Choice of measurement basis and discretionary valuation of real estate: Evidence from Dutch Social Housing Associations

In this study, I examine choice of measurement basis and managerial discretion in accounting for real estate, where I compare measurement on the basis of discounted cash flow (DCF) with measurement based on historical cost (HC). I exploit unique data in the setting of social housing associations (SHAs) in the Netherlands, using data from a supervisory agency which makes an independent assessment of the value of real estate based on comparable assumptions across all SHAs, allowing for a comparison with reported carrying amounts. In line with prior literature, I find that leverage is positively associated with using DCF as measurement basis. In addition, I find evidence that both in case of DCF and HC measurement, carrying amounts increase with leverage, suggesting opportunistic use of managerial discretion in measuring assets. While the degree of opportunism does not differ on average, I find that opportunistic measurement increases as entities switch from HC to DCF measurement. Finally, detailed data on the supervisor's adjustments allow to investigate the assumptions SHAs use to adjust reported DCF carrying amounts. SHAs mostly use the timing of cash flows, the expected sales revenue, parameters such as inflation and the expected rent increases, and the assumed lifespan of real estate.