When applying International Financial Reporting Standards (IFRS) to listed companies in 2017, the Capital Market Authority suspended the use of the fair value and revaluation for measuring investment property and real estate for a period of three years. In a subsequent statement, the Authority extended the suspension until the end of 2021. This was done to help the market absorb the changes in the financial statements of listed companies and to give preparers time to prepare for the restrictions imposed by the Authority.

Real estate and investment property are similar in nature, as they are either land, a building, a part of both, or both; the difference between them lies in their purpose. The purpose of real estate is to produce or supply goods or services or to use them for the company’s administrative purposes, whereas the purpose of investment property is to generate rental income or increase its capital value. Considering the concept of fair value, we find that it is a market-based measurement, not a company-specific one, and its objective is to estimate the price at which a regular transaction could take place between market participants under normal circumstances.

So what is the financial impact of allowing this model? Previously, real estate was measured for accounting purposes at cost, which reflects the actual reality of the event at the time it occurred. It is accurate at the moment the property is acquired, but over time it gradually becomes a thing of the past and may differ from the property’s current fair value due to changes in purchasing power, inflation,and other economic factors.

The purpose of accounting information is to present financial statements that reflect the true financial position of the company to provide useful information to its users; and therefore, the application of the fair value model and revaluation is one of the principles for achieving this objective. In recent decades, the Kingdom has witnessed an unprecedented boom in urban development. Real estate funds and real estate development companies are among the leaders of this boom due to the size of their real estate assets compared to other sectors, and this will often result in revaluation gains that will increase the value of these companies’ assets as well as their equity, and this revaluation will not result in any cash flow.