The objective of this report is to recognize the property valuation of VCX. The report will identify and explain the flexibility that the management have in order to determining valuation of investment property. It will also explain the expected impacts owing to the changes in retail industry and its impact on the financial statements. Finally, the report will state the economic impact of changes in the retail industry.
1.Vicinity Centres (VCX), the leading retail company prepares their financial statement in accordance with the requirement of the GPFR (general purpose financial report). It also complies with the Corporation Act 2001 and the AASs (Australian accounting standards). Further, the company complies with the requirement of IFRS and the statute issued by the IASB (Barth 2013). The company’s investment properties are segregated into leasehold interest and freehold interests on the building and land that is kept for earning income from it. It considers various criteria to evaluate the assets investment potentials. It provides the company with a benchmark framework that assist to recognize when there is an opportunity for acquisition. As per the requirement of AASB, the investments are valued at cost initially. This cost is inclusive of the transaction costs. However, subsequently the investments are recorded at fair values at the closing of each accounting period or at each financial statement. This valuation at fair values is depended upon the market value that is measured by the external valuers or the internal valuations (Vicinity.com.au 2018). While the project is developed the valuations includes work in progress as well as the capital cost. Further, the portfolio valuation project s as follsws –
The company values each of its investment property independently or internally in bi-annual procedure that is every June and December. The requirements of the process are as follows –
- The valuation made by internally shall be reviewed by independent valuation firm or by the director to assess the assumptions adopted and the reasonableness for the outcomes.’
- each of the property shall be individually valued once in a year at least
- When the property is not kept for independent valuation it shall be internally valued.
- If it is found that there is more than 10% variance in the internal valuation of the property as compared to the previous valuation, it shall be valued again by the independent valuation (Hodgson and Russell 2014).
Methodology for the portfolio valuation –
In compliance with the requirement of AASB 13 related to fair value measurement, the company segregates the fair value measurement hierarchy as follows –
- Level 1 – quoted unadjusted price in active market for same type of the liabilities or assets.
- Level 2 – inputs except for quoted price that is included under level 1 that can be recognisable for assets and liabilities, directly or indirectly.
- Level 3 – inputs for liabilities or assets that are not recognized on market data base (Malone, Tarca and Wee 2016).
The fair value is determined as follows –
- Independent valuations as well as internal valuation use the residual value method for valuing the development properties
- Independent valuations shall be taken up at midpoint of the capitalization of net income and for the discounted cash flows
- Properties with the sales agreements at the end of the year shall be valued at the agreed amount of the sales
- The internal valuation method uses latest information available associated to valuation of property.
2.Valuation technique that is used by the company for measuring the fair value must be consistently applied. However, change in the valuation method or in its application shall be accepted if the change results in the measurement that is more representative or equal to the fair value of the under the circumstances (Cristina-Aurora 2013). This will take place in the following circumstances –
- New develops in the market
- Changes in the market conditions
- Improvement in the valuation technique
- Information no longer available those were used previously
- New information are available
However, the revision resulting from changes in valuation method or the application of valuation method must be accounted for as the change in accounting estimates in compliance with AASB 108. However, disclosures under AASB 108 for changes in the accounting estimates are not needed for the revisions that will be resulted from the change in valuation method or the application of it (Riccardi 2016).
3.CX is in the view that the company’s success is equally dependent on the success of its retail segment and growth of the Australian retail growth. Australian retail industry has been completely changed owing to various social and economic technologies and changes in the customer’s expectations and new business emergence. Company’s asset management policies therefore offers high service levels to retailers for ensuring them that the company will provide all kind of supports that they will require from time to time. The data team, insights, leasing teams and marketing team act together to engage the retailers on continuous basis and keep a track of their requirements, supports, resolving any issue in whatever way possible. Changes in the Australian retail sector will have following financial impact on the financial statement of the company –
- Lease accounting – new applicable treatment of lease will have a significant impact on the retail industry as well as its financial statements (Riley and Shortridge 2013). Further, the impact will be on immediate basis on various key financial metrics as follows –
- EBIT – the EBIT of the company will be increased owing to the reason that a portion of lease cost will be considered as interest expenses and the interest expenses are not included while calculating EBIT
- Net debt and the gearing ratio – this will be increased owing to the reason that the reported amount of debt will be increased.
- PBT – though PBT for the entire lease will have null effect, the profit at the initial stage of lease will be lower as the interest rate will be higher with regard to the upfront payment system (Danielsen et al. 2014)
- EBITDA – the EBITDA of the company will be increased as the expenses related to operating lease expenses will not be taken into consideration.
- Impact on sales – owing to new entrance in the retail industry, the company will have to face tough competition. Due to this there will be an impact on the sales of the company. as it already can be seen from the annual report of the company that the sales of the company over the years from 2016 to 2017 has been reduced from $ 1259.5 million to $ 1235.8 million.
4.The Australian retail industry over the past few years are underperforming on continuous basis as compared to the other sectors. It will lead to various changes as follows –
- Strong competition that will lead to reduction of profit margin
- Structural changes in the industry that will be influenced by the shift of the customers towards online shopping
- The wage rate growth will be slower and inflation rate will be higher that will limit the consumer’s spending ability.
- There will be changes in the preference of the consumers that will put greater reliance on experience (Hu, Percy and Yao 2015).
Further due to economic downturn, the company’s foreign exchange earnings as per AASB 121 will have a significant impact (Setyaningrum and Siregar 2015.). The company will not be able to earn that much through foreign investment as it used to earn. However, as per positive accounting theory the accounting works are solely based on reasoning (Kang and Gray 2013). It cannot be altered as the general purpose financial reporting is accepted worldwide. Therefore, taking into consideration this fact the company shall work upon it and find the way to reduce the unfavourable impact of economic downturn.
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Cristina-Aurora, B.B., 2013. Valuation Techniques Used In Fair Value Measurement. Management Strategies Journal, 22(Special), pp.97-104.
Danielsen, B., Harrison, D., Van Ness, R. and Warr, R., 2014. Liquidity, Accounting Transparency, and teh Cost of Capital: Evidence from Real Estate Invetment Trusts. Journal of Real Estate Research, 36(2), pp.221-251.
Hodgson, A. and Russell, M., 2014. Comprehending comprehensive income. Australian Accounting Review, 24(2), pp.100-110.
Hu, F., Percy, M. and Yao, D., 2015. Asset revaluations and earnings management: Evidence from Australian companies. Corporate Ownership and Control, 13(1), pp.930-939.
Kang, H. and Gray, S.J., 2013. Segment reporting practices in Australia: Has IFRS 8 made a difference?. Australian Accounting Review, 23(3), pp.232-243.
Malone, L., Tarca, A. and Wee, M., 2016. IFRS non?GAAP earnings disclosures and fair value measurement. Accounting & Finance, 56(1), pp.59-97.
Riccardi, L., 2016. Accounting Standards for Business Enterprises No. 3—Investment Real Estates. In China Accounting Standards (pp. 25-29). Springer, Singapore.
Riley, M.E. and Shortridge, R.T., 2013. Proposed Changes to Lease Accounting under FASB's Exposure Draft. The CPA Journal, 83(6), p.28.
Setyaningrum, D. and Siregar, S.V., 2015. The Value Relevance of Foreign Translation Adjustment: Case of Indonesia. Academy of Accounting and Financial Studies Journal, 19(2), p.251.
Vicinity.com.au., 2018. Vicinity Centres, Home Page. [online] Available at: https://www.vicinity.com.au/ [Accessed 2 May 2018]