Accounting Standards 22420: VCX Investment Property & Retail Trends

This report examines Vicinity Centres (VCX), an ASX-listed real estate investment trust, focusing on its financial and administrative operations, particularly concerning investment properties and the impact of changes in the retail market. The analysis covers the accounting treatment for investment properties under AASB 140, including recognition, measurement, and disclosure, and how VCX applies these standards to its freehold and leasehold properties. It also details the management's valuation methods, incorporating external valuations, interest rates, rental adjustments, and discounted cash flow factors. Furthermore, the report discusses potential effects of retail industry changes on VCX's financial statements, such as decreased tenant quality, valuation adjustments, capital expenditure declines, and increased lease receivables. Finally, it evaluates the economic consequences of these changes, referencing figures from VCX's 2017 annual report, highlighting impacts on segment income, EPS, and asset values.

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ACCOUNTING STANDARDS

Vicinity Centre VCX
Executive summary
Below we have discussed the financial and the administrative workings of Vicinity Centre
VCX which is an ASX Listed real estate investment trust. It mainly deals with renting out the
properties in form of land and building to the tenants. We have also highlighted the effects of
changes in retail market on the business as a whole and later on the company VCX. Annual
Report has been the main source of our report.
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Vicinity Centre VCX
Answer-a
The accounting treatment for investment property is prescribed under AASB 140- Investment
Property. This AASB 140 deals with recognition, measurement and disclosure of the
investment property. The term investment property basically denotes the property including
land and building that are held for the purpose of earning rental income or for the purpose of
capital appreciation or may be both reasons but is not meant to be sold.
The main specifications of this AASB 140 include measurement of investment property on
the basis of fair value model or the cost model whichever is appropriate in the desired case,
permitting the property interest to be included in the investment property value provided it
meets out the specified requirements under AASB 140, making full fledged disclosures
wherever required, etc,
Further, as per this standard, the investment property is recognised as an asset in the financial
statements only if the two conditions are fulfilled :
i. It is assured that the property will reap future economic benefits and these will be
received by the entity in near future, and
ii. The cost of the investment property can be calculated accurately and must be
reliable.
The company VCX investment properties include freehold and leasehold held properties in
form of land and buildings. These are held to earn rental incomes. These properties are
recorded at their purchase cost and any other related costs specifically incurred to acquire it.
Hence, the policy to record land & building of the company is to record it at cost plus
incidental cost incurred (Vicinity, 2017). The company also determines the current market
values of the properties at the rear end by the values submitted by the valuation person and
are thus carried at fair values (Peirson et. al, 2015). Any significant and material work in
progress cost is also added up to the cost of the properties.
With regard to the regulation, the process of valuation is governed by the Board and also the
Investment Committee of the internal management. The key executive lives are also involved
in the process. The review of this process is done on a periodic basis considering any
regulatory changes or any changes in market conditions, etc (Brigham & Daves, 2012).
The following treatment is also given to following situations or valuations.
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Vicinity Centre VCX
1. The annualized net income from a property is capitalized in perpetuity from valuation
date. The capitalized value is also adjusted due to factors like revision in rentals, future
capital expenditures and increase in interest rates (Vicinity, 2017).
2. The discounted cash flows of the rentals and the properties assumed to be sold called as
the terminal value is calculated by capitalizing by using a terminal yield rate and recorded at
the end of the investment period (Vicinity, 2017).
3. Any future costs to be incurred in the development of an asset like construction cost,
finance cost and any other development cost is calculated using DCF and deducted from the
present value of the asset to arrive at the value of the asset at its completion (Parrino et. al,
2012).
The company also follows AASB 13 Fair Value Measurement which classifies the
investment measurements into three categories mainly;
1. Level 1: Quoted Prices
2. Level 2: Other than Quoted prices
3. Level 3: Values of assets & liabilities which are not based on market data.
Answer-b
Following is the ideology and the valuation method adopted by the management in the
valuation of investment properties:
The management is free to adopt the valuation determined by the external values. The value
is determined by the external values and can further be adjusted on account of interest rates,
increase in rentals, government policies and discounted present value factors. The
management also adds up all the costs specifically incurred in the development and
construction of the investment property to its cost. The asset is also revalued at the year-end
on account of any change in the fair values of the assets. The increase in the fair value is
adjusted in the cost of the asset (Paradise & Rogoff, 2009).
The management has designed a very flexible approach for determining the value of
investment properties which can be summarised as follows:
i. The valuation of each property is done once a year.
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Vicinity Centre VCX
ii. The management chooses the independent valuers from pre-approved panels and makes
sure that they are well qualified.
iii. In case the property does not qualify for independent valuation, the internal valuation is
done in that case.
iv. The internal valuation is compared with the previous independent valuation done and
where there is a variance of more than 10%, then another independent valuation is conducted
irrespective of the fact that one valuation has already been done in that year (Vicinity, 2017).
v. Even the internal valuations done are reviewed by an independent valuation team to
assess the accuracy of the same.
The board has thus set up a flexible system to determine the correct valuation of the
investment properties. The management considers each and every aspect related to the
property at the time of determination of the value of the investment property. (Benabou &
Tirole, 2010)
Answer-c
The following shall be the potential effects of the changes in the retail industry on the
financial statements which are Balance Sheet and Income Statement:
1. In case there is dullness in the retail market, the tenant quality shall decrease. The
payment capacity of the tenant will be decreased due to reduced demand for common
commodity and services in the market. The rentals are bound to go down or will be deferred
substantially which will have an impact on the profitability of the company (Bauer & Hann,
2010).
2. The valuation of the investment properties is also affected due to the overall socio and
economic situations in the retail industry. The valuation shall be on a lower side if the market
situation is negative that is the demand for goods and services are on the decline. The values
shall also give reduced valuations of the investment properties. So this will affect the fair
value of the properties at the rear end of the financial period (Pilbeam, 2009).
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Vicinity Centre VCX
3. The capital expenditure is expected to be declined because of the slump in the overall
economy. For example, the company shall not take up any capital expenditure like
development and construction cost in case the economy is not responding positively (Davies
& Crawford, 2012). It shall also not consider any acquisition or merger or any association of
business because the market scenario does not give a positive signal due to recession or
global slowdown (Bauer & Hann, 2010, p. 44).
4. There shall be an increase in lease receivables due to the reason that the recovery will be
lower from the lessees when the market is down.
5. There shall be increased in amounts payable to creditors and other expenses payable due
to market trends.
6. With the overall slowdown in the market, there are prominent chances that there shall be
high risk of tenant default that is the payments of lease rentals may be delayed or may have to
be written off as bad debts which shall have an effect on the profitability and this may also
affect the other tenants at large and they may also default on payment of lease rentals of the
company (Choi & Meek, 2011).
Answer-d
i. The segment income pertaining to the investment properties at the year ending 30th June
2017 has fallen down on the account of changes in the retail market as compared to the year
ending 30th June 2016 by approximately $ 37 million.
ii. There has been an increase in the rent lost from undertaking development by
approximately $ 10.9 million.
iii. As a result, the underlying EPS has also decreased to 18.74 cents as on 30th June 2017
as compared to 19.14 cents as on 30th June 2016.
iv. There has also been an increase in the total value of assets under management which
includes the investment properties. The increase has been substantial which comprises a
maximum of the investment properties of the company (Vicinity, 2017).
v. Movement in the values of investment properties can be accessed from the following
facts:
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Vicinity Centre VCX
There has been an increase in the overall movement by nearly $1000 million due to changes
in the retail market.
vi. The operating lease receivable have shown an increase as shown in the below extract
from Annual Report :
The value of lease receivable has shown an upward movement by an increase of nearly
265m$ as compared to previous year.
vii. Another effect on the company financial statements is mentioned below. It states that
the payments made to the key management personnel (KMP) have drastically reduced by
nearly more than 15% as compared to previous year mainly on account of nil termination
benefits and reduced share-based payments. The payments have almost reduced by $
2540000. This shows that the company is cutting on the key management employee’s salary
and incentives (Vicinity, 2017).
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Vicinity Centre VCX
References:
Bauer, R. and Hann, D. (2010) Corporate environmental management and credit risk.
Maastricht University.
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 26 April 2018]
Brigham, E. & Daves, P. (2012) Intermediate Financial Management. USA: Cengage
Learning.
Choi, R.D. and Meek, G.K. (2011) International accounting. Pearson .
Davies, T. and Crawford, I. (2012) Financial accounting. Harlow, England: Pearson.
Paradise, R. and Rogoff, B. (2009) Side by Side: Learning by Observing and Pitching In.
Ethos. [online]. 37, pp. 102–138. Available from: https://doi.org/10.1111/j.1548-
1352.2009.01033.x [Accessed 26 April 2018]
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.
Pilbeam, K. (2009) Finance and Financial Markets. Palgrave Macmillan
Vicinity. (2017) Vicinity 2017 annual report & accounts [online]. Available from:
http://vicinity.com.au/media/686503/170816-fy17-annual-report.pdf [Accessed 26 April
2018]
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