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Recognition, Measurement, and Disclosure under AASB 140

1.With reference to VCX identify and summarise the accounting policies relating to investment properties and how these are dictated by regulation.

2.With reference to VCX identify and explain the flexibility management has available in the determination of investment property values.

3.With reference to VCX explain the potential impacts of the changes in the retail industry on the financial reports (balance sheet and income statement impacts).

4.Evaluate the potential economic consequences of these changes in the retail industry on the financial reports of VCX. This should be answered using the accounting theory related to the use of financial reports (Week 0 material).

1.The accounting treatment for investment property is prescribed under AASB 140- Investment Property. This AASB 140 deals with recognition, measurement and disclosure of the investment property. The term investment property basically denotes the property including land and building that are held for the purpose of earning rental income or for the purpose of capital appreciation or may be both reasons but is not meant to be sold.

The main specifications of this AASB 140 include measurement of investment property on the basis of fair value model or the cost model whichever is appropriate in the desired case, permitting the property interest to be included in the investment property value provided it meets out the specified requirements under AASB 140, making full fledged disclosures wherever required, etc,

Further, as per this standard, the investment property is recognised as an asset in the financial statements only if the two conditions are fulfilled :

It is assured that the property will reap future economic benefits and these will be received by the entity in near future, and
The cost of the investment property can be calculated accurately and must be reliable.

 The company VCX investment properties include freehold and leasehold held properties in form of land and buildings. These are held to earn rental incomes. These properties are recorded at their purchase cost and any other related costs specifically incurred to acquire it. Hence, the policy to record land & building of the company is to record it at cost plus incidental cost incurred (Vicinity, 2017). The company also determines the current market values of the properties at the rear end by the values submitted by the valuation person and are thus carried at fair values (Peirson et. al, 2015). Any significant and material work in progress cost is also added up to the cost of the properties.

Investment Property as an Asset

With regard to the regulation, the process of valuation is governed by the Board and also the Investment Committee of the internal management. The key executive lives are also involved in the process. The review of this process is done on a periodic basis considering any regulatory changes or any changes in market conditions, etc (Brigham & Daves, 2012).

The following treatment is also given to following situations or valuations.

The annualized net income from a property is capitalized in perpetuity from valuation date. The capitalized value is also adjusted due to factors like revision in rentals, future capital expenditures and increase in interest rates (Vicinity, 2017).

The discounted cash flows of the rentals and the properties assumed to be sold called as the terminal value is calculated by capitalizing by using a terminal yield rate and recorded at the end of the investment period (Vicinity, 2017).

Any future costs to be incurred in the development of an asset like construction cost, finance cost and any other development cost is calculated using DCF and deducted from the present value of the asset to arrive at the value of the asset at its completion (Parrino et. al, 2012).

The company also follows AASB 13 Fair Value Measurement which classifies the     investment measurements into three categories mainly;

Level 1: Quoted Prices

Level 2: Other than Quoted prices

Level 3: Values of assets & liabilities which are not based on market data.

2.Following is the ideology and the valuation method adopted by the management in the valuation of investment properties:

The management is free to adopt the valuation determined by the external values. The value is determined by the external values and can further be adjusted on account of interest rates, increase in rentals, government policies and discounted present value factors. The management also adds up all the costs specifically incurred in the development and construction of the investment property to its cost. The asset is also revalued at the year-end on account of any change in the fair values of the assets. The increase in the fair value is adjusted in the cost of the asset (Paradise & Rogoff, 2009).

The management has designed a very flexible approach for determining the value of investment properties which can be summarised as follows:

The valuation of each property is done once a year.
The management chooses the independent valuers from pre-approved panels and makes sure that they are well qualified.

VCX Investment Properties

In case the property does not qualify for independent valuation, the internal valuation is done in that case.

The internal valuation is compared with the previous independent valuation done and where there is a variance of more than 10%, then another independent valuation is conducted irrespective of the fact that one valuation has already been done in that year (Vicinity, 2017).

Even the internal valuations done are reviewed by an independent valuation team to assess the accuracy of the same.

The board has thus set up a flexible system to determine the correct valuation of the investment properties. The management considers each and every aspect related to the property at the time of determination of the value of the investment property. (Benabou & Tirole, 2010)

3.The following shall be the potential effects of the changes in the retail industry on the financial statements which are Balance Sheet and Income Statement:

In case there is dullness in the retail market, the tenant quality shall decrease. The payment capacity of the tenant will be decreased due to reduced demand for common commodity and services in the market. The rentals are bound to go down or will be deferred substantially which will have an impact on the profitability of the company (Bauer & Hann, 2010).

The valuation of the investment properties is also affected due to the overall socio and economic situations in the retail industry. The valuation shall be on a lower side if the market situation is negative that is the demand for goods and services are on the decline. The values shall also give reduced valuations of the investment properties. So this will affect the fair value of the properties at the rear end of the financial period (Pilbeam, 2009).

The capital expenditure is expected to be declined because of the slump in the overall economy. For example, the company shall not take up any capital expenditure like development and construction cost in case the economy is not responding positively (Davies & Crawford, 2012). It shall also not consider any acquisition or merger or any association of business because the market scenario does not give a positive signal due to recession or global slowdown (Bauer & Hann, 2010, p. 44).

There shall be an increase in lease receivables due to the reason that the recovery will be lower from the lessees when the market is down.

There shall be increased in amounts payable to creditors and other expenses payable due to market trends.

Valuation Methodology Adopted by the Management

With the overall slowdown in the market, there are prominent chances that there shall be high risk of tenant default that is the payments of lease rentals may be delayed or may have to be written off as bad debts which shall have an effect on the profitability and this may also affect the other tenants at large and they may also default on payment of lease rentals of the company (Choi & Meek, 2011).

4.The segment income pertaining to the investment properties at the year ending 30th June 2017 has fallen down on the account of changes in the retail market as compared to the year ending 30th June 2016 by approximately $ 37 million.

There has been an increase in the rent lost from undertaking development by approximately $ 10.9 million.

As a result, the underlying EPS has also decreased to 18.74 cents as on 30th June 2017 as compared to 19.14 cents as on 30th June 2016.

There has also been an increase in the total value of assets under management which includes the investment properties. The increase has been substantial which comprises a maximum of the investment properties of the company (Vicinity, 2017).

Movement in the values of investment properties can be accessed from the following facts:

There has been an increase in the overall movement by nearly $1000 million due to changes in the retail market.

The operating lease receivable have shown an increase as shown in the below extract from Annual Report :

The value of lease receivable has shown an upward movement by an increase of nearly 265m$ as compared to previous year.

Another effect on the company financial statements is mentioned below. It states that the payments made to the key management personnel (KMP) have drastically reduced by nearly more than 15% as compared to previous year mainly on account of nil termination benefits and reduced share-based payments. The payments have almost reduced by  $ 2540000. This shows that the company is cutting on the key management employee’s salary and incentives (Vicinity, 2017).


Bauer, R. and Hann, D. (2010) Corporate environmental management and credit risk. Maastricht University.

Benabou, R. and Tirole, R. (2010) Individual and Corporate Social responsibility. Ecnomica. [online]. 11, pp. 1-19. Available from: [Accessed 26 April 2018] 

Brigham, E. & Daves, P. (2012)  Intermediate Financial Management.  USA: Cengage Learning.

Choi, R.D. and Meek, G.K. (2011)  International accounting. Pearson .

Davies, T. and Crawford, I. (2012)  Financial accounting. Harlow, England: Pearson.

Paradise, R. and Rogoff, B. (2009) Side by Side: Learning by Observing and Pitching In. Ethos. [online].   37, pp. 102–138. Available from: [Accessed 26 April 2018]

Parrino, R, Kidwell, D. and Bates, T. (2012) Fundamentals of corporate finance. Hoboken, NJ: Wiley

Peirson, G, Brown, R., Easton, S,   Howard, P. and Pinder, S. (2015) Business Finance, 12th ed. North Ryde: McGraw-Hill Australia.

Pilbeam, K. (2009) Finance and Financial Markets. Palgrave Macmillan

Vicinity. (2017) Vicinity 2017 annual report & accounts [online].  Available from: [Accessed 26 April 2018]

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