Investment Property Accounting And Valuation Essay: AASB 140 Case - Vicinity Centre VCX.

Investment Property Accounting Treatment 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.In relation to investment property, accounting treatment for the same is covered under AASB 140 that primarily deals with measurement, recognition, and disclosure of the same. Moreover, investment property generally signifies a property that includes land and building held for earning rental profits or for appreciation of capital or both. However, such property is not meant for sale purposes. The prime specifications of such standard comprise of investment property measurement based on cost or fair value model whichever can be suitable based on the scenario for allowing the interest of property to form part of such investment property (Vicinity, 2017). However, it is needed that such property interest must adhere to the requirements laid down under AASB 140, thereby facilitating in thorough disclosure processes wherever needed.

In addition, based on such standard, investment property is identified as an asset in a company’s financials on the fulfilment of two prime conditions:

It must be ensured that such property will assist in attainment of future financial benefits and these must be attained by the company in the upcoming tenure.
The cost of such property must be computed appropriately so that parties can rely upon the same.

Vicinity Centre VCX investment properties comprise of leasehold and freehold properties in the form of buildings and land that are held for earning rental income. Moreover, such property has been recorded at their original purchase expense and any other associated costs incurred to procure the same. Therefore, the policy to record such property of the company is to record the same at cost plus incurred incidental charges. Nonetheless, the company also ascertains present value of its properties by the values disclosed by the valuation experts so that these are carried or recorded at their respective fair values. Besides, any material work in the progress is also summed up to the properties’ overall cost.

Method of Valuation by the Management

In relation to valuation, the same is regulated by the Board and the company’s Investment Committee. Furthermore, the company’s major executives are also engaged in the same process (Vicinity, 2017). Thereafter, this process is reviewed periodically after accounting for statutory changes or variations in market scenarios, etc. The following treatment must be accounted in the following scenarios:

The discounted cash flow of properties and rentals that are assumed to be sold as terminal amount is computed by capitalizing through a terminal rate of yield and thereafter, recorded at the termination of the investment tenure (Kieso et. al, 2010).

The annual net income of the property is capitalized from the date of valuation in perpetuity form. Further, such value is also adjusted because of factors like future capital expenses, rental revisions, and enhancement in rates of interest.

Future expenses that are incurred in asset development like finance and construction expenses is computed through usage of DCF and thereafter, deducted from the current value of assets to come at an asset value at its completion.

Vicinity Centre VCX has also adhered to AASB 13 (Fair Value Measurement) that classifies investment measurements into categories like Level I (quoted price), Level II (apart from quoted price), and Level III (value of liabilities and assets not based on market information).

2.The method of valuation and ideology accounted for by the management for valuing their investment properties are as follows:

The management is not reluctant to account for valuation based on external values. Such values can be further adjusted based on rates of interest, enhancement in rentals, discounted present value, and government policy factors. Further, the management also sums up the expenses incurred in construction and development of investment property to their cost (Carmichael & Graham, 2012). Moreover, revaluation of asset also takes place at the end of every year owing to variation in fair value of such assets. Nevertheless, enhancement in fair value is adjusted in such asset’s cost (Vicinity, 2017). The management has also framed a measure for ascertaining value of investment properties:

Valuation of every property is conducted only once every year.
Management opts for independent valuers who are well-qualified in nature.
If property fails to qualify for independent valuation, internal valuation processes are conducted thereafter (Peirson et. al, 2015).
Such internal valuation is compared with prior valuations and a difference of more than ten percent results in conduct of another independent valuation.
Even such internal valuation procedures are reviewed to evaluate their accuracy level

Impact of Changes in Retail Environment on Financials

3.The significant impacts of changes in retail environment on financials are as follows:

In the event of dullness in such environment, quality of tenant will diminish. Further, the payment ability will also decline as a result of decreased demand for usual goods and services in the market. Moreover, the rentals are implied to decrease significantly as it can have a major influence upon the company’s profitability (Vicinity, 2017).

Valuation of investment properties is influenced because of overall economical and social scenarios in the retail environment. Further, such valuation must be on a lower side if the market scenario is negative signifying that demand for products and services have declined (Davies & Crawford, 2012). Moreover, such values must also offer decreased valuations of the properties so that it can impact their fair value at the termination of the financial tenure (Carmichael & Graham, 2012).

The capital expenses are also expected to diminish owing to slump in aggregate economy. For instance, the company must not consume any capex such as construction or development expenses in case economy fails to respond properly. Further, it must also not account any merger or acquisition as the market environment has not offered a positive sign owing to international slowdown or recession (Vicinity, 2017).

There must be an increment in the lease (receivables) owing to the recovery from lessees when market is witnessing a diminishing trend.

There must be an increment in payable amounts to expenses and creditors because of such market variations.

With an aggregate market slowdown, there are possibilities of high risk of default on the part of tenants in relation to payment of lease rentals that can be delayed or written off as bad debts, thereby influencing the profitability and other tenants as well (Bodie et. al, 2014).

4.The segment profit or income associated with the investment properties in the year end 30 June 2017 has witnessed a declining trend because of variations in the retail environment in comparison to the previous year by around $37 million.

There has been an enhancement in the rent that is lost from conducting developments by around $10.9 million.

Due to this, the underlying earnings per share has also declined to 18.74 cents as at 2017 in comparison to 19.14 cents that was in the year 2016.

There has also been an enhancement in the net value of assets that also comprises of the investment properties. Furthermore, such enhancement can be regarded as significant in nature that comprise of a maximum number of investment properties owned by the company (Benabou & Tirole, 2010).

Movement or variation in the values of such investment properties can be easily accessed from the fact that there has been an enhancement in the average movement by around $1000 million owing to variations in the retail environment or scenario (Vicinity, 2017).

The receivables associated to operating leases have been depicted as provided in the below mentioned lines observable from the annual report:

The lease receivables values of the company have witnessed an increasing trend by an increase of around $265 million in comparison to the past year (Parrino et.al, 2012).

One more significant impact on the company’s financials can be observed from the following fact. It has been stated that the payments that are made to the KMP have significantly witnessed a major decline by around fifteen percent in comparison to that of the last year. The reason behind this can be attributed to the fact that zero termination benefits and decreased payments associated to shares have paved a way for such decline. Moreover, such payments have almost declined by $2540000, thereby shedding light on the fact that the company is cutting KMP’s salaries and incentives.

References:

Benabou, R. and Tirole, R. (2010) Individual and Corporate Social responsibility. Ecnomica. [online]. 11, pp. 1-19. Available from: https://doi.org/10.1111/j.1468-0335.2009.00843.x [Accessed 30 April 2018] 

Bodie, Z., Kane, A. and Marcus, A. J. (2014) Investments. McGraw Hill

Carmichael, D.R. and Graham, L. (2012)  Accountants Handbook. Financial Accounting and General Topics, John Wiley & Sons.

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

Kieso, D., Weygandt, J., Warfield, T., Young, N and  Wiecek, I . (2010) Intermediate accounting, Toronto: John Wiley & Sons Canada.

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.

Vicinity. (2017) Vicinity 2017 annual report & accounts [online].  Available from: https://vicinity.com.au/media/686503/170816-fy17-annual-report.pdf [Accessed 30 April 2018]