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Real estate investments to be allowed on listed companies' earnings: FSC

TAIPEI, Taiwan -- The Financial Supervisory Commission (FSC, 金管會) yesterday announced that listed companies will be allowed to include real estate investments in earnings under revised accounting standards.

The market responded to the news with ambivalence, with opinions that deemed the change a great boon, while dissenters remained concerned of potential ramifications.

Beginning in the first quarter of next year, companies listed on the over-the-counter GreTai Securities Market (櫃台買賣中心) will be allowed to include the fair value of their respective real estate assets in their financial statements. Companies' real estate holdings will be accounted for on the basis of fair value — a conservative, rational and unbiased estimate of the value of an asset, as defined and included in the terms of the International Financial Reporting Standards (IFRS). Companies with real estate assets that demonstrate the capacity to yield continued and consistent income, such as rent, may be included as earnings in quarterly financial statements, said the FSC.

The market is anticipating companies of the construction, textile, financial and technology sector to reap the most benefit from the change, according to commentators. Companies whose earnings will be increased following the change in income calculation approach will be required to allocate gains towards special reserve provisions, in addition to other required measures.

Earnings for companies of the aforementioned sectors may see their earnings surge dramatically by the hundreds of billions, according to market experts.

Opposing opinions of the change however, stated that under the influence of rising interest rates, companies' earnings performance may see significant declines on an accounting basis. The number of companies electing to adopt the new asset accounting may fail to meet expectations, according to dissenting opinions of the change.

Reports indicate that the FSC is likely to adopt a discount rate of 2.125 percent, calculated by adding three basis points to the post office's two-year fixed deposit rate. Assets with fair values exceeding NT$300 million, or over 20 percent of a company's paid in capital or contributed capital must have the assets appraised by a designated third party.

According to institutional investors, gains derived from the change may be short-lived, and turn detrimental in the long run. While companies holding a large amount of real estate holdings may see a surge in earnings as the discount rate will be significantly lower than the 3.28 percent designated for the insurance sector, Taiwan's interest rates have for a long time been suppressed at a low level, a condition unlikely to persist.

When interest rates begins its upward trajectory, so will the discount rate, causing the calculated fair value of real estate holdings to decline significantly, which may impact companies' long-term earnings prospects.

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