The concept of market value in thin markets and its implications for international accounting rules (IFRS)

Publication Date10 April 2019
AuthorHans Lind,Bo Nordlund
SubjectProperty management & built environment,Real estate & property,Property valuation & finance
The concept of market value in
thin markets and its
implications for international
accounting rules (IFRS)
Hans Lind
Department of Building and Real Estate Economics,
Kungliga Tekniska Hogskolan, Stockholm, Sweden, and
Bo Nordlund
Karlstads Universitet, Karlstad, Sweden
Purpose The purpose of this paper is to discuss how the concepts market value (MV ) and exit price should
be interpreted in thin markets and how accounting rules may need to change to take this into account.
Design/methodology/approach This is a conceptual paper using hypothetical examples as a base for
the conclusions.
Findings In a thin market, actors can have rather different reservation prices. The price will then be set
throughbargaining and the agreed pricecould be considerable abovethe reservation price of theactor with the
second highestreservation price. The exit priceshould then be below what the MV was beforethe transaction
and below the entryprice, and according to the currentaccounting rules, the value in thebalance sheet should
then be below the pricepaid. The authorsexperience is, however, that this rarely happens in practice.
Research limitations/implications The limitation of the paper is that it is a conceptual paper and not
based a systematic empirical study of accounting practices.
Practical implications The results of the paper indicate that there is a need to revise the current
accounting rules. Possible changes are discussed.
Originality/value As far as the authors know, this is the first paper that looks at problems in the current
value concepts related to differences in reservation prices in thin markets.
Keywords Accounting, IFRS, Property valuation, Market value, Fair value, Thin markets
Paper type Conceptual paper
In practice, there seems to be no consensus about what the definition of a market value (MV )
really means in some situations in the real estate market. This is especially the case when
the real estate market is a thin market in terms of number of transactions and number of
potential buyers and sellers. In this paper, we discuss how MV can be interpreted in such a
market, and also implications for accounting rules.
The International Valuation Standards defines MV as follows (IVS, 2017):
Market Value is the estimated amount for which an asset or liability should exchange on the
valuationdate between a willing buyerand a willing seller in an armslength transaction, after proper
marketing and wherethe parties had each acted knowledgeably, prudentlyand without compulsion.
This definition is also the official one in the UK and accepted by RICS (Wyatt, 2013). Many
articles have been made about how to define and interpret MV, see e.g., Lusht (1983),
Dorchester (2011) and Sanders (2018). Lind (1998), e.g., discusses whether it is necessary to
include conditions referring to willing buyer and willing seller. Lind also discusses if there is
any difference between defining MV in terms of most probable price or in terms of highest
price. French (1997) argues that the role of the valuer in assessing MV is to model the likely
market thinking and estimate the point at which the sale will take place. French clearly
Journal of Property Investment &
Vol. 37 No. 3, 2019
pp. 301-310
© Emerald PublishingLimited
DOI 10.1108/JPIF-02-2019-0022
Received 13 February 2019
Revised 25 February 2019
Accepted 25 February 2019
The current issue and full text archive of this journal is available on Emerald Insight at:
Concept of MV
in thin markets

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