First, under IFRS for SMEs, there is a single income statement that will combine the current profit and loss account and statement of total realised gains and losses. The income statement will incorporate the movements on property revaluations of investment vehicles bringing significant volatility to the reported results of those companies and with consequent risks to their loan interest cover covenants.

Secondly, most property investment companies mitigate their exposure to interest rate fluctuation by way of interest rate swaps. These swaps are derivative financial investments which under IFRS for SMEs need to be recognised in the financial statements at fair value. The movement in fair value being reflected in the income statement unless the swap meets the requirements of a hedging transaction, in which case the movement is via reserves. Documenting and annual monitoring of a hedge to ensure it remains ‘effective’ in IFRS terms, will be time consuming and not straightforward. Failure to treat the swap as a hedge or it becoming ‘ineffective’ will give rise to further income statement volatility and further risks to interest covenants. Fair valuing these derivatives will also give rise to fluctuations in the company’s reported net assets, affecting its credit worthiness and give rise to the risk of breaching loan net asset covenants.