Highest and best use and impairment testingThe highest and best use concept is not only relevant for property interests carried at fair value. It is also relevant to the

impairment testing of investment property interests carried at cost and other non-financial assets held by real estate

entities when impairment is measured on the basis of fair value less costs of disposal.

IAS 36 Impairment of Assets stipulates that impairment arises if the recoverable amount of an asset is lower than its

carrying value. The recoverable amount is the higher of an assets or cash generating units fair value less costs of

disposal and its value in use. IFRS also states that:

If either of these amounts exceeds the assets carrying amount, the asset is not impaired and it is not necessary to

estimate the other amount9

Fair value differs from value in use, as defined in IAS 3610

Fair value reflects the assumptions market participants would use when pricing the asset; it assumes that marketparticipants will pay a price that reflects the highest and best use of the asset. Consequently, the highest and best use

concept applies when fair value less costs of disposal is the basis of the impairment test. In contrast, the value in use

concept reflects the reporting entitys estimates based on its expected use of the asset, including the effects of factors

that may be specific to the entity and not applicable to entities in general. IAS 36 states11:

9 IAS 36, paragraph 1910 IAS 36, paragraph 53A11 IAS 36, paragraph 45


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Because future cash flows are estimated for the asset in its current condition, value in use does not reflect:

(a) future cash outflows or related cost savings (for example reductions in staff costs) or benefits that are expected

to arise from a future restructuring to which an entity is not yet committed; or

(b) future cash outflows that will improve or enhance the asset's performance or the related cash inflows that are

expected to arise from such outflows.

How we see itOnly in rare circumstances will it be possible to determine the fair value of an investment property based on current

prices in an active market. Accordingly, if fair value is used for impairment testing, it may have to be estimated using

other valuation techniques, such as discounted cash flow projections. If fair value is estimated using discounted cash

flow projections, care is needed to ensure the projections reflect the assets highest and best use.

A5. The valuation premise for property interests

When determining the highest and best use for non-financial assets, such as property interests, it is important to

determine whether the highest and best use of that property interest is its use in combination with other assets and/or

liabilities, or on a stand-alone basis. If the fair value of an asset for which highest and best use is its use in combination

with other assets and/or liabilities, fair value is determined assuming the asset is sold for use by market participants in

combination with those other complementary assets and/or liabilities. Market participants are assumed to hold thosecomplementary assets and/or liabilities already. In contrast, the fair value of a property interest that provides maximum

value on a stand-alone basis is measured based on the price that would be received to sell that property interest on a

stand-alone basis.

To illustrate, consider a mixed-use property interest that has residential housing, a hotel and retail space. If the

aggregate fair value of the mixed-use property interest is higher to market participants than the sum of the fair value of

the individual property interests because of synergies and complementary cash flows, the fair value of that mixed-use

property interest would be maximised as a group. That is, the fair value is determined for the mixed-use property

interest as a whole.

While the mixed-use property interest is one example in which fair value would be maximised as a group, in most cases,

it would not be appropriate to estimate fair value of property interests as a group or portfolio of assets. Entities

generally should not assume the fair value of a property interest is maximised through its use with other assets, unlessthere is sufficient evidence to support this assertion. In many instances when valuing property interests, fair value is

determined based on the price that would be received in a current transaction to sell the asset on a stand-alone basis.

Determining whether the maximum value to market participants would be achieved by using a real estate asset in

combination with other real estate assets and/or liabilities, or by using the real estate asset on a stand-alone basis

requires considerable judgement of the specific facts and circumstances.

IFRS 13 sets out that the unit of account for the asset to be measured at fair value must be determined in accordance

with the IFRS that requires or permits the fair value measurement.12 If, for example, a real estate entity owns a

portfolio of several office buildings located in different cities and all of them have been classified as investment

properties under IAS 40, then each building would probably present a separate unit of account (rather than the whole

portfolio being considered as one unit of account). A block discount, which would be incurred if the portfolio of

properties were sold as a whole, cannot be considered in the fair value measurement of the individual properties.13

12 IFRS 13, paragraph 1413 IFRS 13, paragraph 69


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Table 1: Valuation techniques under IFRS 13 and IVS

Approaches described in IFRS 13 IVS equivalent Application guidance provided by IVSC14

Market

approach

Uses prices and

other relevant

information

generated by

market transactions

involving identical

or comparable

assets

Market approach

(or market

comparison

approach)

Under the market approach, the value is determined based

on comparable transactions. Although property interests

are not homogeneous, the IVSC considers the market

approach most commonly applied.

In order to compare the subject of the valuation with the

price of other real property interests that have been

recently exchanged or that may be currently available in

the market, it is usual to adopt a suitable unit of

comparison. Units of comparison that are commonly used

include analysing sales prices by calculating the price per

square meter of a building or per hectare for land. Other

units used for price comparison where there is sufficient

homogeneity between the physical characteristics include a

price per room or a price per unit of output, eg, crop yields.

A unit of comparison is only useful when it is consistently

selected and applied to the subject property and thecomparable property interests in each analysis.

Income

approach

Converts future

amounts (e.g., cash

flows or income and

expenses) to a

single current

(discounted)

amount

Income

approach (e.g.,

the income

capitalisation

and discounted

cash flow

methods)

Various valuation methods can be captured under this

valuation technique. They all have in common that the

valuation is based on estimated future income and profits or

cash flows. Most commonly recognised are the income

capitalisation method and the discounted cash flow method:

Under the income capitalisation method, an income stream

that is likely to remain constant is capitalised using a single

multiplier. This method is quick and simple, but cannot be

reliably used when the income is expected to change infuture periods to an extent greater than that generally

expected in the market or when a more sophisticated

analysis of risk is required.

In cases in which the income capitalisation method is not

reliable, various forms of the discounted cash flow method

can be used. These vary significantly in detail, but share the

basic characteristic that the net income for a defined future

period is adjusted to a present day value using a discount

rate.

14 IVSC, International Valuations Standards, July 2011, IVS 230 Real Property Interests C12 C24.


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Table 1: Valuation techniques under IFRS 13 and IVS (continued)

Approaches described in IFRS 13 IVS equivalent Application guidance provided by IVSC15

Cost

approach

Reflects the amount

that currently would

be required to

replace the service

capacity of an asset

(often referred to as

current replacement

cost)

Cost approach

(e.g., the

depreciated

replacement

cost method)

IVSC considers that this method should be applied by

exception only:

It is normally used when there is either no evidence of

transaction prices for similar property or no identifiableactual or notional income stream that would accrue to the

owner of the relevant interest. It is principally used for the

valuation of specialised property, which is property that is

rarely if ever sold in the market, except by way of sale of

the business or entity of which it is part.

In practice, the cost approach is seldom used to establish the fair value of investment property, but is sometimes used to

measure fair value for owner-occupied property (if the revaluation option under IAS 16 Property, Plant and Equipment is used).

The decision to use more than one valuation technique, or place more weight on one indication of value over another,

depends on the specific facts and circumstances. But, in all cases, a fair value measurement should maximise the use of

observable market inputs. When available, observable market transactions should be considered in the determination of

fair value, unless these transactions are determined not to be orderly. The objective is to use the valuation technique (or

combination of valuation techniques) that is appropriate in the circumstances and for which there is sufficient data.

IFRS 13 requires that valuation techniques used to measure fair value should be consistently applied. Changes in

valuation techniques (or their application) are appropriate only if the change results in a measurement that is equally or

more representative of fair value in the circumstances.

When it is determined that use of multiple valuation techniques is appropriate, as is often the case for real estate (e.g.,

using the results from both a market approach and an income approach), IFRS 13 indicates that the results should be

evaluated and weighted considering the reasonableness of the range indicated by those results. A fair value

measurement is the point within the range that is most representative of fair value in the circumstances. However, before

determining this point, management should gain an understanding of the differences in results. Applying a percentage

weighting to the results of each technique to determine fair value may only be appropriate in limited circumstances.A8. Applying the fair value hierarchy to real estate appraisals

When measuring fair value, an entity is required to maximize the use of relevant observable inputs and minimise the use

of unobservable inputs. IFRS 13 includes a fair value hierarchy (described in Table 2) that prioritises the inputs in a fair

value measurement. The inputs used in measuring fair value drive categorisation of the fair value measurement (as a

whole) within the fair value hierarchy for disclosure purposes. Significant differences in disclosure requirements apply to

fair value measurements categorised within each level of the hierarchy in order to provide users with insight into the

reliability of the fair value measurement.

Table 2: Fair value hierarchy

Fair Value Hierarchy

Level 1 Quoted prices, which are not adjusted, in an active market for identical assets andliabilities that the entity can access at the measurement date

Level 2 Inputs, other than quoted prices in Level 1, that are observable, either directly orindirectly

Level 3 Unobservable inputs

15 IVSC, International Valuations Standards, July 2011, IVS 230 Real Property Interests C12 C24.


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The fair value hierarchy is based on the relative reliability and relevance of the information used in the valuation.

Regardless of whether the valuation was compiled internally or externally, the reporting entity should review and

understand the inputs used in the valuation to determine the appropriate classification of those inputs in the fair value

hierarchy.

It may be appropriate to classify a market-corroborated input, which is supported by observable market data of a similar

asset, in Level 2, even though the input itself is not directly observable. This is because such an input is less subjective than

an unobservable input in Level 3. However, unless the assets are essentially the same, judgement is needed to determine

whether an adjustment is required to the corroborating observable input. For example, if there is no recent transaction forapartments in a small residential building, Building A, an entity may consider a price per unit area data that is derived from

recent transaction prices of comparable apartments in a nearby residential building, Building B, to determine the fair value

of an apartment in Building A. However, an analysis must be performed to determine whether an adjustment is required to

the price per unit area of an apartment in Building B to determine the fair value for an apartment in Building A.

IFRS 13 requires that the significance of adjustments to observable data be considered in the context of the overall fair

value measurement. That is, when an observable input is adjusted to reflect differences between the asset being valued

and the observed transaction, the adjustment may render the entire measurement a lower level in the fair value

hierarchy, that is a Level 3 measurement instead of a Level 2 measurement.

Examples of fair value measurements categorised within Level 2 could include:

Residential units in an apartment block or street with a sufficient number of comparable units and a sufficientvolume of recent sales transactions for which prices could be observed

Office stock in a business district with many similar buildings with comparable office space and a sufficient volume

of recent sales transactions for which prices could be observed

For such properties, one would expect that the fair value would be determined using a market comparable approach

with the price per square metre as the most significant observable input. However, this should not lead to the conclusion

that the existence of any published market price per square metre will automatically result in a fair value measurement

categorised within Level 2. In the illustrative example 17 accompanying IFRS 13, for example, commercial properties

measured using the market comparable approach are categorised within Level 3 (rather than Level 2)16.

When selecting the most appropriate inputs to a fair value measurement from multiple available values, those that

maximise the use of observable data, rather than unobservable data, should be selected. Even in a market that is

inactive, an entity should not presume that the transactions in that market do not represent fair value or that the

market is not orderly. Entities will need to consider the individual facts and circumstances in making this assessment.

Notwithstanding the need for judgement, an entity should have sufficient evidence for concluding that a current

observable market price can be ignored based on a view that it represents a liquidation or distressed sale value.

How we see it:In market conditions in which real estate is actively purchased and sold and that have a stock of sufficient

comparable (i.e., similar but not identical) properties, the fair value measurement may be classified within Level 2.

However, that determination will depend on the facts and circumstances, including the significance of adjustments to

observable data. Accordingly, in active and transparent markets, there may be real estate valuations that are

classified within Level 2, provided that no significant adjustments have been made to the observable data of identical

properties.

However, very few properties are identical. Consequently, in many cases, valuers have to make adjustments to

observable data of similar properties to determine the fair value of a property. Since significant adjustments to

observable data will result in a Level 3 measurement, considerable judgement may be required to determine whether

the adjustments are significant.

16 IFRS 13, Illustrative Example, paragraph 63


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Notwithstanding the foregoing, in inactive or less transparent real estate markets, we believe that it is unlikely that

real estate will be classified within Level 2. Rather, it will be classified within Level 3. Accordingly, in consecutive

years, a valuation may move up or down in the hierarchy, depending on the liquidity of the market. Therefore, care

should be taken in classifying a property valuation within Level 2.

A9. Expanded disclosure requirements

A9.1 GeneralThe IASB significantly expanded the required disclosures related to fair value measurement to enable users of financial

statements to understand the valuation techniques and inputs used to develop fair value measurements. For each of the

disclosure requirements under IFRS 13, Table 3 below indicates whether it is currently required under IFRS. Although

the table below focuses on a comparison between the disclosure requirements in IAS 40 and IFRS 13, it is important to

note that, in most cases where fair value is used or disclosed, the disclosure requirements have been significantly

expanded as compared to current IFRS. For example, entities that measure interests in a real estate joint venture or

associate at fair value, or measure other financial instruments at fair value, will need to comply with increased

disclosure requirements for such items as well.

The additional disclosures required by IFRS 13 are mainly dependent on:

Whether the fair value measurement for a property (as a whole) is categorised within Level 3 or within Level 1 or

Level 2 of the fair value hierarchy

How the property is grouped into classes of assets for disclosure purposes

Certain IFRS 13 disclosures are only required for fair value measurements categorised within Level 3 and not for those

within Level 1 or Level 2. For example, a description of the valuation processes used by an entity is required for fair

value measurements categorised within Level 3, but not for those within Level 1 or Level 2.

A9.2 Asset classes

Many of the IFRS 13 disclosures are required for each class of assets (and liabilities). IFRS 13 requires these classes of

assets (and liabilities) be determined based on:

(a) the nature, characteristics and risks of the asset or liability; and

(b) the level of the fair value hierarchy within which the fair value measurement is categorised.The determination of the appropriate class of assets will require significant judgement. At one end of the spectrum, the

properties in an operating segment (as defined by IFRS 8 Operating Segments) may be a class of assets for the purpose

of the disclosures required by IFRS 13. This may be the case even if there is a large number of properties in the

segment, if the properties have the same risk profile (e.g., the segment comprises residential properties in countries

with property markets of similar characteristics). At the other end of the spectrum, IFRS 13 disclosures may be required

for individual properties or small groups of properties if the individual properties or groups of properties have different

risk profiles (e.g., a real estate entity with two properties an office building in a developed country and a shopping

centre in a developing country).

In light of this, we expect that real estate entities may define a class of assets to include only fair value measurements

that are in a single level of the fair value hierarchy.

The number of classes may need to be greater for fair value measurements categorised within Level 3 of the fair value

hierarchy because those measurements have a greater degree of uncertainty and subjectivity. Determining appropriate

classes of assets and liabilities for which disclosures about fair value measurements should be provided requires

judgement. A class of assets and liabilities will often require greater disaggregation than the line items presented in the

statement of financial position. However, an entity is required to provide information sufficient to permit reconciliation

to the line items presented in the statement of financial position.


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When determining the appropriate classes, entities should also take note of the requirements in paragraph 92 of

IFRS 13, which require entities to consider all of the following:

(a) the level of detail necessary to satisfy the disclosure requirements;

(b) how much emphasis to place on each of the various requirements;

(c) how much aggregation or disaggregation to undertake; and

(d) whether users of financial statements need additional information to evaluate the quantitative informationdisclosed.

In addition, the same paragraph requires entities to disclose additional information if the disclosures provided in

accordance with IFRS 13 (and other standards) are insufficient to meet the objectives of the disclosure requirements set

out in paragraph 91 of IFRS 13:

An entity shall disclose information that helps users of its financial statements assess both of the following:

(a) for assets and liabilities that are measured at fair value on a recurring or non-recurring basis in the statement of

financial position after initial recognition, the valuation techniques and inputs used to develop those

measurements.

(b) for recurring fair value measurements using significant unobservable inputs (Level 3), the effect of themeasurements on profit or loss or other comprehensive income for the period.

As highlighted in paragraph 94 of IFRS 13, determination of the appropriate classes will, in many cases, require

judgement. This judgment needs to be carefully exercised, as the meaningfulness of the disclosure of quantitative

information used in Level 3 fair value measurements will depend on an entity's determination of its asset and liability

classes and the level of aggregation for each class of assets and liabilities.17

17 IFRS 13, Basis for Conclusions, paragraph 193


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Table 3: Disclosure requirements in IFRS 13

Disclosures Investment property at fair value

(measured at fair value on a recurring basis)

Investment property at cost

(for which fair value is disclosed)

IFRS 13 IAS 40 Currentrequirements


Fair value at the end of the reportingperiod

Level of the fair value hierarchywithin which the fair valuemeasurement in its entirety iscategorised

Not required Not required

For Level 2 and Level 3measurements, valuation techniqueand the inputs used, and changes inthe valuation technique, ifapplicable, and the reasons for thosechanges


For Level 3 measurements,quantitative information regardingthe significant unobservable inputs

Not required Not required Not required

Amount of transfers between Level1 and Level 2, the reasons andrelated accounting policies


For Level 3 measurements,reconciliation from the openingbalances to the closing balances(including gains and losses,

purchases, sales, issues,settlements, transfers in and out ofLevel 3 and reasons and policies fortransfer and where all such amountsare recognised)

Not required Not required**

For Level 3 measurements, the totalgains or losses included in profit orloss that are attributable to thechange in unrealised gains or lossesrelating to those assets andliabilities held at the reporting date,and a description of where suchamounts are recognised


For Level 3 measurements, adescription of the valuationprocesses used by the entity



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Table 3: Disclosure requirements in IFRS 13 (continued)

Disclosures Investment property at fair value

(measured at fair value on a recurring basis)

Investment property at cost

(for which fair value is disclosed)



For Level 3 measurements, anarrative description of thesensitivity of the fair valuemeasurement to changes inunobservable inputs if a change inthose inputs might result in asignificantly different amount and, ifapplicable, a description ofinterrelationships between thoseinputs and other unobservableinputs and of how they mightmagnify or mitigate the effect ofchanges in the unobservable inputs

* disclosure mayalso be required byIAS 1***

Not required byIAS 40, butdisclosure may berequired by IAS 1***


If the highest and best use of anon-financial asset differs from itscurrent use, disclose that fact andthe reason for it


* The IASB decided not to require a quantitative sensitivity analysis for non-financial assets and liabilities at the time IFRS 13 was issued. Theproposals, which had been included in the exposure draft and which required the presentation of a quantitative sensitivity analysis, had beenheavily criticised by preparers, who were concerned about the additional cost, among other concerns. Instead, the Boards decided to deferadding this requirement until additional outreach could be completed (see IFRS 13, BC 202-210).

** A reconciliation of the opening and closing balances of investment properties measured at fair value amounts is required. However, areconciliation of the opening and closing balances of investment properties measured at cost is not required.

*** IAS 1 Presentation of Financial Statements, paragraphs 125 and 129 require disclosure of information about assumptions an entity makes,and other sources of estimation uncertainty, that have a significant risk of resulting in a material adjustment to the carrying amounts of assetsand liabilities. Hence, notwithstanding the fact that IFRS 13 does not require a quantitative sensitivity analysis, IAS 1 may still require it.Determining when to disclose such information requires judgement. An example of such a disclosure is included in Good Real Estate.

A10. Final thoughts

While many of the concepts in IFRS 13 are consistent with current practice, certain principles and disclosure

requirements could have a significant impact on real estate entities. Careful consideration is required to identify

situations in which there may be a significant change to current practice.

Although the descriptions of valuation approaches in IFRS 13 are generally consistent with definitions in IVS, there are

still differences in fair value concepts between IFRS and IVS. For example, IVS does not include a fair value hierarchy

and IVS applies a different fair value definition. Management should be aware of these differences when assessing

appraisals prepared pursuant to IVS. Considerable judgement may be required when applying the fair value

measurement concepts included in IFRS 13. Management needs to have a good understanding of the concepts when

making judgements related to its fair value measurements.


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Section B Illustrative set of disclosures required under IFRS 13 for a real estate

entity with investment properties

B1. Introduction

This section sets out an illustrative set of disclosures for a real estate entity that has investment properties measured at fair

value on its statement of financial position, in its first set of financial statements following the adoption of IFRS 13. In

determining the information to be disclosed in its financial statements, an entity uses judgement in light of the principles of

materiality and aggregation in IAS 1. Hence, depending on an entitys circumstances, more detail or more aggregation than

is contained in these illustrative disclosures may be required.

This section includes only disclosures related to investment properties that are measured at fair value. Disclosures of

fair value measurements of other assets and liabilities (e.g., financial instruments) are not covered. Entities in the real

estate sector often use derivatives (e.g., swaps or interest collars) to hedge cash flow risks that result from variable

interest loans. These derivatives are measured at fair value and are generally categorised within Level 2 of the fair value

hierarchy. IFRS 13 requires disclosures for these derivatives in addition to those required under IFRS 7 Financial

Instruments: Disclosures. However, we do not expect the amount of additional disclosures to be provided under IFRS 13

for such derivatives to be significant for many real estate entities compared with the level of additional disclosures

required for the property interests held by these entities.

Commentary 1: Where in the notes should the disclosures be made?We recommend that entities include all the fair value disclosures for investment properties in one note (or as part of

one note) in the financial statements, rather than throughout and in the annual report. If such information was

previously included in the Managements Discussion and Analysis or the Directors report, it may have to be

transferred to the notes to the financial statements. Disclosures that are required by IFRS 13 need to be included in

the financial statements.

Commentary 2: Presenting information required under different standards in one table

Paragraph 99 of IFRS 13 requires an entity to present the necessary quantitative disclosures in a tabular format unless

another format is more appropriate. In some cases, it may be useful to present the information required by IFRS 13

together with the information required by IAS 40, to avoid replicating information in the financial statements and to

provide comprehensive integrated user-friendly analysis. An example would be the combination of disclosures required

under paragraph 93 (e) of IFRS 13 with the disclosures required under paragraph 76 of IAS 40.

Paragraph 93 (e) of IFRS 13 requires an entity with recurring fair value measurements categorised within Level 3 of

the fair value hierarchy to reconcile the opening balances to the closing balances.

Paragraph 76 of IAS 40 requires an entity that applies the fair value model to its investment property to provide a

reconciliation between the carrying amounts of investment property at the beginning and the end of the period.

If most or all of the entitys investment property is categorised within Level 3, the information above could be

presented in the same table instead of separate tables.

B2. Illustrative disclosures OverviewIn the remaining sections of this document we provide illustrative disclosures on the following:

B3 Early adoption

B4 Classes of investment property

B5 Fair value measurement, valuation techniques, changes in valuation techniques, inputs and other key

information

B6 Reconciliation of balances of classes of investment property


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B7 Valuation process

B8 Sensitivity information

B9 Highest and best use

The illustrative disclosures supplement the disclosures in Good Real Estate.

B3. Illustrative disclosure Early adoption

Good Real Estate Group (International) Limited (the Company) has early adopted IFRS 13 for the first time in its financialstatements as of 31 December 2012.

IFRS 13 was applied prospectively starting from 1 January 2012. Even though, in case of initial application of IFRS 13,

IFRS 13 does not require disclosure of information for the comparative period, this information was provided by

management of the Company as it believes that this enhances the meaningfulness of the fair value measurement

information.

Commentary 3: Effective date and transition

Appendix C of IFRS 13 states the following with respect to the effective date and the transition date:

C1 An entity shall apply this IFRS for annual periods beginning on or after 1 January 2013. Earlier application is

permitted. If an entity applies this IFRS for an earlier period, it shall disclose that fact.

C2 This IFRS shall be applied prospectively as of the beginning of the annual period in which it is initially applied.

C3 The disclosure requirements of this IFRS need not be applied in comparative information provided for periods

before initial application of this IFRS.

B4. Illustrative disclosure Classes of investment property

In determining the appropriate classes of investment property the Company has considered the nature, characteristics

and risks of its properties as well as the level of the fair value hierarchy within which the fair value measurements are

categorised. The following factors have been applied to determine the appropriate classes:

a) The real estate segment (retail, office or industrial)

b) The geographical location (Estateland, Netherlands, Germany, Luxembourg, France)

c) The construction status (completed investment property or under construction)

d) The level of the fair value hierarchy (Level 2 or Level 3)

This resulted in the following classes of investment properties:

Estateland Office Level 2

Estateland Office Level 3

Estateland Retail Level 3

Germany Industrial Level 3

Germany Office Level 3

Germany Retail Level 3

Luxembourg Office Level 3

France Industrial properties Level 3

France Office Level 3

France Office Investment property under construction Level 3


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Commentary 4: Determining appropriate classes of assets

As the nature, characteristics and risks of the properties held by Good Real Estate differ, management has applied

the factors disclosed above to determine the appropriate classes of properties for the purposes of IFRS 13

disclosure.

As significant judgement is required to determine the classes of properties, other criteria and aggregation levels for

classes of properties may also be appropriate, provided they are based on the risk profile of the properties (e.g., the

risk profile of properties in an emerging market may differ from that of properties in a mature market). Refer to

Section A9.2 for more information. Because most properties are unique, IFRS 13 may be interpreted as requiring a

preparer to provide disclosure information on a property-by-property basis. It is clear that a balance must be found

between meaningful and useful disclosure and avoiding a level of detail that for many companies would be onerous

and/or commercially sensitive.

Examples of different asset classes are:

Core, value-added and opportunistic

Geographic allocation: country level (Germany, France, Luxembourg) or area level (Europe EU, Europe non-EU,

North America, South America, China, Rest of Asia Pacific, Emerging Markets)

Retail, offices, industrial, residential and mixed use

Care should be taken in the assessment of asset classes, as different companies have different portfolios withdifferent risk profiles and concentrations. A company that, for example, has invested a significant part of its portfolio

in just a few countries may need to provide disclosure on a country-by-country basis. In contrast, a company that has

invested in property all over the world would need to disclose properties in several countries (i.e., on an area level) in

one asset class. However, some regulators, e.g. Australia, may require information on a property-by-property basis.

We expect that real estate entities may further break down asset classes that are subject to Level 2 and Level 3

valuations within the IFRS 13 hierarchy. For companies with a large number of properties that are categorised within

Level 3, it is important to establish a robust assessment process to determine the appropriate classes of assets.


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B5. Illustrative disclosure Fair value measurement, valuation techniques, changes in valuation tech

information

The table below presents the following for each class of investment property:

The fair value measurements at the end of the reporting period (IFRS 13, paragraph 93(a))

The level of the fair value hierarchy (e.g., Level 2 or Level 3) within which the fair value measurements are categorised in

A description of the valuation techniques applied (IFRS 13, paragraph 93(d))

The inputs used in the fair value measurement (IFRS 13, paragraph 93(d))

A description of changes in valuation technique as well as the reason(s) for making them (IFRS 13, paragraph 93(d))

For Level 3 fair value measurements, quantitative information about the significant unobservable inputs used in the fair value

For Level 2 fair value measurements, the same disclosures in the preceding bullet on a voluntarily basis

In addition, management has provided, for each class of property, other assumptions made in the determination of fair value

properties. Management believes that this information is beneficial in evaluating the fair values of the investment properties.


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Fair value implications for the real estate sector and example disclosures for real estate entities


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* The inputs used in the determination of fair values are considered observable in case of Level 2 measurements and unobservable in case of Level ** The fair value of a shopping mall in Estateland (included in the retail portfolio) was previously determined based on the income capitalisation methcash flow (DCF) method provides better transparency than the income capitalisation method and has, therefore, decided to change the valuation met


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Estimated rental value(ERV) (per sqm p.a.)

The estimated rental value at which space could be let in the market conditions prevailing at t

Rent growth p.a. The estimated average increase in rent based on both market estimations and contractual ind

Long term vacancyrate

ERV of expected long term average structural vacant space divided by ERV of the whole prop

Long-term vacancy rate can also be determined based on the percentage of estimated vacan

Discount rate Rate used to discount the net cash flows generated from rental activities during the period of

Exit yield The capital value of the investment property at the end of the period of analysis (exit value) erent. The exit value is the net amount that an entity expects to obtain for an asset at the end the expected costs of disposal.

Net initial yield Annualised net rental income based on the gross cash rents passing at the balance sheet datenon-recoverable property expenses, divided by the market value of the property, increased b

Reversionary yield Anticipated yield, to which the initial yield will rise once the rent reaches the ERV. It is calcula

Length of leases inplace (in years)

Remaining length of contracted unexpired lease term. It is calculated across all the tenants intenants lettable area or the tenants income against the total combined area or income of the

Actual vacancy rate ERV of vacant space divided by ERV of the whole property.

Passing rent(per sqm p.a.)

The annualised contractual cash rental income expected to be received as at a certain date, efor lease incentives. When no rent is currently being paid due to a rent-free period, the passin


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B6. Illustrative disclosure Reconciliation of balances of classes of investment property

Country Estateland Germany Lux

Completed IP or IPUC IP IP IP IP IP IP IP IP

Segment Office Office Retail Industrial Office Retail Industrial Industri

Level 2 3 3 3 3 3 3 3

000 000 000 000 000 000 000 000

Opening balance

(1 January 2012)8,620 16,394 49,895 70,950 0 1,261 70,286 171,2

Transfers in fair value hierarchy*

Transfers from Level2 into Level 3 **

(5,000) 5,000 0 0 0 0 0

Transfers from Level3 into Level 2 ***

10,000 (10,000) 0 0 0 0 0

Total gains or loss for the period

Included in profit orloss ****, ***** (7,783) (5,000) 12,784 (15,414) 5,484 (931) (5,316) 31,1

Included in OCI 0 0 0 0 0 0 0

Purachases and sales

Additions frompurchases throughbusinesscombinations

0 0 10,000 0 20,000 10,000 0 35,00

Additions from otherpurchases

0 0 0 0 0 0 0

Sales 0 0 0 0 0 0 0 (26,67

Other movements

Foreign exchangedifferences

0 0 0 0 0 0 0

Transfer from IPUCto completed IP

0 0 0 0 0 0 0

Transfer frominventory

0 0 1,047 0 0 0 0


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Transfer to inventory 0 0 0 0 0 0 0

Subsequentexpenditure oncompleted IP

104 50 100 50 0 50 50 10

Straight lining oflease incentives 0 0 0 0 0 0 0

Subsequentexpenditure on IPUC

0 0 0 0 0 0 0

Interest capitalisedon IPUC

0 0 0 0 0 0 0

Other 0 0 0 0 0 0 0

Closing balance

(31 December 2012)5,941 6,444 73,826 55,586 25,484 10,380 65,020 210,80

* Transfers between levels of the fair value hierarchy are deemed to have occurred at the end of the reporting period.

** Transfers from Level 2 to Level 3 amounting to 5,000,000 relate to an office building located in Smalltown/Estateland. In 2011, marke

so that observable market data was no longer available.*** Transfers from Level 3 to Level 2 amounting to 10,000,000 relate to an office building located in Capitaltown/Estateland. In 2011, msignificantly, so that observable market data became available.

**** Gains and losses recorded in profit or loss for recurring fair value measurements categorised within Level 3 of the fair value hierarchy a 7,783,000) and are presented in the income statement in line items valuation gains from completed investment property (22,763,000under construction (3,920,000).

***** All gains and losses recorded in profit or loss for recurring fair value measurements categorised within Level 3 of the fair value hierargains or losses relating to investment property (completed and under construction) held at the end of the reporting period.


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Completed IP or IPUC IP IP IP IP IP IP IP IP

Segment Office Office Retail Industrial Office Retail Industrial Industria

Level 2 3 3 3 3 3 3 3

000 000 000 000 000 000 000 000

Opening balance

(1 January 2011)7,620 17,394 49,895 50,950 0 1,261 70,286 104,83

Transfers in fair value hierarchy*

Transfers from Level2 into Level 3 **

0 0 0 0 0 0 0

Transfers from Level3 into Level 2

0 0 0 0 0 0 0

Total gains or loss for the period

Included in profit orloss

600 (1,500) (4,600) 1,845 0 0 (1,000) 14,13

Included in OCI 0 0 0 0 0 0 0

Purachases and sales

Additions frompurchases throughbusinesscombinations

0 0 0 0 0 0 0

Additions from otherpurchases

0 0 4,000 16,180 0 0 0 51,24

Sales 0 0 0 0 0 0 0

Other movements

Foreign exchangedifferences

0 0 0 0 0 0 0

Transfer from IPUCto completed IP

0 0 0 0 0 0 0

Transfer frominventory

0 0 0 0 0 0 0

Transfer to inventory 0 0 0 0 0 0 0


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Subsequentexpenditure oncompleted IP

400 500 600 1,975 0 0 1,000 1,00

Straight lining oflease incentives

0 0 0 0 0 0 0

Subsequentexpenditure on IPUC

0 0 0 0 0 0 0

Interest capitalisedon IPUC

0 0 0 0 0 0 0

Other 0 0 0 0 0 0 0

Closing balance

(31 December 2011)8,620 16,394 49,895 70,950 0 1,261 70,286 171,2

* Gains and losses recorded in profit or loss for recurring fair value measurements categorised within Level 3 of the fair value hierarchy amo 600,000) and are presented in the income statement in line items valuation gains from completed investment property ( 8,880,000) aunder construction ( 2,005,000).

** All gains and losses recorded in profit or loss for recurring fair value measurements categorised within Level 3 of the fair value hierarchy

or losses relating to investment property (completed and under construction) held at the end of the reporting period.


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Commentary 6: Reconciliation of balances of classes of investment property

The table above has been provided to comply with paragraph 93(e) of IFRS 13, which states that an entity has to

disclose, at a minimum, the following information for each class of assets:

for recurring fair value measurements categorised within Level 3 of the fair value hierarchy, a reconciliation from the

opening balances to the closing balances, disclosing separately changes during the period attributable to the following:

(i) total gains or losses for the period recognised in profit or loss, and the line item(s) in profit or loss in which those

gains or losses are recognised.

(ii) total gains or losses for the period recognised in other comprehensive income, and the line item(s) in other

comprehensive income in which those gains or losses are recognised.

(iii) purchases, sales, issues and settlements (each of those types of changes disclosed separately).

(iv) the amounts of any transfers into or out of Level 3 of the fair value hierarchy, the reasons for those transfers and the

entity's policy for determining when transfers between levels are deemed to have occurred (see paragraph 95).

Transfers into Level 3 shall be disclosed and discussed separately from transfers out of Level 3.

In addition, IFRS 13, paragraph 93(f) requires an entity to disclose, for recurring fair value measurements categorised

within Level 3 of the fair value hierarchy, the amount of the total gains or losses for the period in paragraph 93(e)(i)

included in profit or loss that are attributable to the change in unrealised gains or losses relating to those assets and

liabilities held at the end of the reporting period, and the line items in profit or loss in which those unrealised gains or

losses are recognised. In the tables above, this information is provided in the footnotes to the table.

As outlined below, paragraph 76 of IAS 40 requires an entity to provide a similar reconciliation of investment

properties measured at fair value. If the IFRS 13 reconciliation includes all investment properties of the entity that are

measured at fair value, an entity may choose to provide a single, more detailed, reconciliation that also meets the

disclosure requirements set out in paragraph 76 of IAS 40:

In addition to the disclosures required by paragraph 75, an entity that applies the fair value model in paragraphs

3355 shall disclose a reconciliation between the carrying amounts of investment property at the beginning and end of

the period, showing the following:

(a) additions, disclosing separately those additions resulting from acquisitions and those resulting from subsequent

expenditure recognised in the carrying amount of an asset;

(b) additions resulting from acquisitions through business combinations;

(c) assets classified as held for sale or included in a disposal group classified as held for sale in accordance with IFRS

5 and other disposals;

(d) net gains or losses from fair value adjustments;

(e) the net exchange differences arising on the translation of the financial statements into a different presentation

currency, and on translation of a foreign operation into the presentation currency of the reporting entity;

(f) transfers to and from inventories and owner-occupied property; and

(g) other changes.


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B7. Illustrative disclosure Valuation process

The management group that determines the Companys valuation policies and procedures for property valuations

comprises the Companys chief operating officer (COO) and chief financial officer (CFO). Each year, the COO and the

CFO decide, after approval from the audit committee, which external valuer to appoint to be responsible for the external

valuations of the Companys properties. Selection criteria include market knowledge, reputation, independence and

whether professional standards are maintained. Valuers are normally rotated every three years. In addition, the COO

and CFO are responsible for recruiting personnel in the Companys internal valuation department. The Companys

internal valuation department comprises two employees, both of whom hold relevant internationally recognisedprofessional qualifications and are experienced in valuing the types of properties in the applicable locations.

The COO and CFO decide, after discussions with the Companys external valuers and the Companys internal valuation

department:

Whether a propertys fair value can be reliably determined (this is particularly important for investment properties

under construction, which are valued at cost until such time as fair value becomes reliably determinable)

Which valuation method should be applied for each property (the methods that are applied for fair value

measurements categorised within Level 3 of the fair value hierarchy are the discounted cash flow method and the

income capitalisation method; for fair value measurements in Level 2 of the fair value hierarchy, the market

comparison approach is used)

The assumptions made for unobservable inputs that are used in valuation methods (the major unobservable inputsare estimated rental value, rent growth per annum, long term vacancy rate, discount rate and exit yield)

Valuations are performed on a quarterly basis at each interim reporting date. Valuations for interim reporting purposes

are performed internally by the Companys internal valuation department. Internal methods are aligned with those used

by external valuers and such methods are externally validated by an independent party. However, on a sample basis (for

approximately 25% of all properties properties are rotated every quarter), external valuations are obtained to validate

the internal valuations for interim reporting purposes or external valuers are requested to confirm the main input

variables used in the internal valuations. As at each year-end, all properties are valued by external valuers.

At each reporting date, the internal valuation department analyses the movements in each propertys value. For this

analysis, the internal valuation department verifies the major inputs applied in the latest valuation by agreeing the

information in the valuation computation to contracts (e.g., rent amounts in rental contracts), market reports (e.g.,

market rent, cap rates in property market reports) and other relevant documents. In addition, the accuracy of thecomputation is tested on a sample basis. For each property, the latest valuation is also compared with the valuations in

the four preceding quarters as well as with the valuations of the two preceding annual periods. If fair value changes

(positive or negative) are more than any of the thresholds set out below, the changes are further analysed ( e.g., by

having discussions with external valuers):

1.0% during the most recent 3 months




6.5% during the most recent 24 months 9.0% during the most recent 36 months

The internal valuation department also compares each propertys change in fair value with relevant external sources

(e.g., the investment property database or other relevant benchmark) to determine whether the change is reasonable.

On a quarterly basis, after the COO and the CFO have discussed the valuations with the internal valuation department,

they present the valuation results with the Companys external valuers, the audit committee and the Companys

independent auditors. This includes a discussion of the major assumptions used in the valuations, with an emphasis on:

(i) properties with fair value changes outside of the relevant thresholds set out above; and (ii) investment properties

under construction.


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Commentary 7: Valuation process

IFRS 13, paragraph 93(g) requires, for recurring and non-recurring fair value measurements categorised within

Level 3 of the fair value hierarchy, a description of the valuation processes used by the entity (including, for example,

how an entity decides its valuation policies and procedures, and analyses changes in fair value measurements from

period to period).

The Illustrative Examples to IFRS 13 (IE.65 Example 18) indicate what an entity might disclose about its valuation

process to comply with the standard:

For fair value measurements categorised within Level 3 of the fair value hierarchy, the IFRS requires an entity to

disclose a description of the valuation processes used by the entity. An entity might disclose the following to comply

with paragraph 93(g) of the IFRS:

(a) for the group within the entity that decides the entity's valuation policies and procedures:

(i) its description;

(ii) to whom that group reports; and

(iii) the internal reporting procedures in place (eg whether and, if so, how pricing, risk management or audit

committees discuss and assess the fair value measurements);

(b) the frequency and methods for calibration, back testing and other testing procedures of pricing models;

(c) the process for analysing changes in fair value measurements from period to period;

(d) how the entity determined that third-party information, such as broker quotes or pricing services, used in the

fair value measurement was developed in accordance with the IFRS; and

(e) the methods used to develop and substantiate the unobservable inputs used in a fair value measurement.

B8. Illustrative disclosure Sensitivity information

The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value

hierarchy of the entity's portfolios of investment properties are:

Estimated rental value (per sqm p.a.)

Rent growth p.a.

Long term vacancy rate

Discount rate and exit yield if DCF is applied

Specifically to property under development: construction costs, lease up period, construction period and

development profit

Significant increases (decreases) in estimated rental value (per sqm p.a.) and rent growth p.a. in isolation would result in

a significantly higher (lower) fair value measurement. Significant increases (decreases) in long-term vacancy rate and

discount rate (and exit or yield) in isolation would result in a significantly lower (higher) fair value measurement.

Generally, a change in the assumption made for the estimated rental value (per sqm p.a.) is accompanied by a

directionally: Similar change in the rent growth p.a. and discount rate (and exit yield)

Opposite change in the long term vacancy rate


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Significantassumptions

2011

Estimatedrentalvalue

Rentalgrowthper

annum

Longtermv

acancyrate

Discountrate/exityield

orreversionaryyield

Leaseupperiodfor

vacantspace

Constructioncosts

Constructionperiod

Developmentprofit

Sensitivity Level 10% increaseor decrease

1% more orless growth

1% more orless vacancy

25 basispoints

1 monthmore or less

100 persqm

1 monthmore or less

10% plusor minus

000 000 000 000 000 000 000 000

Estateland Offices Level 2 1,078 1,078 86 278 57 N/A N/A N/A

Estateland Offices Level 3 2,049 2,049 164 529 109 N/A N/A N/A

Estateland Retail Level 3 6,237 6,237 499 1,610 333 N/A N/A N/A

Germany Industrial

Level 3 8,869 8,869 710 2,289 473 N/A N/A N/A

Germany Offices Level 3 N/A N/A N/A N/A N/A N/A N/A N/A

Germany Retail Level 3 158 158 13 41 8 N/A N/A N/A

Luxembourg Offices Level 3 8,853 8,853 708 2,285 472 N/A N/A N/A

France IndustrialProperties Level 3 21,402 21,402 1,712 5,523 1,141 N/A N/A N/A

France Offices Level 3 N/A N/A N/A N/A N/A N/A N/A N/A

France OfficesInvestment Property underconstruction Level 3 3,862 3,862 309 997 206 2,000 200 3000

Commentary 8: Sensitivity information to be provided under IFRS 13For investment properties measured at fair value that are categorised within Level 3 of the fair value hierarchy,

paragraph 93(h) of IFRS 13 requires the following disclosures to be provided:

a narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs if a

change in those inputs to a different amount might result in a significantly higher or lower fair value measurement. If

there are interrelationships between those inputs and other unobservable inputs used in the fair value measurement,

an entity shall also provide a description of those interrelationships and of how they might magnify or mitigate the

effect of changes in the unobservable inputs on the fair value measurement. To comply with that disclosure

requirement, the narrative description of the sensitivity to changes in unobservable inputs shall include, at a minimum,

the unobservable inputs disclosed when complying with (d).

It is clear that IFRS 13 requires only narrative information with respect to sensitivities. However, quantitative

information on sensitivities may be useful for the users of financial statements. In Section B.8 above, the managementof Good Real Estate has voluntarily provided quantitative information on sensitivities as it believes that this

information would benefit the information needs of the users of their financial statements.


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Commentary 9: Sensitivity analysis under IAS 1.129 (b)

Paragraph 129 of IAS 1 has not been amended as a result of the requirements of IFRS 13. Hence, companies will

have to consider whether disclosure of a quantitative sensitivity analysis is required in accordance with paragraph

129(b) of IAS 1. This analysis may not necessarily be for the same classes of assets as the IFRS 13 disclosures.

However, a detailed sensitivity may be useful in certain circumstances, e.g., when there is a significant estimation

uncertainty pertaining only to the fair value of certain properties of an entity. In line with the development of best

practice18, we believe it is meaningful to provide sensitivity information on a quantitative basis.

B9. Illustrative disclosure Highest and best use

For all investment properties that are measured at fair value, the current use of the properties is their highest and best

use.

Commentary 10: Highest and best use

If, for recurring and non-recurring fair value measurements, the highest and best use of a non-financial asset differs

from its current use, an entity shall disclose that fact and why the non-financial asset is being used in a manner that

differs from its highest and best use (IFRS 13, paragraph 93(i)).

An example of a situation where the current use of a property differs from its highest and best use is a property that

is being used as a parking area. The entity that holds the property has determined that use of the property as an

office building, after development, will generate the most economic benefits, i.e., use as an office building is the

highest and best use of the property.

18 Reference is made to the annual financial statement survey of real estate entities conducted by Ernst & Young, which can be found atwww.ey.com/Publication/...IFRS/.../Surveying_IFRS_for_real_estate


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