This report evaluates the approach used by SCP for valuing its property and the impact on financial performance due to change in retail industry. It discusses the flexibility available to the management in using the approach for investment property valuation and highlights the economic effect of change in the retail industry.
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Running head: ACCOUNTING AND FINANCIAL REPORTING Accounting and financial reporting Name of the student Name of the university Subject name and number Student ID Author note
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1ACCOUNTING AND FINANCIAL REPORTING Executive summary Primary purpose of the report is to evaluate the approach used by SCP for valuing its property. It will focus on the flexibility available to the management in using the approach that will be applied for investment property valuation. In the next section the report will focus on the impact on financial performance owing to change in retail industry. In the last part the report will highlight the economic effect of change in the retail industry.
2ACCOUNTING AND FINANCIAL REPORTING Introduction SCP that is the Shopping Centres Australia Property Group that is listed under ASX is engaged in the operation of investment trust for real estate. It is managed internally and owns quality neighbourhood portfolio that also includes sub regional shopping centres along with freestanding retails focusing on the convenience retailing throughout Australia. As most of the retail outlets those have physical presence are facing the issues regarding experience of modern shopping, management committee for risk of the entity are increasingly concerned regarding changes in retail industry (Scaproperty.com.au, 2019).The same can be evidenced through the information delivered by the Australian Beureu of Statistics and its adverse impact on big retailers like David Jones, Oroton, Specially Fashion Group and Myer. Answer (a) From the annual statement of the company for the period closed in 2018 it is identified that the financial reports are prepared in compliance with the prerequisite of presenting as the general purpose financial reporting and the financial reports are complied with the requirement of AAS (Australian accounting standards), Australian interpretations, Corporations Act 2001 and differentotherauthoritativepronouncementsissuedbyAASB.Annualstatementsofthe company further meet the terms of the Australian accounting standards released by AASB as well as international financial reporting standards released by the IASB (Scaproperty.com.au, 2019). The entity has 2 registered and managed scheme for investment those includes (i) Shopping Centres Australasia Property Management Trust and (ii) Shopping Centres Australasia Property Retail Trust and. Investment interest for the land and building that includes the plant and equipment’sintegral part held for generating rental income is includedunder investment properties. The property is measured at cost at initial and the cost here inclusive of transactional cost.Afterinitialrecognitionthesamepropertyismeasuredatfairvaluessubsequently (Scaproperty.com.au, 2019). Fair value for investment property is the expected priced estimated to be received from sales of asset or to be paid for settlement of the liability as per normal business transactions taken place between the market participants on the date when measurement is done. At each date of
3ACCOUNTING AND FINANCIAL REPORTING reporting the investment property’s carrying value is reconciled with the assessment made by the directors after making required adjustments to the value reported in the financial statements or the carrying value (Cristina-Aurora, 2013)Current price in the active market appropriate for similar property with same condition as well as location is considered to be the best evidence for fair value computation. Gains or losses generated, if any from the alteration in investment property’s fair value are recognise under the income statement for the period concerned in which the gain or loss is generated (Aasb.gov.au, 2019). Investment properties are reported at fair value at each reporting date and are reported under the developments and are differentiated as investment property. As building and land satisfies the condition of investment and therefore held as composite asset. Overall value of land and building are affected by different factors like economic factors and market demand. However, most crucial factor is the income yield as against the decrease in value of building at reduced by the wear and tear due to usage over time. Fair value is evaluated through referring to reliable estimates for the cash flows of future period, status of development and the related profile for risks. Hence, the building and all the related components that also includes the equipments as well as the assets those forms the building’s integral parts are not considered for depreciation (Aasb.gov.au, 2019). Answer (b) Investment valuation can be made in the following ways by the management – Long term flexibility – if the investor has the flexibility with regard to reinvestment of the investment money for the long term period or if the investor has the option of switching the investment that is withdrawing money from one investment and reinvesting to another, the value of the investment can be altered as per the investment made and associated other things. Increase in sales and productivity – if the organisation has opportunity to increase the production adequately along with increasing the sales it will have more disposable income to make investments. Further, increase in sales that will provide more return will enable to entity to take better and informed decision as it will have more options to choose. In such
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4ACCOUNTING AND FINANCIAL REPORTING scenariotheentitywillhavetheopportunitytoenhancethevalueofinvestment accordingly. Forecasted returns – if any entity evaluates that it will be able to earn sufficient return over the future period that will exceed its projections the valuation of investments will be altered accordingly. Better return will give the entity an opportunity to the entity to invest with the best offered investment as the entity will be in a position to take higher risk for getting higher return (Miah, 2017). Opportunity of development – re-investment opportunity will enable the entity to have more options for investment. When the options are more, decision can be taken based on the requirement. For example, if the company at present getting 10% return from any investment and any other option is providing 15% return it has the opportunity to withdraw the money from the current investment and re-invest it with the option that is providing higher return (Malone, Tarca & Wee, 2016). Competition – with more competition there is likelihood of reduction of market price. If chances are there for reduction in the market price the investment value will be adjusted by the management accordingly. Hence, in above mentioned scenarios the management has the flexibility in valuation. Answer (c) Retail industry in Australia has been restructured due to various factors. These factors include economic factors, social factors and technological factors. These factors have significant impact on expectation and demand of the customers that leads to opening of new channels as well as new business models. To assist the customers and the communities with the changes in the publication of future retail models, different case studies of Australian retail business can be summed up that will help in understanding the retail business’s trends for the past years. On the basis of the findings the business model of retail business can be remodelled or reshapes as per the expectation and requirement (Danielsen et al., 2014). As per the view of SCP, the success of the business is largely dependent upon the success of retailers. Leasing, data team, insights team andmarketingteamworkstogetherforemployingtheretailersoncontinuousbasisfor comprehending the needs, provides supports and solving the issues of the retailers. In addition to that, SCP’s asset management technique provides high quality services to the retailers for
5ACCOUNTING AND FINANCIAL REPORTING assuring them that adequate supports will be provided by them with regard to operations (Hodgson & Russell, 2014).If any changes take place in the Australian retail industry, it will affect the SCP’s financial performances in the below mentioned ways – Ability of expanding the investment – as SCP is new to the retail industry it is definite fact that it will have to face stiff competition. In addition to that the Aldi’s entry from German will be a tough competition for SCP. It will have impact on SCP’s sales and profit. This fact can be established through the fact that revenue of the entity faced sharp decline from $ 320 million to $ 175.2 million from 2017 to 2018 (Scaproperty.com.au, 2019). Change in lease accounting led to changes in entity’s key performance metrics – new methodforaccountingofleasewillhaveimmediateimpactondifferentkey performance metric of SCP that is generally observed by the existing as well as potential shareholders for analysing the performance of the entity (Hu, Percy & Yao, 2015). These are – 1.EBIT – as the interest expenses for lease expenses will be charges as interest expenses, the EBIT of the entity will be enhanced significantly by that amount. 2.EBITDA – as the expenses amount for operating lease will be excluded it will increase the EBITDA 3.PBT – lease expenses though not have any immediate impact on PBT, profit generated in the initial period of lease will be lower as compared to later period as interest rate will be higher on the initial amount of payment. 4.Debt to equity ratio – amount of debt reported in the liability section will be enhanced however it will not make any addition to the right of use assets (Riccardi, 2016). Answer (d) As against the other economy in Australia, retail industry is underperforming and due to the same fact various convergences taken place as follows – Slower rate of growth for the wages and higher rate of inflation for the essentials limited the spending capability of consumer Shift in structure of online shopping changed the industry structure
6ACCOUNTING AND FINANCIAL REPORTING Profit margin decreased due to stiff competition However, as stated by positive accounting theory major driving factor in accounting is reasoning. Hence, the accounting approaches those are generally accepted cannot be changed as they are globally accepted. In addition, to that if economic situation changes it will have direct impact on the foreign exchange of the entity in compliance with AASB 121 (Setyaningrum & Siregar, 2015).
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7ACCOUNTING AND FINANCIAL REPORTING Reference Aasb.gov.au.(2019).Retrieved17May2019,from https://www.aasb.gov.au/admin/file/content105/c9/AASB121_07-04_COMPfeb07_02- 07.pdf Cristina-Aurora,B.B.,(2013).ValuationTechniquesUsedInFairValue Measurement.Management Strategies Journal,22(Special), pp.97-104. Danielsen,B.,Harrison,D.,VanNess,R.&Warr,R.,(2014).Liquidity,Accounting Transparency,andtehCostofCapital:EvidencefromRealEstateInvetment Trusts.Journal of Real Estate Research,36(2), pp.221-251. Hodgson,A.&Russell,M.,(2014).Comprehendingcomprehensiveincome.Australian Accounting Review,24(2), pp.100-110. Hu, F., Percy, M. & 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. & 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. InChina Accounting Standards(pp. 25-29). Springer, Singapore. Scaproperty.com.au.(2019).Retrieved17May2019,from https://www.scaproperty.com.au/Resources/pdf/LCM448_AR_2018_Complete %20vFs.pdf
8ACCOUNTING AND FINANCIAL REPORTING Setyaningrum, D. and Siregar, S.V., (2015). The Value Relevance of Foreign Translation Adjustment:CaseofIndonesia.AcademyofAccountingandFinancialStudies Journal,19(2), p.251.