Research On Motivations Of Employing Fair Value Model In Investment Real Estate

In the last couple of decades,the real estate market of China has been experiencing dramatic development,while the price also has reached to an unprecedented peak,which results in a big gap between the historical cost of estate market and its fair value.Therefore,the historical cost can no longer provide the financial reporting users with relevant accounting information.In 2006,the new accounting standards released by the Ministry of Finance give permissions to utilize fair value model,and by doing so,China has achieved a major breakthrough in the subsequent measurement of investment property.In 2014,by releasing Accounting standards.for Enterprises No.39-fair value measurement(CAS39),Ministry of Finance further standardizes the utilization of fair value,which reflects government’s determinations on promoting the application of this model.Compared to historical cost model,the accounting information based on fair value model is more useful for making decision and is more value relevant,but it has not been widely accepted by the listed companies in our country.Overall,the defective circumstances,such as complicated value estimation,high cost,accounting criteria restrictions and imperfect disclosing and supervising system,impedes the application of fair value model in the real estate investment of China.These defects reduce listed companies’ interests in applying fair value model in the subsequent measurement of property investment.Even if they’re willing to use this model,their motivations are laid in somewhere else rather than improving the relevance of accounting information.In this study,we make a detailed analysis to those motivations above,meanwhile providing valuable advises on improving the application of fair value model in investment property.This article employed a variety of research methods,such as document analysis,deductive induction and case analysis.By sorting the guidelines associated with fair value and property investment and analyzing the issues regarding application of this model in property investment,we concluded that the motivations that affect companies’ decisions on using fair value model include increasing the correlation of accounting information,avoiding loss,increasing executive compensation,the demand of debt financing and the consideration of overseas markets.And we also quoted a case,AVIC Real Estate(000043),and analyzed the background of the subsequent changes in the investment method of its investment real estate and its impact on the financial situation.In our opinions,in addition to improving the relevance of accounting information,there may be also incentives to improve performance and enhance debt-financing capacity.In summary,although currently,the imperfect application circumstances of fair value model has provided opportunities and means for listed companies to use fair value measurement to achieve their purposes other than improving the quality of accounting information.However,from the perspective of improving the relevance of accounting information,the application of fair value model in China is still necessary.At the end of this study,some policy suggestions are put forward,such as the method of determining the fair value,changing the direction of the guideline and improving the professional accomplishment of the accounting personnel,hoping to improve the application circumstances of fair value in our country.China’s existing studies are more focused on the consequences of application of fair value in investment real estate,but the motivations of the companies to develop or change accounting policies are rarely involved.Our study makes up for this deficiency to a certain extent.At the same time,this study takes AVIC as a case to explore the motivations of listed companies employing the fair value model in China,so as to help investors make more objective and accurate judgment when making investment decisions.