Being proactive, RioCan REIT is the first out of the gate to announce the effect of the new accounting standards (International Financial Reporting Standards) on its book value.
Under the new rules, RioCan's assets will gain $1.6-billion to total $6.9-billion.
For those who don't know, the IFRS rules come into effect in Canada on January 1 (but have already been implemented in Europe) and they require firms to record assets at fair value, not historical book value. These changes will make sure market fluctuations are accounted for.
To assess its book value, RioCan used a 7.1 per cent cap rate, which is higher than the Street's current estimates around 6.5 to 7 per cent. But that isn't necessarily a bad thing, analyst Heather Kirk at National Bank Financial noted this morning. RioCan's valuation was completed as at January 1, 2010, which is backward looking. Since, cap rates have compressed.
RioCan completed most of the valuation in-house, but 38 of its assets were valued externally to offer a third-party check on its process.
To prepare for the new accounting standards, firms can adjust their book values in 1 of 3 ways. Some will opt for the European model, which will reset all of their accounting statements. In the future, these firms will continuously update their book values by running any appreciations (gains) or depreciations (expenses) through their income statements. Other firms will simply run the IFRS valuation as a separate model and disclose this number in the notes to their financial statements.
The third option, which RioCan used, allows for a one-time big increase (or decrease), and then further disclosure in the notes to their financial statements.