ey ifrs real estate survey 2019
TRANSCRIPT
IFRS real estate survey
December 2019
Contents1. Executivesummaryandkeyfindings .......................................................... 1
2. The survey ............................................................................................... 3
3. Measurement of investment property ......................................................... 6
3.1 Introduction....................................................................................... 6
3.2 Fair value model versus cost model ..................................................... 6
3.3 External or internal valuation .............................................................. 6
3.4 Valuationmethodology....................................................................... 6
3.5 Highestandbestuseassumption ........................................................ 7
3.6 Disclosures on assumptions and sensitivity .......................................... 8
4. Recently adopted IFRS ............................................................................ 10
4.1 Impact from application of IFRS 9 ..................................................... 10
4.2 Impact from application of IFRS 15 ................................................... 13
4.3 Impact from application of IAS 7 ....................................................... 16
5. IFRSissuedbutnotyeteffective .............................................................. 17
5.1 Expected impact from application of IFRS 16 ..................................... 17
5.2 Expected impact from application of the amendments to IFRIC 23 and IFRS 3 .................................................19
6. Goodwill and impairment ......................................................................... 20
7. Alternative performance measures (APMs) ............................................... 21
8. Key audit matters (KAMs) ........................................................................ 22
9. Lookingahead ........................................................................................ 23
10. Area IFRS contacts .................................................................................. 24
1. Executive summary and keyfindings
The2018financialstatementssurvey(hereinafterreferredtoasthe2018Survey)istheseventhsurveypublishedbyEYGlobalIFRSRealEstateSectorGroup.Inthissurvey,weprovideananalysisofsomeofthekeyfinancialreportingissuesof53realestateentitiesreportingunderInternationalFinancialReportingStandards(IFRS).Ofthese53entities,wecategorised43entitiesas“investmentpropertyholdingentities”and10as“development&constructionentities”.Thedistinctionbetweenthetwocategoriesisimportantbecausetheentitiesineachcategoryhavedifferentbusinessmodelsandareexposedtodifferentrisksandaccountingissues.
Theeconomicandregulatoryenvironmenthaschangedsignificantlyoverthelastfewyearsandthevaluationof,andreportingoninvestmentproperties,continuestoevolve.
Inprevioussurveys,weanalysedwhetherthechangingenvironmentimpactedthelevelofdisclosuresinthefinancialreportsofrealestateinvestmententities,inparticular,withrespect to the adoption of IFRS 13 Fair Value Measurement in 2012andcrisis-relatedissuessuchasvaluationuncertainty,debtcovenantsand“goingconcern”issues.
Inthisyear’ssurvey,wecontinuedtofocusonmeasurement/valuation of investment properties and the related disclosures. Inaddition,weaddressedotherareasoffinancialreportingthat have recently attracted attention in the sector:
• We looked at the impact on real estate entities of the new accountingstandardsIFRS9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers that becameeffectiveformostentitiesin2018.
• Weconsideredtheexpectedimpactofaccountingstandardsandinterpretationsthatwillbecomeeffectiveformostentitiesin2019and2020,inparticular,IFRS16Leases,IFRIC23Uncertainty over Income Tax Treatments and amendments to IFRS 3: Definition of a Business.
• A few real estate entities in the survey have recorded goodwillimpairmentsinthelastcoupleofyears.Weanalysedhowsignificantgoodwillcontinuestobeforrealestateentitiesandtowhatextentgoodwillimpairmentshavebeenrecorded.
• Alternativeperformancemeasures(APMs),suchasfundsfromoperations(FFO)orthemeasurespublishedbytheEuropeanPublicRealEstateAssociation(EPRA),maysupplementfinancialreportingforrealestateentitiesandoftenrepresentaneffectivewayofcommunicatingimportantentity-specificdevelopments.WeexploredtheextenttowhichAPMshavebeenusedbyrealestateentities.
• InJanuary2015,theInternationalAuditingandAssuranceStandards Board (IAASB) issued its new and revised auditor reportingstandards,whichrequireauditorstoprovidemore transparent and informative reports on the entities theyaudit.Thesestandardshavebeenissuedinresponsetodemandfromusersoffinancialstatements,inthewakeofthefinancialcrisis,formorerelevantinformationonaudits. A particular area of focus within the new standards aretherequirementsofthenewISA701Communicating Key Audit Matters in the Independent Auditor’s Report. Forauditsoflistedentities,anewsectioninthereportcalledKeyAuditMatters(KAMs),highlightsthoseissuesthat,intheauditor’sprofessionaljudgement,wereofmostsignificanceintheaudit.Formostofthefinancialstatementsincludedinthissurvey,theauditor’sreportsincludedKAMs.WehaveinvestigatedhowmanyKAMswere included in the respective reports and which risks werehighlighted.
Our2018Surveyfoundthat:
• Nearlyunchangedcomparedtoour2012survey,almostallsurveyedentitiesbelongingtothecategory“investmentpropertyholdingentities”measuredtheirinvestmentpropertiesusingthefairvaluemodel(incontrasttothecostmodel).Thetechniquesusedtomeasurefairvaluewereeitherdiscountedcashflow(DCF)methodsorincomecapitalisationmethods,oramixofbothofthesevaluationmethods.Comparedtoour2012survey,wedidnotfindanysignificantchanges.
• Almostthreeoutoffourinvestmentpropertyholdingentities(74%)assignedexternalexpertstovaluesubstantiallythewholeportfolioofinvestmentproperty,while only 11% of the entities relied (almost) exclusively on internal valuations.
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• Almostallofthesurveyedinvestmentpropertyholdingentitiescategorisedthefairvaluemeasurementsoftheir investment property within Level 3 of the IFRS 13 fairvaluehierarchy,i.e.,fairvaluemeasurementsforwhichunobservableinputsaresignificanttotheentiremeasurement.
• Thenumberofinputsforwhichquantitativeinformationwasdisclosedvariedacrosstheentitiessurveyed.However,themajorityofinvestmentpropertyholdingentitiesprovidedbetweenthreeandsevenquantitativeinputs.
• Themaininputs,forthoseentitiesthatdisclosedquantitativeinformation,werediscountrate,followedbynetrentpersqm,exityield,rentalincomeandrentalgrowth.
• While it is clear that for investment property measured atfairvalue,IFRS13requiresonlynarrativeinformationwithrespecttosensitivity,quantitativeinformationonsensitivitymaybeusefulfortheusersoffinancialstatements. 74% of the surveyed investment property holdingentitiesprovidedquantitativeinformationonsensitivity.
• OftheentitiesinoursurveythatadoptedIFRS9in2018,thevastmajorityreportedno,oronlyanimmaterial,effectontheequityasaresultoftheadoptionofIFRS9.
• Of36surveyedinvestmentpropertyholdingentitiesthathaveadoptedIFRS15,fiveentitiesreportedthattheyhavechangedtheiraccountingpolicieswithrespecttothepresentationofservicecharges.
• Fordevelopment&constructionentities,thechangesbroughtbyIFRS15weremoresignificantthanforinvestmentpropertyholdingentities,giventhatthemajorrevenuestreamforadevelopment&constructionentitytypically comes from contracts with customers that are in
the scope of IFRS 15. For two entities that were impacted byIFRS15,wehaveincludedabstractsfromtheirfinancialstatementsinwhichtheydescribedtheresultingchanges.
• Withrespecttotherequirementsinparagraph44AofIAS 7 Statement of Cash Flows,66%ofthesurveyedentitieshavedisclosedareconciliationbetweentheopeningandclosingbalancesoffinancingliabilitiestodisclosechangesinliabilitiesfromfinancingactivities.
• OnlyoneentityreportedthatithasadoptedIFRS16early.ForentitiesthatplantoadoptIFRS16inthefuture,theaverageincreaseinassetsasaresultofadoptionisexpectedtobeimmaterial.
• With respect to the expected effects from the adoption oftheamendmentstoIFRS3andIFRIC23,noneofthesurveyed entities indicated that it expects a material impact fromeitherofthesestandards/amendments.
• Thevastmajorityofsurveyedentitiesdidnotcarrysignificantamountsofgoodwillintheirbalancesheets.However,17ofthemcarriedmorethananinsignificantamountofgoodwillin2017(i.e.,aratioofmorethan1%incarryingamountofgoodwilltototalassets).Ofthese17entities,41%recognisedagoodwillimpairmentin2018.
• There is still a lot of diversity with respect to the use of APMsintheindustry.WhiletheuseofFFOisprominentinAustraliaandCanada,inEurope,theEPRAmeasuresaremorecommonlyused.DiversityisalsoobservedintheuseofAPMsbothwithinandoutsidethefinancialstatements.
• Almostallofthefinancialstatementsinour2018Survey(onallofwhichanunqualifiedauditopinionwasexpressed),includedKAMsintheauditor’sreports.Typically,theKAMsmostoftenaddressedintheauditreportswerevaluationofinvestmentproperty,revenuerecognitionandgoodwillimpairment.
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2. The survey
Figure 2: Number of entities by category
Figure 1: Geographical composition of the entire population by number of entities
Investment property holdingentities
Development&construction entities
10
43
Thefinancialstatementsincludedinoursurveystemfrom53publiclylistedrealestateentitiesfromallovertheworld.
Ofthese53entities,wehavecategorised43as“investmentpropertyholdingentities”and10entitiesas“development&construction entities”.
Thedistinctionbetweenthesetwocategoriesisimportantbecauseeachgrouphasadifferentbusinessmodelandisexposedtodifferentrisksandaccountingissues.
Forthe43“investmentpropertyholdingentities”inoursurvey,theproportionofinvestmentpropertiesinrelationtototalamountofassetwastypicallyfairlyhigh(i.e.,higherthan70%forthevastmajorityofsurveyedentities).ThetotalvalueoftheassetsheldbytheseentitiesineurosismorethanEUR600billion,withanaveragetotalvalueofEUR14billion per entity.
Brazil
Europe*
4
South Africa 4 Australia 7
Asia**28Canada 55
*Germany:4,UnitedKingdom:4;France:4;Spain:4;Switzerland:3;Poland:3;Netherlands:2;Belgium:2;CzechRepublic:1,Austria:1
**Singapore:4;Japan:1
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Forthe10“development&constructionentities”inoursurvey,investmentpropertiestypicallydidnotpresentasignificantportionofthetotalassets.ThetotalamountofassetsoftheseentitieswasaroundEUR35billion,withanaveragetotalamountofassetsofEUR3.5billionperentity.Thisissignificantlylowerthantherespectiveamountfortheinvestmentpropertyholdingentities.
Whilethevastmajorityofthefinancialstatementsincludedinoursurveyhave31Decemberasthefiscalyearenddate,somehaveearlierfiscalyearenddates(e.g.,manyentitiesbasedinAustraliahavetheirfiscalyearenddateson30June).Accordingly,thereweresomedifferencesinrespectofthedateofinitialapplicationforcertainaccountingstandards,suchasIFRS15andIFRS9.Entitiesarerequiredtoapplythesestandardsforannualreportingperiodsbeginningonorafter1January2018.Thismeansthatanentitywithafiscalyearenddateof31Decemberwouldhaveadoptedthesestandardsintheir2018financialstatements,whileanentitywithafiscalyearenddateotherthan31Decemberwillonlyneedtoadoptthesestandardsforthefirsttimeintheir2019financialstatements.
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Company name Country Fiscal year endGeneral Property Trust Australia 31 Dec 2018
Stockland Trust Australia 30 Jun 2018
Scentre Group Australia 31 Dec 2018
LendLease Group Australia 30 Jun 2018
Vicinity Centres Australia 30 Jun 2018
Goodman Group Australia 30 Jun 2018
AbacusPropertyGroup Australia 30 Jun 2018
CAImmobilienAnlagenAG Austria 31 Dec 2018
BefimmoSA Belgium 31 Dec 2018
CofinimmoSA Belgium 31 Dec 2018
MRVEngenhariaeParticipaçõesS.A Brazil 31 Dec 2018
Tecnisa S.A. Brazil 31 Dec 2018
Cyrela Brasil Realty S.A. Brazil 31 Dec 2018
GafisaS.A Brazil 31 Dec 2018
BrookfieldPropertyPartnersL.P. Canada 31 Dec 2018
Riocan REIT Canada 31 Dec 2018
DreamOfficeREIT Canada 31 Dec 2018
First Capital Realty Inc. Canada 31 Dec 2018
MorguardCorp. Canada 31 Dec 2018
CPI Property Group S.A. CzechR. 31 Dec 2018
Gecina S.A. France 31 Dec 2018
Klépierre SA France 31 Dec 2018
Icade SIIC France 31 Dec 2018
Unibail-Rodamco-WestfieldSE France 31 Dec 2018
Vonovia SE Germany 31 Dec 2018
Deutsche Wohnen SE Germany 31 Dec 2018
TLGImmobilienAG Germany 31 Dec 2018
Company name Country Fiscal year end
alstriaofficeREIT-AG Germany 31 Dec 2018
lidaGroupHoldingsCo.,Ltd. Japan 31 Mar 2019
Wereldhave N.V. Netherlands 31 Dec 2018
Vastned Retail N.V. Netherlands 31 Dec 2018
EPP N.V. Poland 31 Dec 2018
GlobeTradeCentreS.A. Poland 31 Dec 2018
GlobalworthRealEstateInvest.Ltd. Poland and Romania
31 Dec 2018
Ascendas-SingbridgePteLtd. Singapore 31 Mar 2018
City Developments Ltd. Singapore 31 Dec 2018
MapleTree Investments Pte Ltd Singapore 31 Mar 2019
CapitaLand Ltd. Singapore 31 Dec 2018
Growthpoint Properties Ltd. South Africa 30 Jun 2018
RedefinePropertiesLtd. South Africa 31Aug2018
Emira Property Fund Ltd. South Africa 30 Jun 2018
Accelerate Property Fund Ltd. South Africa 31 Mar 2019
MerlinPropertiesSOCIMIS.A. Spain 31 Dec 2018
Aedas Homes S.A. Spain 31 Dec 2018
Neinor Homes S.A. Spain 31 Dec 2018
InmobiliariaColonialSOCIMIS.A. Spain 31 Dec 2018
PSP Swiss Property AG Switzerland 31 Dec 2018
MobimoHoldingAG Switzerland 31 Dec 2018
Implenia AG Switzerland 31 Dec 2018
The British Land Company plc UK 31 Mar 2019
Hammerson plc UK 31 Dec 2018
Land Securities Group plc UK 31 Mar 2019
Derwent London plc UK 31 Dec 2018
Thetablebelowshowsalloftheentitiesincludedinour2018Survey,plusthecountrytheyarelocatedinandthefiscalyearenddatesofthefinancialstatements:
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3.3 External or internal valuation
Entitiesholdinginvestmentpropertyandchoosingthefairvaluemodelareencouraged,butnotrequired,tomeasurethefairvalueoftheseinvestmentpropertiesonthebasisofavaluationbyanindependentvaluerwhoholdsarecognisedandrelevantprofessionalqualificationandhasrecentexperienceinthelocationandcategoryoftheinvestmentpropertybeingvalued(IAS40.32).Despitethefactthatthe involvement of an independent (external) valuer is not mandatory,thevastmajorityofentitiessurveyeddidinvolveindependent (external) valuers: 74% of the entities surveyed assignedexternalexpertstovaluesubstantiallythewholeportfolioofinvestmentproperty,whileafurther19%assignedexternalexpertstovalueatleasta(substantial)portionoftheirinvestmentproperty.Only7%oftheentitiessurveyedperformed (almost) exclusively internal valuations.
3.4 Valuation methodologyOurprevioussurveyshaveshownthatinvestmentpropertyholdingentitiestypicallyapplyoneormoreofthefollowingthreevaluationtechniquestodeterminethefairvalueoftheirinvestment property:
3. Measurement of investment property
3.1 IntroductionInthissection,wefocusonlyonthefinancialstatementsofthe43entitiesinthe“investmentpropertyholdingentities”category,forwhichtheproportionofinvestmentpropertiesinrelationtototalamountofassetistypicallyfairlyhigh.
3.2 Fair value model versus cost modelFigure 3: Measurement basis for investment property
At fair value
At cost
2%
98%
IAS 40 Investment Property allows entities to choose as itsaccountingpolicyeitherthefairvaluemodelorthecost model and to apply that model to all of its investment properties.However,evenifthecostmodelisapplied,entitiesarerequiredtodisclosethefairvaluesoftheirinvestmentproperty(IAS40.79(e))and,therefore,needtodeterminethefair value. Almost all of the surveyed entities (98% or 42 out of43)appliedthefairvaluemodel,whichrepresentsaslightincrease in the popularity of the fair value model compared to ourlastsurveyin2012,when92%ofsurveyedentitiesappliedthatmodel.Onlyoneentity,Icade,stillappliesthecostmodel.However,Icadeprovidesextensivedisclosuresonthefairvaluemeasurement of its investment properties in the notes.
Figure 4: Extent to which portfolio of investment property is valued by external valuers
74%
19%
7% (Substantially)alloncea year
At least a portion once a year
Nosubstantialportion(internal valuation)
Discounted cash flow model (DCF
method)
Income capitalisation
method
(Drect) market comparison
method
6 | IFRS real estate survey
Whilethefirsttwomethodsaremostoftenappliedwhenvaluingbuildingsandland,amarketcomparisonmethodisoftenappliedwhenvaluingundevelopedland. Thefollowingchartshowstheextenttowhichthedifferentvaluationtechniqueshavebeenappliedbytheentitiesinour2018Survey(multipleanswerswerepossible):
Figure 5: Valuation techniques used
DCF method
Income capitalisation
Market approach (comparableprices)
81%
72%
37%
Consistentwithourfindingsinrecentsurveys,theDCFmethodisstillthemethodappliedbymostentities,followedbytheincomecapitalisationmethodandthedirectmarketcomparison method.
However,asthenextchartshows,60%ofentitiesdonotrelyontheuseofasinglevaluationmethodtovaluealloftheirproperties,butratherusedifferenttechniquesfordifferentproperties:
Figure 6: Combinations of valuation techniques used
More than one
OnlyDCF
Onlyincomecapitalisation
60%26%
14%
Exclusiveuseofasinglevaluationmethodwasobservedby40%oftheentitieswesurveyed,ofwhich26%usedtheDCFmethod,whiletheremaining14%usedtheincomecapitalisation method.
3.5 Highest and best use assumptionWhendeterminingthefairvalueofaninvestmentproperty,anentityhastoconsideramarketparticipant’sabilitytogenerateeconomicbenefitsbyusingtheinvestmentpropertyinitshighestandbestuseorbysellingittoanothermarketparticipantthatwouldusetheassetinitshighestandbestuse(IFRS13.27).IFRS13definesthehighestandbestuseas“theuseofanon-financialassetbymarketparticipantsthatwouldmaximisethevalueoftheassetorthegroupofassetsandliabilities(e.g.,abusiness)withinwhichtheassetwouldbeused”(IFRS13,AppendixA).Anentity’scurrentuseofanon-financialassetispresumedtobeitshighestandbestuse,unlessmarketorotherfactorssuggestthatadifferentusebymarketparticipantswouldmaximisethevalueoftheasset(IFRS13.29).However,theremaybesituationsinwhichthehighestandbestuseofaninvestmentpropertydiffersfromitscurrentuse.Insuchasituation,anentityisrequiredtodisclosethatfactandwhytheinvestmentpropertyisbeingusedinamannerthatdiffersfromitshighestandbestuse.
Inour2018Survey,onlyfouroutof43entitiesvaluedanyoftheirinvestmentpropertybasedonahighestandbestuseassumption that differs from its current use.
Oneoftheseentities,PSPSwissProperty,madethefollowingdisclosuresoninvestmentpropertyforwhichthehighestandbestusewasdifferentfromitscurrentuse:
As at 31 December 2018, the independent valuation company identified eleven properties which may have significant optimization potential (2017: twelve Properties). The valuation company assessed these properties in accordance with IFRS 13 on the basis of the Highest and Best Use” concept as at the balance sheet date. At six of these properties in the Zurich region, specific clarifications are being made with regard to the implementation of potential usage optimizations. For three properties the basis for the usage optimization already exist. Likewise the optimizing of the use of one property in Lausanne was continued in dialogue with the city of Lausanne. At the remaining four properties (two in the area Basel and one in Zurich as well as one in Geneva), no concrete measures are planned at the moment.
Extract 1: PSP Swiss Property (2018)
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3.6 Disclosures on assumptions and sensitivityThe disclosure of the assumptions used to measure the fair value of investment properties and the disclosure of thesensitivityoffairvaluemeasurementstochangesinunobservableinputscontinuetobeimportantinlightofboththecontinuingvolatilityand/orcontinuingriseofrealestatevaluesinmanyrealestatemarkets,andthedemandsfortransparencyfromboththeusersoffinancialstatementsandregulators.
TheextentofdisclosuresonfairvaluemeasurementrequiredbyIFRS13dependsontheLevel(1,2or3)ofthefairvalue hierarchy within which the fair value measurement foraproperty(asawhole)iscategorised.Inthissurvey,weexaminedhowtheentitiescategorisedthefairvaluemeasurements of their investment property:
Figure 7: Level of fair value measurement category
Level 3 only
Level 2 and 3142
WhilejustoneentitycategorisedthefairvaluemeasurementoftheirinvestmentpropertieswithintwoLevels(2and3),alloftheotherentitiesinthesurveyhadexclusivelycategorisedthe fair value measurement of their investment properties within Level 3.
ForLevel2andLevel3measurements,IFRS13requiresthedisclosure of the inputs used in the fair value measurement. Figure8showsthenumberofdifferentinputsthattheentitiesin the survey disclosed.
Figure 8: Total number of inputs used in fair value measurement that have been disclosed
1–2 >7
Thefollowingtableshowsthepercentageofentitiesthathaveprovided disclosures on each of the inputs:
1-2 inputs
3-4 inputs
5-7 inputs
More than 7 inputs
23%
35%21%
21%
Figure 9: Types of inputs disclosed
37%
12%
12%
16%
21%
23%
23%
26%26%
35%
42%
42%
49%
53%
74%Discount rate
Netrentpersqm
Exit yield
Rental income
Rentgrowth
Actual vacancy rate
Net initial yield
Cap rate
Longtermvacancyrate
Construction costs
Reversionary yield
Lengthofleasesinplace
Service costs
Passingrent
Estimated rental value
Equivalentyield
Other9%
10%
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IFRS13doesnotprescribepreciselyhowthequantitativedisclosures of inputs used in the fair value measurement shouldbemade.Illustrativeexample17(valuationtechniquesandinputs)accompanyingIFRS13suggeststhatsuchdisclosurescouldbemadebyprovidingarangeofvalues,aswellasaweightedaveragevalueforeachinput.
Thefollowingchartshowshowthesurveyedentitieshaveprovidedthequantitativedisclosuresoninputsusedinthefairvaluemeasurement,i.e.,bypresentingarangeofvalues,bypresentinganaveragevalue,orbypresentingboth:
42%
30%
28% Range
Average
Both(oftheabove)
ForLevel3measurements,IFRS13requiresanarrativedescription of the sensitivity of the fair value measurement tochangesinunobservableinputsifachangeinthoseinputsmightresultinasignificantlydifferentamountand,ifapplicable,adescriptionofinterrelationshipsbetweenthoseinputsandotherunobservableinputsandofhowtheymightmagnifyormitigatetheeffectofchangesintheunobservableinputs.WhileitisclearthatIFRS13requiresonlynarrativeinformationwithrespecttosensitivities,quantitativeinformationonsensitivitiesmaybeusefulfortheusersoffinancialstatements.Thefollowingchartshowsthatthevastmajorityofentitiessurveyed(74%)havevoluntarilyprovidedquantitativeinformationonsensitivities:
Quantitative sensitivity analysis disclosed
Noquantitativesensitivity analysis disclosed
74%
26%
Forthoseentitiesthatdisclosedquantitativesensitivityinformation,weanalysedtheinputsforwhichthesensitivityinformationwasprovided.Thechartbelowshowsthatallofthese entities disclosed sensitivity information for at least discountrateoryield.However,wealsoobservedthatmanyentities provided additional sensitivity information for other inputs,suchasrentalincome,netrentpersqm,rentgrowthorconstruction costs:
Figure 12: Sensitivity analysis by input
100%
28%
22%
22%
9%
6%
6%
3%
3%
16%
Anydiscountrate/yield
Rental income
Netrentpersqmp.a
Rentgrowth
Construction costs
Estimated rental value
Longtermvacancyrate
Actual vacancy rate
Service costs
Other
Figure 11: Disclosure of quantitative sensitivity analysis
Figure 10: Disclosure approaches for input value parameters
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4. First-time application of new standards and amendments4.1 Impact of application of IFRS 9IFRS9wasissuedin2014,bringingtogethertheclassificationandmeasurement,impairmentandhedgeaccountingsectionsoftheInternationalAccountingStandardsBoard’s(IASB)projecttoreplaceIAS39Financial Instruments: Recognition and Measurement.Thestandardbecameeffectiveforannualperiodsbeginningonorafter1January2018,whileearlyapplication was permitted.
ThefollowingchartshowsthenumberofentitiessurveyedthathaveearlyappliedIFRS9,appliedIFRS9atitseffectivedateorthathavenotyetappliedIFRS9,giventhatthoseentitieshadafiscalyearbeginningbefore1January2018:
Figure 13: Date of application of IFRS 9
ForthoseentitiesthatappliedIFRS9in2018,themajorityexperiencedno,oronlyanimmaterial,impactonequityasaresultoftheapplicationofIFRS9.Inparticular,noneoftheentitiesreportedasignificantimpactfromapplyingthenewimpairment loss model under IFRS 9.
However,asanexception,oneentity,CityDevelopmentLtd.reported a material effect from the adoption of IFRS 9 in respectofunquotedequityinstrumentsthathadpreviouslybeenmeasuredatcost(underIAS39)andnowhadtobemeasured at fair value (under IFRS 9). City Development Ltd. disclosedthefollowing:
4.2 Impact of application of IFRS 15IFRS15wasissuedin2014andbecameeffectiveforannualperiodsbeginningonorafter1January2018,withearlyadoptionpermitted.IFRS15allowsbothfullretrospectiveapplication,inwhichIFRS15mustbeappliedforallperiodspresentedinthefinancialstatements(withsomelimitedreliefprovided),ormodifiedretrospectiveapplication,inwhichIFRS 15 is only applied in the current period presented in the financialstatements(i.e.,theinitialperiodofapplication),withthecumulativeeffectofinitiallyapplyingIFRS15recordedasanadjustmenttotheopeningbalanceofretainedearningsinthe current period.
ThefollowingchartshowsthenumberofentitiessurveyedthathaveappliedIFRS15using:thefullretrospectivemethod;themodifiedretrospectivemethod;entitiesthathavenotyetappliedIFRS15(giventhatthoseentitieshadafiscalyearendbefore31December2018)*:
Figure 14: Transition method applied under IFRS 15
4.2.1 Investment property holding entitiesThemajorrevenuestreamforaninvestmentpropertyholdingentityistypicallyrentalincomegeneratedfromitstenants.TheaccountingforrentalincomeisscopedoutofIFRS15,as it falls within the scope of IAS 17 Leases or IFRS 16. However,servicesincludedinleasecontracts(e.g.,commonareamaintenance)giverisetorevenuefromnon-leasecomponentsthatneedtobesplitoutandaccountedforseparately in accordance with IFRS 15. When more than one partyisinvolvedinprovidinggoodsorservicestoacustomer,IFRS15requiresanentitytodeterminewhetheritisaprincipaloranagentinthesetransactionsbyevaluating
the nature of its promise to the customer. An entity is a principal(and,therefore,recordsrevenueonagrossbasis)ifitcontrolsapromisedgoodorservicebeforetransferringthatgoodorservicetothecustomer.Anentityisanagent
6%
79%
15% Earlyappliedbefore 1 January 2018
Applied in year ended 31December2018
Not yet applied 17
23
9
Full retrospective method
Modifiedretrospectivemethod
Not yet applied
These equity investments represent investments that the Group and the Company intend to hold for the long term for strategic purposes. As permitted by SFRS(I) 9, the Group and the Company have designated these investments at the date of initial application as measured at FVOCI. Unlike FRS 39, the accumulated fair value reserve related to these investments will never be reclassified to profit or loss.
Extract 2: City Development Ltd (2018)
*InBrazil,realestatedevelopmententities,registeredwiththeBrazilianSecuritiesandExchangeCommission(CVM),havetoprepareconsolidatedfinancialstatementsinaccordancewithAccountingPracticesAdoptedinBrazilandwithInternationalFinancialReportingStandards(IFRS),applicabletorealestatedevelopmententities,inaccordancewiththeguidancecontainedinCVM/SNC/SEPCircularLetterNo.02/2018,dated12December2018,whichprovidesguidancefortheaccountingproceduresrelatedtotherecognition,measurementanddisclosureofcertaintypesoftransactionsarisingfromcontractsforthepurchaseandsaleofrealestateunitsunderconstruction.Theyhavebeenexcludedfromthisgraph.
10 | IFRS real estate survey
Net versus gross revenue recognition
Before the adoption of IFRS 15, the Group analysed principal versus agent criteria stipulated by IAS 18 and concluded that it does not have an exposure to the significant risks and rewards associated with service charges and accounted for these transactions as if it was an agent. Under IFRS 15, control of the specified goods or services is the overarching principle to consider in determination whether an entity acts as a principal or an agent. The Group evaluated individual service charge arrangements and determined that it does control the services before they are transferred to tenants and therefore that the Group rather acts as a principal in the arrangements. Consequently, the Group changed, in respect of service charges, revenue recognition from net to gross, before deduction of costs of services.
Management also concluded that service revenue should no longer be presented separately from other service charges, because combined presentation of the service charges provides more relevant information about the business. More detail on service charge and other income is provided in note 2.2.
There is no impact of the IFRS 15 adoption on the statement of financial position as at 1 January 2017 and 31 December 2017. The presentation of the statement of profit or loss for the year ended 31 December 2017 was adjusted due to changes in accounting policy as follows:
(and,therefore,recordsrevenueatthenetamountthatitretainsforitsagencyservices)ifitsroleistoarrangeforanotherentitytoprovidethegoodsorservices.TheapplicationguidancecontainedwithinIFRS15todeterminewhetheranentityisactingasaprincipalorasanagenthaschangedcomparedtolegacyrevenuerequirementsinIAS18.Hence,wehaveinvestigatedwhether,underIFRS15,entities reached different conclusions on transition than theydidpreviously.Inthisrespect,wefocusedonlyonthoseentitiesintheinvestmentpropertyholdingentitiescategoryinthis survey.
ThefollowingchartshowsthenumberofinvestmentpropertyholdingentitiessurveyedthatappliedIFRS15in2018thatchangedtheirpresentationofservicechargesinconnectionwiththeapplicationofIFRS15becausetheyreachedadifferentconclusionaboutwhethertheyareaprincipaloranagent:
31.12.2017
Effect of IFRS 15
adoption31.12.2017
adjusted
Gross rental income 262.1 – 262.1
Service revenue 10.8 (10.8) –
Netservicechargeincome 14.7 (14.7) –
Servicechargeandotherincome – 102.6 102.6
Cost of service and other charges – (77.1) (77.1)
Propertyoperatingexpense (55.9) – (55.9)
Net rental income 231.7 – 231.7
Total revenues 438.2 77.1 515.4
Totaldirectbusinessoperatingexpenses (166.4) (77.1) (243.6)
Netbusinessincome 271.8 – 271.8
14%
86%
ChangeinpresentationNochangeinpresentation
Ofthoseentitiesthatchangedthepresentation,weonlyobservedoneentitythatchangedthepresentationforsomeelementsofservicechargeincomeandexpensefromagrosstoanetbasis,whileforallotherentities,thechangewasfromanettoagrossbasis.OneoftheentitiesthatchangeditspresentationisCPIPropertyGroupS.A.whichdescribedthischangeintheir2018financialstatements,asfollows:
Extract 3: CPI Property Group S.A. (2018)
Figure 15: Change in presentation of service charges
11IFRS real estate survey |
AnotherentitythathaschangeditspresentationwithrespecttoservicechargesisalstriaofficeREITAG,whichdescribedthischangeintheir2018financialstatements,asfollows:
The Group mainly generates revenues from the long-term leasing of real estate space. The accounting of these revenues is based on IAS 17 or, in the future, on IFRS 16 and is not subject to the requirements of IFRS 15. In addition, revenues are generated from the Group’s own provision of real estate management services, which, however, are of subordinate importance in relation to the Group’s total revenues. Proceeds from the sale of real estate assets are not reported under sales but in a separate line item, Net result from the disposal of investment property” and are also subject to the regulations of IFRS 15.
As part of the conclusion — also taking emerging industry best practices into consideration — it emerged that alstria assumes a principal position with regard to the service charge costs of letting and that these ancillary costs charged to the tenants are to be presented as revenues. The costs incurred relating to the provision of services in this context are presented as real estate operating expenses. This does not result in a change in net rental income. The following table shows how revenues and the corresponding expenses from property management increased in the 2017 and 2018 financial years compared to the balance sheet to be applied up to December 31, 2017.
EUR k 2018 2017
Revenue in accordance with IAS 18 193,193 193,680
Revenue in accordance with IFRS 15 232,353 231,067
Increase in revenue as result of application of IFRS 15 39,160 37,387
Expensesfrompropertyoperatingexpenses due to presentation in accordance with IAS 18 (24,125) (20,769)
Expensesfrompropertyoperatingexpenses due to presentation in accordance with IFRS 15 (63,285) (58,156)
Increaseinoperatingexpensesdueto presentation in accordance with IFRS 15 (39,160) (37,387)
Since alstria applies the retrospective approach with regard to the first-time application of IFRS 15, the comparative information in the consolidated financial statements 2018 has been adjusted for the corresponding periods of the 2017 financial year. Expenses and income from service charges in accordance with IFRS 15 are now presented gross, but their amount does not change. Therefore, the first-time application of IFRS 15 has no impact on the earnings position of the Group.
Extract 4: alstria office REIT (2018)
12 | IFRS real estate survey
4.2.2 Development & construction entitiesThechangesbroughtbyIFRS15weremoresignificantfordevelopment&constructionentities,thanforinvestmentpropertyholdingentities.Thisisbecausethemajorrevenuestreamforadevelopment&constructionentitytypicallyresults from contracts with customers that are in the scope ofIFRS15,whileforinvestmentpropertyholdingsentities,themajorrevenuestreamistypicallyrentalincome,whichisaccounted for under IAS 17 or IFRS 16.
While many of the principles in IFRS 15 are similar to the legacyrevenuerequirementsunderIAS11Construction Contracts,IAS18,andrelatedInterpretations(includingIFRIC 15 Agreements for the Construction of Real Estate) whichwereallreplacedbyIFRS15,forsomeentitiesthepatternofrevenuerecognitionforsomeoralloftheirarrangementshaschanged.UnderIFRS15,somedevelopment&constructionentitieswererequiredtomakeadditionaljudgementsthattheydidnothavetomakeunderlegacyrevenuerequirements.IFRS15alsospecifiestheaccountingtreatmentforcertainitemsnottypicallythoughtofasrevenue,suchascertaincostsassociatedwithobtainingandfulfillingacontractandthedisposalofcertainnon-financialassets(includinginvestmentproperty).Keyissuesfordevelopment&constructionentitiesinclude:
• Identifyingperformanceobligations
• Recognitionofrevenueatapointintimeorovertime.Refertoextract5whereImpleniadescribesitsaccountingpolicyincludingthecriteriafordeterminingatwhichpointintimerevenueisrecognised
• Accountingforcontractmodificationsandtheconstraintonvariableconsideration.Refertoextract5whereImpleniaexplainsthatithaschangeditsaccountingpolicydue to IFRS 15.
• Evaluatingsignificantfinancingcomponents
• Measuringprogressovertimetowardsatisfactionofaperformanceobligation
• Recognisingcontractcostassets(includingcostsofobtainingacontract).Refertoextract6whereCityDevelopments explains that sales commissions are no longerexpensedasincurred,butcapitalisedascoststoobtainacontract
• Presentationofcontractassetsandliabilities.Referto extract 6 where City Development Ltd. explains the changesitmadetothepresentationofcontractassetsandliabilitiesduetoIFRS15
• Addressingdisclosurerequirements
ItisalsoworthnotingthatunderIAS11,entitieshadtorecordassetsforunbilledaccountsreceivablewhenrevenuewasrecognised,butnotbilled.Oncetheinvoicewassubmittedtothecustomer,theunbilledreceivablewasreclassifiedasabilledaccountsreceivable.Similarly,billingsinexcessofcostsweregenerallyrecognisedasliabilities.Incontrasttothis,IFRS15isbasedonthenotionthatacontractassetoracontractliabilityisgeneratedwheneitherpartytoacontractperforms.Inaddition,anentitydoesnotrecogniseareceivableuntilithasanunconditionalrighttoreceiveconsiderationfromthecustomer.Entitiesarerequiredtopresentcontractassetsorcontractliabilitiesinthestatementoffinancialpositionordisclosetheminthenotestothefinancialstatements.
FurtherinformationonIFRS15canbefoundinourpublicationApplyingIFRS,AcloserlookatIFRS15,therevenuerecognitionstandard(updatedSeptember2019).
13IFRS real estate survey |
IFRS 15 Revenue from Contracts with Customers
IFRS 15 Revenue from Contracts with Customers” replaces the standards IAS 11 Construction Contracts” and IAS 18 Revenue” as well as associated interpretations and aretobeappliedtorevenuestreamsfromcontractswithcustomers.Theprovisionsenvisageafive-stepmodelforrecognizingrevenue,whichisapplicabletoallcontractswithcustomers.Revenueforservicessuppliedistoberecognizedintheamountoftheexpectedconsideration.Thepointintimeorperiodforrecognizingrevenueisbasedon the transfer of control to the customer.
InGeneralContracting,inConstructionWorksandforservices,contractuallyagreedrevenueisrecognizedovertime.Salesofrealestatearerecognizedatthemomentinwhichcontrolistransferred,i.e.atthetimetitleistransferred,whichisnormallyuponentryintheofficiallandregister.Nomaterialconversioneffectsresultedfrom this.
IFRS15containsmorestringentguidelinesregardingaccountingforcontractmodifications.AccordingtoIFRS15,revenueisonlytoberecognizedifitishighlyprobablethatsignificantamountsofrevenuewillnotbereversedatalaterdate.Claimswerepreviouslycapitalizedifapprovalfromthecustomerwasprobable.ThereassessmentofclaimspreviouslyrecognizedasassetsledtoareductioninequityofCHF14.2millionaftertaxasat1January2018.ThebalancesheetitemtradereceivablesdecreasedbyCHF11.2millionasaresult,workinprogressbyCHF7.5millionanddeferredtaxliabilitiesbyCHF4.5million.
Guarantee retentions are now reported under work inprogress,sincethereisnounconditionalrighttoconsiderationonsuchreceivables.Asaresult,tradereceivableswerereducedbyCHF66.8millionasat1January2018,whileworkinprogressincreasedaccordingly.
ThebalancesheetitemfortradereceivableswasreducedbyatotalofCHF78.1millionfortheabovementionedreasonsandthebalancesheetitemforworkinprogressincreasedbyatotalofCHF59.3million.TheseadjustmentsresultedinareductionindeferredtaxliabilitiesofCHF4.5million.Non-controllinginterestsdecreasedbyCHF0.4million as a result.
Afurtherdeviationemergesfromthereportingofclaimsthathavenotyetbeenapproved.Thesewillnolongerbereportedasvalue-adjustedreceivables,asthereisnounconditionalrighttoconsideration.Tradereceivablesonlycontainunconditionalrightstoconsideration.Theallowanceforexpectedcreditlossesontradereceivablesonlycontainsallowancesforunconditionalreceivables.Thecorrespondingreceivablesandallowancesassociatedtherewith of CHF 78.0 million each were offset as at 1January2018.Thebalancesheetitemfortradereceivablesdidnotchangeasaresult.
Impleniaappliesthemodifiedretrospectivemethodforthe conversion to IFRS 15. If Implenia had applied the replacedstandardsinthereportingperiod,grouprevenueandconsequentlyprofitbeforetaxwouldhavebeenaroundCHF20millionhigher.ConsolidatedprofitandequitywouldhaverisenbyaroundCHF15million.
Extract 5: Implenia AG (2018)
14 | IFRS real estate survey
1. Success-based sales commissions
TheGroupandtheCompanypaysalescommissionstobothexternalandinternalpropertysalesagentsforsecuringpropertysalescontractsfortheGrouponasuccessbasis.TheGroupandtheCompanypreviouslyrecognizedsalescommissionsasanexpensewhenincurred,butnowcapitalizessuchcostsascostsofobtainingacontractunder SFRS(I) 15 i.e. contract costs as they are incremental andareexpectedtoberecovered.Thecapitalizedcostsareamortizedconsistentlywiththepatternofrevenuerecognizedfortherelatedcontract.
2. Amortization of development costs
TheGroupandtheCompanypreviouslyrecognizedcostofsalesonthesoldunitsinitsdevelopmentprojectsbyapplyingthepercentageofcompletionontherelevantprojects’totalestimatedconstructioncosts.OnadoptionofSFRS(I)15,theGroupandtheCompanyrecognizesuchcostsinprofitorlosswhenincurredtotheextentofunitssoldinadevelopmentproject.
3. Borrowing costs
ArisingfromthetentativeagendadecisionissuedbytheIFRSInterpretationCommittee(IFRIC)relatingtothecapitalizationofborrowingcostsfortheconstructionofaresidential multi-unit estate development where revenue is recognizedovertime,theGrouphasceasedcapitalizationofborrowingcostsonitsdevelopmentproperties.
4. Presentation of contract assets and liabilities
OnadoptingSFRS(I)15,theGroupandtheCompanyhavealsochangedthepresentationofthefollowingamounts:
• Contract assets in respect of the property development businesswhichrelateprimarilytotheGroup’sandtheCompany’srighttoconsiderationforworkcompletedbuthavenotbeenbilledatthereportingdate.
Group:Asat31December2017,$139.5millionand$168.9million(1January2017:$223.8millionand$371.2million)whichwerepresentedastradereceivables”anddevelopmentproperties”respectively,underFRShavebeenreclassifiedtocontractassets.
Company:Asat31December2017,$8.8millionand$168.9million(1January2017:$9.2millionand$272.1million)whichwerepresentedastradereceivables”anddevelopmentproperties”respectivelyunderFRShavebeenreclassifiedtocontractassets.
• Contractliabilitiesinrespectofthepropertydevelopmentbusinesswhichrelatemainlytoadvance consideration received from customers and progressbillingsinexcessoftheGroup’srighttotheconsideration.
Group:Asat31December2017,$356.3million(1January2017:$403.2million)whichwaspresentedastradeandotherpayables”underFRShasbeenreclassifiedtocontractliabilities.”
Extract 6: City Developments Ltd (2018)
15IFRS real estate survey |
4.3 Impact of application of amendment of IAS 7InJanuary2016,theIASBpublishedamendmentstoIAS7.Theamendmentsrequireanentitytoprovidedisclosuresthatenableusersoffinancialstatementstoevaluatechangesinliabilitiesarisingfromfinancingactivities,includingbothchangesarisingfromcashflowsandnon-cashchanges.Theamendmentswereapplicableforannualperiodsbeginningonorafter1January2017.UnderIAS7,onewaytofulfilthesedisclosurerequirementsisbyprovidingareconciliationbetweentheopeningandclosingbalancesinthestatementoffinancialpositionforliabilitiesarisingfromfinancingactivities.
Asrealestateentitiestypicallyhavesignificantliabilitiesfromfinancingactivities,welookedathowthesenewdisclosurerequirementshavebeenimplemented,i.e.,whetherornottheinformationprovidedbytheentitieswasintheformofareconciliationbetweentheopeningandclosingbalancesoftheseliabilities.Theoutcomeisshowninthechartbelow:
Figure 16: Use of a reconciliation to provide information on changes in financing liabilities
Yes
No66%
34%
16 | IFRS real estate survey
5.IFRSissuedbutnotyeteffective
5.1 Expected impact of application of IFRS 16Realestateentitieswillneedtochangecertainleaseaccountingpracticeswhenimplementingthenewleasesstandard,IFRS16,issuedbytheIASBin2016,whichbecomeseffectiveforannualperiodsbeginningonorafter1January2019.
WhileIFRS16significantlychangestheaccountingforlesseesthatarerealestatetenants,requiringthemtorecognisemostleases(i.e.,rentalcontracts)ontheirbalancesheetsasleaseliabilitieswithcorrespondingright-of-use-assets,landlord/lessoraccountingissubstantiallyunchangedfromcurrentaccounting.AswithIAS17,IFRS16requireslandlordstoclassifytheirrentalcontractsintotwotypes:financeleasesandoperatingleases.Leaseclassificationdetermineshowandwhenalandlordrecognisesleaserevenueandwhatassetsalandlordrecords.Inmostcircumstances,theprofitorlossrecognitionpatternforlandlordsisnotexpectedtochange.
UnderIFRS16,anintermediatelandlordaccountsfortheheadleasebyrecognisingleaseliabilitieswithacorrespondingright-of-use-assetandforthesubleasessimilartoleasesoverownedassets.However,anintermediatelandlordconsiderstheleaseclassificationcriteriawithreferencetotheremainingright-of-useassetratherthantheunderlyingasset(e.g.,abuildingsubjecttoalease)arisingfromtheheadleasewhenclassifyingasubleaseasfinanceoroperating.Ifaleasedpropertymeetsthedefinitionofinvestmentproperty,thesubleaseisclassifiedasanoperatingleaseandtheintermediatelandlordelectsthefairvaluemodelinIAS40asanaccountingpolicy,IFRS16requirestheintermediatelandlordtomeasureright-of-useassetsarisingfromleasedpropertyinaccordancewithIAS40.ThisrepresentsachangefromthecurrentscopeofIAS40.Underexistingrequirements,thisisanelectionthatisavailableonaproperty-by-propertybasis.
IFRS 16’s transition provisions permit lessees to use either the fullretrospectiveorthemodifiedretrospectiveapproachforleasesexistingatthedateofinitialapplicationofthestandard(i.e.,thebeginningoftheannualreportingperiodinwhichanentityfirstappliesthestandard),withoptionstousecertaintransitionreliefs.OnlyoneoftheentitiessurveyedhasadoptedIFRS 16 early.
In respect of disclosure of the different transition approaches theentitiesintendtoapplywhenadoptingIFRS16,themajorityofentitiessurveyed(62%)intendtoapplythemodifiedretrospectiveapproach,whileonlyasmallproportionoftheentities surveyed (6%) intend to apply the full retrospective approach. Approximately a third of the entities did not provide therelateddisclosure,presumablyforreasonsofmateriality.
Figure 17: Transition method to be applied under IFRS 16
Modifiedretrospectiveapproach
Fully retrospective approach
Not disclosed
62%
32%
6%
Thevastmajorityofentitiessurveyed(49of53)madequalitativeorquantitativedisclosuresontheexpectedeffects that the adoption of IFRS 16 would have on their balancesheetsand/ortheirequity.However,wefoundveryfew disclosures of the potential effects of IFRS 16 on the
17IFRS real estate survey |
IFRS 16 Leases
Thenewstandardconcerningleaseswillbeappliedfrom1 January 2019 and replaces IAS 17 Leases” as well as interpretations associated therewith.
UnderIFRS16,allassetsandliabilitiesarisingfromleasesmustberecognizedinthebalancesheetunlesstheleaseterm is not more than twelve months or the asset is of minorvalue.Thecapitalizationofleasedassetsandtherecognitionofleaseobligationsasliabilitieswillexpandthebalancesheet.
Impleniahasmaterialleasesforrealestate,large-scaleequipment,vehiclesandsmallmachineryaswellassiteequipment.Leasesforsmallmachineryandsiteequipmentoften have a term of less than one year and are therefore notpostedonthebalancesheetunderthenewstandardeither.
RightsofuseandleaseliabilitiesofaroundCHF160millionwouldhavetoberecognizedatthereportingdate.Recognitionofrightsofusewouldmainlyrelateto
realestateandlarge-scaleequipment.Asaresultofthisbalancesheetexpansion,theequityratiowoulddecreasebyapproximately1.1%atthereportingdatewhileequitywouldremainvirtuallyunchanged.OperatingincomebeforedepreciationandamortizationwouldhaveimprovedbyCHF68million.Operatingincomeinthereportingperiodwouldhavebeenmarginallyhigher.Conversionwillleadtoareductioninrentalexpense.Incontrast,depreciationandinterestexpensewillbehigher.Theimpactonprofitbeforetaxwouldbeimmaterialinthereportingperiod.CashflowfromoperatingactivitieswouldincreasebyCHF65millioninthereportingperiodandcashflowfromfinancingactivitieswoulddecreaseaccordingly.
Theextentofthebalancesheetexpansiondependsonthenumberofpiecesoflarge-scaleequipmentleasedasatthereportingdate,thecompany-specificinterestrateandtheassessmentregardingtheexerciseofpossibleextension,purchase or cancellation options.
ImpleniawillapplythemodifiedretrospectivemethodforIFRS 16.
Accordingly,onaveragethefootprintofIFRS16infinancialstatementsofentitiesintherealestatesectorwillnotbeassignificantascanbeobservedinothersectorssuchasretail,utilities,telecommunicationandairlines.
Theentityinour2018SurveythatexpectedthehighestrelativeincreaseinassetsandliabilitiesfromtheapplicationofIFRS16wasImpleniaAG,adevelopmentandconstructionentityfromSwitzerland(i.e.,notaninvestmentpropertyholdingentity).ImpleniaAGprovidedthefollowingdisclosuresontheexpectedimpactofIFRS16inits2018financialstatements:
incomestatementorthestatementofcashflows.Underthe assumption that for those entities which stated that the adoption of IFRS 16 would not have a material effect on their balancesheetand/ortheirequity,therespectiveeffectisnil,wehavecalculatedtheunweightedaverageeffectsfromadoptingIFRS16,asfollows:
• Anaverageexpectedincreaseintotalassetsby0.7%
• Anaverageexpectedincreaseintotalliabilitiesby1.2%
• Theaverageexpectedimpactontotalequitywasonlymarginal
Extract 7: Implenia AG (2018)
18 | IFRS real estate survey
5.2 Expected impact of the amendments to IFRIC 23 and IFRS 3
5.2.1 IFRIC 23 Uncertainty over Income Tax TreatmentsInJune2017,theIASBissuedIFRIC23.IFRIC23clarifiestheaccountingforuncertaintiesinincometaxes.Theinterpretationhastobeappliedtodeterminethetaxableprofit(taxloss),taxbases,unusedtaxlosses,unusedtaxcreditsandtaxrates,whenthereisuncertaintyoverincometax treatments under IAS 12 Income Taxes. IFRIC 23 is effectiveforannualreportingperiodsbeginningonorafter1 January 2019.
Oursurveylookedatthesurveyedentities’disclosureofthepossibleimpactthatapplicationofIFRIC23willhaveontheirfinancialstatementsintheperiodofinitialapplication.Noneof the entities surveyed indicated that they expect a material impactfromthisnewinterpretation.Oneentitywasnotinapositiontofinallyassessimpacteffectsasithadnotfinishedits analysis.
5.2.2 Amendments to IFRS 3 Definition of a BusinessIntherealestatesector,thequestionwhethertheacquisitionofrealestateconstitutesabusinesscombinationortheacquisitionofagroupofassetshasbeendiscussedforalongtime.Oneofourearliersurveyshighlightedsignificantdifferences in how entities in the real estate sector determine whetheranacquisitionqualifiesasabusinesscombination,whichreinforcestheviewthatthedeterminationwassubjecttojudgement.
InOctober2018,theIASBissuedamendmentstoIFRS3aimedatresolvingsomeofthedifficultiesthatarisewhenanentitydetermineswhetherithasacquiredabusinessoragroupofassets.Theamendmentsareeffectiveforbusinesscombinationsforwhichtheacquisitiondateisonorafterthebeginningofthefirstannualreportingperiodbeginningonorafter 1 January 2020.
Oursurveylookedatthesurveyedentities’disclosureofthepossibleimpactthatapplicationoftheamendmentstoIFRS3willhaveontheirfinancialstatementsintheperiodofinitialapplication. None of the entities surveyed indicated that it expectsamaterialimpactfromapplyingIFRS3.Oneentitywas not in a position to assess the effects of any impact as it had not completed its analysis.
19IFRS real estate survey |
6. Goodwill and impairment
Goodwill in the real estate sector typically arises on the acquisitionofabusinessasaresultofthefollowingfactors:
• Synergiesoftheacquiredportfolioandsynergiesofcombiningportfolios(e.g.,anticipatedabilitiesoftheacquiredmanagement/developmentteamtooutperformthe market or achieve economies of scale)
• Therequirementtomeasureidentifiableitemsusingameasurementbasisotherthanfairvalue—typicallydeferred taxes measured at nominal value
• Overpayments
Welookedattheextenttowhichgoodwillwasrecognisedintheentities’financialstatementsatyearend2018andforthecomparativeperiodbydeterminingthepercentageofthecarryingamountofgoodwillinrelationtototalassets.Wethencategorisedtheentities,asfollows:
• Entitieswithgoodwillamountingto5%oftotalassetsormore
• Entitieswithgoodwillamountingtomorethan1%butlessthan 5% of total assets
• Entitieswithgoodwillamountingtolessthan1%oftotalassets
Thefollowingchartshowstheoutcomeofthisanalysisfor2017and2018,whichdemonstratesthatthemajorityofsurveyedentitiesdonotcarrysignificantamountsofgoodwillontheirbalancesheets:
Forthoseentitiessurveyedthat,asofyear-end2017,hadgoodwillamountingto1%ormoreoftotalassets(17entitiesintotal)weinvestigated:
• Whetheranygoodwillimpairmentwasrecordedinthesubsequentyearof2018.And,ifso
• Howlargetheimpairmentwasrelativetothecarryingamountofgoodwillattheprecedingyearendin2017
Wefoundthat41%ofthoseentitiesincurredgoodwillimpairmentchargesin2018,andtheaverage(unweighted)impairmentchargeamountedto27%ofthecarryingamountofgoodwillattheprecedingyearend.Someentitiesexplainedthattheincreaseinrealestatevalueswasacauseforgoodwillimpairment.
Figure 18: Relative significance of goodwill
0
5
10
15
20
25
30
35
40
Relationgoodwill/total assets 5% or
bigger
Relationgoodwill/total assets 1%<x<5%
Relation goodwill/total
assetsbelow1%
2017 2018
7 710
8
3836
20 | IFRS real estate survey
7. Alternative performance measures
Alternativeperformancemeasures(APMs),suchasFFO,orthemeasurespublishedbyEPRA,oftensupplementGAAP-reportingforrealestateentitiesandrepresentaneffectivewayofcommunicatingimportantentityspecificdevelopmentsandmakethemcomparablewithpeers.
TheEPRAisanon-profitorganisationbasedinBrusselsand represents the interests of listed European real estate entities.EPRA’spurposeisinbroadeningtheunderstandingofinvestment opportunities in listed real estate entities in Europe as an alternative to traditional assets. In order to improve the comparabilityofrealestateentitiesandtopresentproperty-specificissues,EPRAhascreatedaframeworkforstandardreportingbeyondIFRSrequirements.
WeanalysedtheextenttowhichAPMshavebeenusedbythe43entitiesthatwecategorisedas“investmentpropertyholdingentities”,forwhichtheproportionofinvestmentpropertiesinrelationtototalamountofassetistypicallyfairlyhigh.
Wefoundthefollowing:
• AllofthesurveyedentitiesusedsomekindofAPMs,eventhoughnotnecessarilyFFOoroneoftheEPRAmeasures
• FFOwaspresentedby40%ofthesurveyedentities,primarilybyentitieslocatedinAustralia,CanadaandGermany.MostoftheseentitiespresentedFFOin
theManagementDiscussionandAnalysis(MD&A)/managementcommentaryandothersectionsoftheannualreportoutsidethefinancialstatements.Interestingly,someentitiesinAustraliaalsopresentedFFOwithinthefinancialstatementsaspartoftheirsegmentreportingdisclosures.
• TheEPRAmeasureswerepresentedby50%ofsurveyedentities,inparticular,byEuropeanrealestateentities.
• Typically,EPRAmeasureswerepresentedoutsidethefinancialstatements.However,afewentitiesalsopresentedEPRAmeasureswithinthefinancialstatements,oneofthoseentitiesbeingDerwentLondonplc(seebelow).
• Approximately 30% of the entities surveyed used a separate section in their annual report to present EPRA measures.
• Some of the entities located in South Africa did not use EPRAmeasures,but,instead,usedothersimilarmeasures.
Aspointedoutabove,DerwentLondonplcwasoneoftheentities that included EPRA measures in their notes to financialstatements.AnextractofthisnoteshowingthesummarytableofEPRAmeasuresispresentedbelow:
38 EPRA Performance measuresSummary table
2018 2017Pence per share
pPence per share
p
EPRAearnings £126.1m 113.07 £105.0m 94.23
EPRA net asset value £4,220.8m 3,776 £4,153.1m 3,716
EPRA triple net asset value £4,131.1m 3,696 £4,042.8m 3,617
EPRA vacancy rate 1.8% 1.3%
EPRAcostratio(includingdirectvacancycosts) 23.3% 20.8%
EPRA net initial yield 3.4% 3.4%
EPRA topped-up” net initial yield 4.6% 4.4%
Extract 8: Derwent London plc (2018)
21IFRS real estate survey |
8. Key audit matters (KAMs)
InJanuary2015,theInternationalAuditingandAssuranceStandardsBoardissueditsnewandrevisedauditorreportingstandards,whichrequireauditorstoprovidemoretransparentand informative reports on the entities they audit. These standardshavebeenissuedinresponsetodemandfromusersoffinancialstatements,inthewakeofthefinancialcrisis,for more relevant information on audits. A particular area offocuswithinthenewstandardsistherequirementsofthenewISA701.Forauditsoflistedentities,anewsectioninthereport,KeyAuditMatters,highlightsthoseissuesthat,intheauditor’sprofessionaljudgement,wereofmostsignificanceintheaudit.Theseareareaswheretheremightbeahigherriskofmaterialmisstatementorwheresignificantmanagementorauditorjudgementsareinvolved.ISA701includesajudgement-baseddecision-makingframeworktohelpauditorsdecide which issues from the audit would constitute KAMs.
Inalmostallofthefinancialstatementsinoursurvey(onallofwhichanunqualifiedauditopinionwasexpressed),theauditor’s report included KAMs. We analysed how many KAMs wereincludedintherespectivereports.Thechartbelowshowsthat most audit reports included two or three KAMs:
Figure 19: Number of KAMs that have been addressed in the audit reports
Thechartbelowshowsthethreetopicsthatweremostoftenaddressed as KAMs in the audit reports:
Figure 20: Areas for which KAMs have been prepared
Valuation of investment property
Revenuerecognition
Goodwill impairment
82%
31%
13%
Notsurprisingly,forthoseentitiesthatwecategorisedas“investmentpropertyholdingentities”thepercentageofauditreportsinwhichaKAM“valuationofinvestmentpropertywasincluded was almost 100%.
Asimilarobservationwasmadewithrespecttoauditreportsofentitiesinoursurveycategorisedas“development&constructionentities”forwhichtherelativefrequencyoftheKAM“Revenuerecognition”wassignificantlyhigherthanthatforthoseentitiescategorisedas“investmentpropertyholdingentities”:Fordevelopment&constructionentities”,sevenofnine (78%) audit reports that included KAM included a KAM on “RevenueRecognition”,whileforinvestmentpropertyholdingentitiesthecorrespondingnumberwasonly18%.
TherelativefrequencyoftheKAM“Goodwillimpairment”isquitesignificant,consideringthatthecarryingamountofgoodwilltypicallymakesuponlyaminorportionofarealestateentities’totalassets.However,thisisconsistentwithourobservationinsection6abovethat,fortheentitiessurveyedthatcarriedmorethananinsignificantamountofgoodwillin2017,therewasahighlikelihoodofasignificantgoodwillimpairmentin2018.
18%
42%22%
16%2% 1
2
3
4
6
22 | IFRS real estate survey
9.Lookingahead
Oursurveyshowsthat,whileinsomeareasoffinancialreportingofrealestateentities,ahighdegreeofglobalconsistencyhasalreadybeenachieved(especiallyinrespect of the increased use of the fair value model comparedwiththecostmodel)andthereisgreaterconsistencyinrelateddisclosures,significantdiversityindisclosuresremainsinmanyareaswhichmakesitdifficultfor investors to directly compare entities.
Themajornewaccountingstandardsthathavebeenissuedintherecentyears—IFRS9,IFRS15andIFRS16—willlikelynotleaveasignificantfootprintinthefinancialstatementsofinvestmentpropertyholdingentities,whileinparticular,inrespectofIFRS15,theimpactfordevelopment&constructionentitiesmaybemoresignificant.Itremainstobeseentowhatextentthesenewstandardswillimpactthedegreeofconsistencyordiversityinfinancialreportingofrealestateentities.
Real estate entities should closely monitor the IASB’s PrimaryFinancialStatementsprojects,whichispartoftheIASB’splantopromote“BetterCommunicationinFinancialReporting”.Theobjectiveofthisprojectistoimprovetheprimaryfinancialstatementswithafocusonthestatementsoffinancialperformance.TheIASBisalsoproposingareductioninthenumberofpresentationchoicesforitemsinthestatementoffinancialperformanceandstatementofcashflowstomakeiteasierforinvestorsto compare entities’ performances and evaluate their futureprospects.Anumberofillustrativeexamplesofstatementsoffinancialperformanceareexpectedtobeincluded in an exposure draft in order to illustrate the IASB’sproposal.TheIASBexpectstopublishanexposuredraftattheendof2019.Thisprojectmayhavefarreachingconsequencesforrealestateentities.
23IFRS real estate survey |
10. Area IFRS contacts
Global
Victor Chan [email protected] +44 20 7980 0677
Europe, Middle East, India and Africa
Belgium Vincent van Caloen [email protected] +32 2 774 6498
France NathalieCordebar [email protected] +33 1 46 93 62 64
Germany ChristophPiesbergen [email protected] +49 40 36132 12343
Greece Christiana Panayidou [email protected] +30 2102886230
Israel GilKatz [email protected] +97 2 3 5680345
Italy Giuseppe Savoca [email protected] +39 02722122585
Kenya Frederick C Macharia [email protected] +25 4 20 2715300
South Africa DennisJEsterhuizen [email protected] +27 11 502 0079
Spain JesusFernandoPerezMolina [email protected] +3 4917493376
Sweden KatrineSöderberg [email protected] +46 8 520 598 12
Switzerland ElisaAlfieri [email protected] +41 58 286 3687
Switzerland DanielZaugg [email protected] +41 58 286 4686
UK Bernd Kremp [email protected] +44 20 7951 3142
UK Michael Varila [email protected] +44 20 7951 7297
Americas
Brazil Marcos Alexandre S. Pupo [email protected] +55 11 2573 3048
Canada Jeff Glassford [email protected] +1 4169433826
USA Derek VanEmon [email protected] +1 3176817490
Asia Pacific
Australia Peter H Barnikel [email protected] +61 2 9248 5243
Australia Mark J Conroy [email protected] +61 2 8295 6988
Indonesia Ma Cynthia D Belen [email protected] +62 21 5289 4911
Indonesia GibbsonBNiala [email protected] +63 2 8910307
Singapore SengChoonTan [email protected] +65 6309 6950
Japan YukikoKobayashi [email protected] +81 3 3503 1100
24 | IFRS real estate survey24 | IFRS real estate survey
Notes
25IFRS real estate survey |
EY | Assurance | Tax | Transactions | Advisory
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About EY’s Global Real Estate, Hospitality & Construction Sector Today’s real estate sector must adopt new approaches to address regulatoryrequirementsandfinancialriskswhilemeetingthechallengesofexpandinggloballyandachievingsustainablegrowth.EY’sGlobalRealEstate,Hospitality&ConstructionSectorbringstogetheraworldwideteamofprofessionalstohelpyousucceed—ateamwithdeeptechnicalexperienceinprovidingassurance,tax,transactionandadvisoryservices.TheSectorteamworkstoanticipatemarkettrends,identify their implications and develop points of view on relevant sector issues.Ultimately,thisteamenablesustohelpyoumeetyourgoalsandcompete more effectively.
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