Accounting Policies Relating to Investment Properties

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.

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.

Vicinity is the world leader in the retail sector for management of the assets that brings together 2 most established companies in the retail property management of Australia that is Novion property group and Federation Centres. The main objective of the company is to enrich the community experience and the company is re-imagining the destinations for the future to create places where the people will love to connect (Vicinity.com.au 2018).

Looking into the annual report of the company it is identified that the company prepares its financial statements as per the requirement of general purpose financial report. Further, the report is prepared in accordance with Corporation Act 2001 and the AASBs (Australian accounting standards). That is issued by the Australian accounting standards board. It further ensures the compliance with the IFRS (International Financial Reporting Standards) that is issued by IASB (International accounting standards board).

Vicinity takes into consideration various criteria for evaluating the investment potential of assets. This offers framework with which the company can benchmark the portfolio composition in every six months and it also refers when reviews the potential opportunities for acquisition (Malone, Tarca and Wee 2016). The investment properties of the group represents leasehold and freehold interests on building and land that is held for deriving rental income. Initially the investments are measured at cost including the associated transaction cost. Eventually, these are carried at the fair values at each of the reporting period on the basis of the market value that is determined by the internal valuations or external valuers. These valuations are inclusive of the cost of capital and work in progress on the development projects (Setyaningrum and Siregar 2015). The process of portfolio valuation is as follows –

Each investment property of the company is valued internally or independently in December and June of each year as part of biannual process of valuation. This process required –

• Each property shall be valued independently at least once in the year.
• Internal valuation must be carried out if the property is not due for the purpose of independent valuation
• Internal valuation shall be reviewed by the director of independent valuation firm for assessing the adopted assumptions and the reasonableness of outcomes.
• If the internal valuations reveals that the variance is more than 10% as compared to the previous independent valuation then a new independent valuation shall be taken place (Hodgson and Russell 2014)

Flexibility Management has in Determining Property Values

For determining the fair values –

• Independent valuations shall be adopted commonly at the midpoint of capitalization of the net income and the methods of discounted cash flows.
• Internal valuations utilizes the latest available information related to property valuation
• Properties with sales agreements in the place at the closing of the year are valued at agreed amount of sale
• Both internal as well as independent valuation employs the method of residual value while valuing the properties for development (Miah 2017)

Further, the company classifies the measurement of fair value into the following hierarchy as per the requirement of AASB 13 on Fair Value measurement –

• Level 1 – unadjusted quoted price in the active market for similar type of liabilities or assets.
• Level 2 – inputs except for the quoted price that is included within level 1 that can be observable for assets and liabilities, directly or indirectly.
• Level 3 – inputs for liabilities or assets that are not recognized on market data base.

The management can make the investment valuation as follows –

• Based on forecasted future returns – if the company feels that the future returns will be more than expected based on the expected returns then the valuation of the inventories can be altered accordingly.
• Competition – if there exists a competition then the market price may be reduced and the investment price shall be adjusted accordingly.
• Resilience on long-term basis – if there is flexibility in long term basis that the investment can be altered or reinvested then the value can be changed accordingly.
• Potential of development – if the company has reinvestment opportunity then it can increase the valuation of the investment
• Growth and sales productivity – if the company has good opportunity of productivity and sales then the company can increase the value of the investment accordingly.

Retail industry of Australia has been reshaped by interplay among the economic, technology and social circumstances that is changing the customer’s expectations and emergence of new business channels and models. For assisting the customers and the community to navigate the change in the future retail publication it will bring together wide range of case studies in the Australian retail business that will embrace the trends and re-imagine the future of the retail business (Cristina-Aurora 2013). The company believes that its success is deeply associated with the success of its retailers. The asset management approaches of the company offers high level of service to the retailers for assuring that they will be well supported in the operations. The leasing, data, insights and marketing team’s works together for engaging with the retailers on the ongoing basis for understanding their requirements, solving any issues and supporting them in various ways. However, the changes in the Australian retail industry will have the following impact on the financial statement of VCX. –

• Investment extending capacity – with new entrance in the industry, it will face tough choice. The new entrants like Aldi from German will give tough competition which in turn will reduce the sales of the company. it can be identified from the annual report of the company that the revenues of the company has been reduced from $ 1259.5 million to $ 1235.8 million over the years from 2016 to 2017 (Hu, Percy and Yao 2015).
• Key metric changes due to changes in lease accounting – the new accounting treatment will have immediate impact on wide range of key metrics those are monitored by the shareholders and it includes –
• Gearing and net debt – it will increased as the reported debt will increase, however the ROU assets will not be included in this (Danielsen et al. 2014).
• EBITDA – it will go up as no operating lease expenses will be included
• EBIT – it will be increased as part of lease cost will be included under interest expenses that are not included in EBIT.
• PBT – while the PBT for overall lease will be neutral, the profit will be lower in initial stages of the lease owing to higher rate of interest in respect of the upfront payment.

The retail sector of Australia is underperforming continuously as compared to the other economy. This is leading to the various convergences of events that include –

• Structural changes with regard to the industry that is driven by the shift to the online shopping
• Changes in the consumer preference that will include greater emphasis on the experience
• Fierce competition that will lead to the compression of margin (Riccardi 2016)
• Every slow rate of wage growth and higher rate of inflation for the essentials that will limit the ability of the consumers for spending.

However, as per the positive accounting theory the accounting work is completely based on reasoning. The generally accepted accounting cannot be completely changed as they are universally accepted. Further, the changes in the economic condition will have an impact on the foreign exchange of the company as per the AASB 121 on the effects of changes in foreign exchange rates.

Reference

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.

Malone, L., Tarca, A. and Wee, M., 2016. IFRS non?GAAP earnings disclosures and fair value measurement. Accounting & Finance, 56(1), pp.59-97.

Miah, M.S., 2017. Accounting standards complexity, audit fees and financial analyst forecasts in Australia: a thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy in Accounting at Massey University, Albany, New Zealand (Doctoral dissertation, Massey University).

Riccardi, L., 2016. Accounting Standards for Business Enterprises No. 3—Investment Real Estates. In China Accounting Standards (pp. 25-29). Springer, Singapore.

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].