Following Accounting Standards for Financial Reporting
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)
Vicinity Centres is a company which is engaged in retail business for management of assets which is formed with the combination of two established companies of in retail property management business in Australia. The companies which are combined to form Vicinity centres are Novion property group and Federation Centres. The main purpose of the company is to re structure the business which can provide effective services to the community and customers.
1.As per the financial statements of Vicinity Centre, the financial statements are prepared of the company are prepared as per the requirement of general purpose financial reporting framework(Chenget al. 2014). The financial reports of the company are prepared fairly following rules and regulations which are present in Corporation Act 2001 and the relevant standards which are issued by Australian Accounting Standard Board (AASB). The company is mandatorily required to follow accounting standards which are issued by AASB and also provisions of Corporation Act 2001 which is applicable on the company(Kang and Gray 2013). The accounting framework which is followed by the company is also in compliance with the guidelines of IFRS and International Accounting Standard Board (IASB).
The company takes into consideration all the necessary guidelines for identifying and evaluating investment properties. The framework offers business an opportunity to benchmark the portfolio composition of the business which can be done in every six months period and also helps businesses to review possible scenarios of acquisitions(Christensen and Nikolaev 2013). The investments properties of Vicinity Centre consist of properties which are of leasehold or freehold nature which is used by the business for the purpose of earning rental income for the business. The investment properties are initially measured at cost and thereafter measured at fair value on the basis of market value of the property which can be accurately estimated by an expert in the field. The valuation of the properties is done considering the cost of capital of the business and also work in progress for developing properties(Lawryet al. 2017). The valuation process of the properties is based on the policies which are set by the management of the company. The investment properties of the company are valued independently in the month of June and December as per the policy of biannual valuation process of the business(Crosby and Henneberry 2016). The basic requirement of the process is given below:
- The properties which the company is possessing should be valued at least once a year.
- Internal valuation to ascertain the accurate value of the property is to be done if independent valuation has not been carried out.
- The properties which are agreed for sales should be valued at the agreed amount of sales at the closing of the year.
- In case of valuing properties for development residual value method must be used.
Measuring Investment Properties
As per AASB 13 Fair Value measurement, the measurement of fair value of a property is classified into the following types or levels which are discussed below:
- The unadjusted price in the active market which is applicable for similar types of assets or liabilities for the first level(Barth 2013).
- The inputs except for their quoted price which are already covered under the first level
- The inputs for liabilities or assets which are not recognized on market data base.
2.The alternative technique which can be used by the management as an alternative to the current policies can be a self-developed policy which is not in any way violation with the provisions of accounting standards which are issued by AASB(Enever, Isaac and Daley 2014). The self-developed policy should be such that it meets the requirements of the management and effectively represents the valuation of investments. The management can formulate the policy for investment valuation by taking into consideration the below factors:
- Future Forecasted Returns: If the returns which the management anticipates for future is more from the investment property then the valuation procedure will be altered accordingly(Havard 2013).
- Competition: The level of competition which exist in the market is also a factor which is responsible for the valuation of the assets of the company.
- Scope of further Development: The valuation of the assets also will depend on the fact whether there is a scope for reinvestment in the asset so that the asset can be further developed.
- Sales productivity and growth of the asset: If the company can achieve effective sales and growth with the asset than the investment property can be valued accordingly by the management of the company.
- Nature of the Asset: If the asset which is being used by the company as investment property is intended to be kept for a long term basis then this should also be taken into consideration for valuing the investment property of the business(Blackledge 2016).
3.The retail industry in Australia is ever changing due to various reasons such as growth, market requirements, increasing demand and inflation, technological changes and changing needs and expectations of the customers. Due to such changes business model of such retail business are also changing along with changes in their financial and economic factors as well.
In the case of Vicinity Centre, the management of the company recognizes that the survival and development of the company both depends on how the retailers under the company can perform. The Australian retail market is changing and the management of the company feels that proper asset management approach will be enabling the company to provide support to its retailers in their operation so that they can perform well. The changes which are happening in retail industry is also likely to have impacts on the financial statements as some of the financial policies which are followed by the business will be affected. The changes in Australian retail industry will have the following impact on the financial statement of the company which are given below:
- Sales Generation Capacity: As the market is changing therefore foreign brands or even new brands in retail industry might enter the market. With the entering of such industries the market will be become more competitive and hence the sale generation will be a bit tough for the companies. The annual reports of Vicinity Centre show that the sales of the company has fallen from $ 1259.5 million to $ 1235.8 million from 2016 to 2017. This can be attributed to the entry of Aldi in the market which made the market more competitive.
- Changes in Lease Accounting: The new accounting treatment which is to be introduced for lease accounting will have impacts on key metrics which are often referred to by the investors to judge the financial performance of the business(Riley and Shortridge 2013). Such key metrics are:
- Gearing rate: It will affect the debt structure and the reported debt will be increasing
- EBITDA: This will increase as there is no operating lease inclusion
- EBIT: The value of EBIT will increase as a part of the cost which is of lease will be included under interest that are not included in computation of EBIT.
4.As discussed earlier the changes which are occurring in the retail industry will affect the financial reports and the economical structure of the company as well. The changes which can be expected and which will be affecting the annual reports of the business are given below:
- The increased level of competition will be affecting the sales generating capacity of the company which will in turn impact the revenue of the business and ultimately the net profit of the business(Ioannou and Serafeim 2017).
- The changes in the market will result in increasing amount of costs of the company which if accrued will impact the profit and loss statement and if paid will impact the cash flow statement of the business adversely.
- Changes in the preference pattern of the customers will affect the demand for the products of the company and in turn affect the financial performance of the business.
References
Barth, M.E., 2013. Measurement in financial reporting: The need for concepts. Accounting Horizons, 28(2), pp.331-352.
Blackledge, M., 2016. Introducing property valuation. Taylor & Francis.
Cheng, M., Green, W., Conradie, P., Konishi, N. and Romi, A., 2014. The international integrated reporting framework: key issues and future research opportunities. Journal of International Financial Management & Accounting, 25(1), pp.90-119.
Christensen, H.B. and Nikolaev, V.V., 2013. Does fair value accounting for non-financial assets pass the market test?. Review of Accounting Studies, 18(3), pp.734-775.
Crosby, N. and Henneberry, J., 2016. Financialisation, the valuation of investment property and the urban built environment in the UK. Urban Studies, 53(7), pp.1424-1441.
Enever, N., Isaac, D. and Daley, M., 2014. The valuation of property investments. Taylor & Francis.
Havard, T., 2013. Investment property valuation today. Taylor & Francis.
Ioannou, I. and Serafeim, G., 2017. The consequences of mandatory corporate sustainability reporting.
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.
Lawry, S., Samii, C., Hall, R., Leopold, A., Hornby, D. and Mtero, F., 2017. The impact of land property rights interventions on investment and agricultural productivity in developing countries: a systematic review. Journal of Development Effectiveness, 9(1), pp.61-81.
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
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