A Model for the accounting of fair value adjustments on investment property to enhance transparency in financial reporting: a case study of First Mutual Properties Limited.

Abstract

The research aimed to develop a model incorporating fair value adjustments over an investment asset in line with IAS 40. A blended approach to research was employed, utilizing data obtained from First Mutual Properties' audited financial statements and questionnaires distributed to 40 finance professionals, purposively selected from accounting and auditing backgrounds for their direct experience with fair value measurement and reporting. The research methodology involved computing profit-based ratios for First Mutual Properties, initially with fair value adjustments and subsequently without. The analysis was conducted utilizing the Wilcoxon rank test and Z score effect size. The results indicated a substantial disparity among profitability ratios with and without fair value adjustments as per IAS 40, with statistically significant differences observed across all four ratios tested (p < .05) and effect sizes ranging from moderate to large (r = 0.612 to 0.652). After consulting with the finance experts, the model included elements such as dual rate disclosure model for level 3 assets, standardized valuation inputs, real-time sensitivity analysis disclosure, and the integration of ESG factors into valuation models. . Rather than recommending the removal of fair value adjustments, the study recommends that these four disclosure elements be adopted to improve the transparency of fair value reporting under IAS 40, allowing users of financial statements to distinguish valuation-driven movements from underlying operating performance without requiring any change to the standard itself.