FAIR VALUE VERSUS HOUSING: UN-INTENDED CONSEQUENCES OF ACCOUNTING FOR PROPERTY IN SWEDISH MUNICIPALITIES

In January 2014 a new private sector regulatory accounting framework was introduced in Sweden, the K3-framwork. The K3 is heavily, but not completely, influenced by IFRS for SMEs. In a Swedish setting this means, compared to... [ view full abstract ]

In January 2014 a new private sector regulatory accounting framework was introduced in Sweden, the K3-framwork. The K3 is heavily, but not completely, influenced by IFRS for SMEs. In a Swedish setting this means, compared to previous regulation, an explicit requirement to disclose the fair value of investment properties, where fair value below cost value indicate impairment-needs. Regarding investment properties in Sweden, these can largely be linked with the municipally owned housing companies, which in the current situation possess a stock of around one third of total investment properties linked to housing in Sweden (SCB, 2013). Through ownership and consolidated financial reporting fair value issues enters the realm of the municipal sector and becomes a vital issue in the public debate.

At present, there is both national and local pressure to build more rental properties to accommodate a growing population. However, the Swedish model for rental levels is based on utility value and not supply and demand, which might make it difficult to defend cost values particularly in sparsely populated municipalities. Recently, various actors, are claiming, that the disclosure of valuations of investment properties, which subsequently, leads to requirements for impairment, is considered to prevent housing development in certain municipalities.

This paper therefore seeks to explore what happens when private sector accounting regulation clashes with a public sector strategy to provide housing for citizens, by building municipal rental properties. We, more specifically, unravel the unintended consequences of fair value disclosure requirements for municipal companies with respect to issues such as political housing policy, the municipality as an owner and consolidated financial reporting. The paper more broadly, aims to contribute to the debate on the fair value accounting in financial reporting in public sector settings, by means of a case study-based examination of municipalities in Sweden.

The paper consists of three key parts. The first part is concerned with the debate regarding the use of fair values and untangles the emergence of the K3 framework in Sweden. We analyse how it travelled from the private sector into the policies and financial reports of Swedish municipalities. The second part considers the impact of valuation of investment properties in the consolidated financial statements of three selected Swedish municipalities via their housing companies. The third and key part of the paper examines, through the selected Swedish municipalities, the local municipal consequences of the valuation of investment properties in municipal housing companies, as described and construed by the local actors. The final analysis addresses the tensions and unintended consequences of financial reporting when it clashes with the political reality of Swedish municipalities.