Paragraph 93(h) of IFRS 13 requires the following disclosures to be provided for investment properties measured at fair value categorised within Level 3 of the fair value hierarchy:
“… 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).”
The guidance does not explicitly require a quantitative sensitivity analysis. However, such sensitivity analysis might be necessary in order to satisfy the requirements of IAS 1.
Paragraph 125 of IAS 1 requires that “an entity shall disclose information about the assumptions it makes about the future, and other major sources of estimation uncertainty at the end of the reporting period, that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year. In respect of those assets and liabilities, the notes shall include details of: (a) their nature; and (b) their carrying amount as at the end of the reporting period”.
Where assumptions made in determining the fair value of investment property are significant assumptions in the context of IAS 1, further information must be provided within the financial statements, so that users understand the effect of estimation uncertainty. The disclosure of the sensitivity of carrying amounts to significant assumptions is an example of information to be provided in accordance with paragraph 129 of IAS 1.
Of the companies reviewed, 78% (2016: 67%) provided quantitative disclosure of sensitivities, and 8% (2016: 24%) provided qualitative disclosure of sensitivities. This shows an increasing trend in quantitative disclosure compared to our previous survey results, and perhaps it indicates an increasing recognition of the requirements of IAS 1 as set out above. Surprisingly, 14% (2016: 7%) did not provide any sensitivity analysis, and 8% (2016: 2%) provided qualitative disclosures for some unobservable inputs and quantitative disclosures for others. For those providing quantitative disclosure of sensitivities, the format of the disclosure varies significantly between companies, with 79% (2016: 73%) choosing to present the analysis in a tabular format, and others providing a summary narrative.
For each of the companies in the sample, we have compared the number of significant unobservable inputs disclosed to the number of sensitivities presented. As outlined above, IFRS 13 requires companies to include a narrative description of the sensitivity to changes in unobservable inputs; at a minimum, such a description should be provided for significant unobservable inputs used in the fair value measurement.
Of the companies reviewed, 68% (2016: 62%) disclosed fewer sensitivities than inputs, perhaps suggesting that not all unobservable inputs disclosed were considered ‘significant’ in the context of IFRS 13 and were disclosed to enhance users’ understanding of the valuation. A further 25% (2016: 24%) of companies disclosed the same number of sensitivities and inputs, suggesting that all inputs disclosed were considered significant. The remaining 7% (2016: 14%) of companies disclosed more sensitivities than inputs; these additional sensitivities are qualitative and provided as a narrative summary. The rationale for disclosing these additional sensitivities is unclear in all cases:
Where companies provided quantitative sensitivities, the most commonly used sensitivities were a variation of 25 basis points for yield/discount rate and a 5% variation for income. Of the companies reviewed, 63% (2016: 69%) disclosed a variation of 25 basis points for yield/discount rate; and 30% (2016: 33%) used 5% variation for income. It was noted that more companies are now starting to disclose different variations, ranging from 1% to 10%, or even monetary increases in income, rather than percentages. Of the companies reviewed, 78% disclosed a variation ranging from 5 basis points to 50 basis points for yield/discount rate; and 43% of companies disclosed a variation ranging from 1% to 20% for income.
Four years after the adoption of IFRS 13, there have been some notable changes in disclosures made by entities in the real estate industry, specifically:
- Entities have increased the level of disaggregation when disclosing information about different classes of property. Entities have continued moving away from disaggregation driven by segment reporting with further disaggregation by geography and type of property.
- More entities are providing the disaggregation ‘by geography and type of property’, while disaggregation by location has an increasing trend among non-UK entities.
- More entities are providing quantitative instead of qualitative disclosure of the required sensitivity analysis for significant inputs compared to previous surveys.
- There continues to be a significant number of entities that have disclosed fewer sensitivities than inputs compared to 2016, suggesting that not all unobservable inputs disclosed were considered ‘significant’ in the context of IFRS 13.