Financial Accounting And Reporting Policies: Impacts And Consequences

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Executive Summary

This report undertakes analysing the effects of the changes in retail industry on the operations of Shopping Centres Australia Property Group (SCP). This report sheds light on the requirements of AASB 140 related to the investment properties. The discussion on management flexibility is another major aim of the report. Analysis shows that these changes in retail industry have certain negative impact and economic consequences on the financial statements of these two companies.

Introduction

The presence of certain changes in the Australian retail industry can be seen in the recent years leaving certain negative financial as well as economic impacts on the companies operating in this industry. The main aim of this report is to analyse as well as evaluate the impact of the changes in retain industry on the business operations of Shopping Centres Australia Property Group (SCP). First part of the report identifies as well as summarizes the standards of AASB 140 Property Investment. The next part discusses about the flexibility of the management in the determination of the investment property value. The last two parts of the report analyses the impact and economic consequences of the changes in retail industry on the financial reports of SCP.

Accounting Policies related to Investment Properties

The management of SCP has certain obligations to follows certain standards and principles related to the investment properties and their regulations. In Australia, the ASX listed companies are needed to comply with the principles of AASB 140 Investment Properties related to the investment properties and the same is applicable for SCP (aasb.gov.au, 2019). Different parts of this standard are discussed below.

According to AASB 140, Section 2, the management of SCP is needed to apply this standard for the recognition, measurement and disclosure of investment property. As per AASB 140, Section 3, among the other things, SCP can apply this standard in the lease financial statements of investment property. As per AASB 140, Section 5, Investment Property can be considered as the property that the companies held for earning rentals or for capital appreciation or both rather than for utilization in the supply or production of goods or services or for administrative purposes and for the sales in the ordinary business course (aasb.gov.au, 2019).

As per AASB 140, Section 6, a property interest that a lessee holds under an operating lease can be classified as well as accounted for an investment property in case the property meets the definition requirement of investment property and leases uses in the fair value model mentioned in paragraph 33-55 for the recognized assets. For the management of SCP, recognition of the investment properties is a crucial aspect that they needs to consider (aasb.gov.au, 2019). According to AASB 140, Section 16, the company is needed to recognize as asset as investment property when there is a probability that the associated future economic benefit associated with the investment property will flow to the company and it is possible to reliably measure the cost of the investment property (aasb.gov.au, 2019).

At the same time, measurement of the recognition of investment property is considered as another crucial aspect for the management of SCP. According to AASB 140, Section 20, the company is needed to measure an investment property initially at cost. In addition, it is needed to include the transaction costs in the initial measurement (aasb.gov.au, 2019). At the same time, AASB 140, Section 32A (a) states that SCP can chose either the cost model or the fair value model for their all investment property. Under the fair value model, after the process of initial recognition, SCP will be needed to measure all of their investment property at fair value and gain or loss due to the alteration in the fair value of investment property needs to be recognized in the profit or loss statement. As per AASB 140, Section 56, under cost model, the company is needed to measure all of their investment property at cost model (Yao, Percy & Hu, 2015).

Flexibility of Management

Management Flexibility is considered as the ability of the management team to adapt investment decisions that includes timing and scale, to the existing market condition as opposed to the existing assumptions and goals. It needs to be mentioned that the retail industry is subject to major volatilities in the prices as well as market demands for various range of products. For this reason, the management of SCP has the flexibility in investing different assets that includes investments in properties because it provides them the scope of diversification in investments (Trigeorgis & Reuer, 2017). Under the presence of this flexibility, the management of SCP has the option to analyse as well as evaluate different types of investment properties with the aim to assess their positive as well as negative impacts on their investment decisions. This particular aspect indicates towards the crucial aspect that there is sufficient freedom lies in the hands of the management of SCP for the determination of the values of different investment properties so that they can invest in those investment properties. These investments will lead to the generation of expected return that is needed for the success of their businesses (Karadag, 2015).

Impacts of the Changes in Retail Industry on the Financial Reports

In the context of this report, it needs to be mentioned that there are certain major changes taking place in the Australian retail industry. Some of the crucial aspects of these changes are increase in global competition, stagnant sales, major rise in the fixed costs and rapid revaluation of online sales (smh.com.au, 2019). It is crucial to mention in this aspect that these changes have certain impacts on the financial statements of SCP that are income statement and balance sheet. In case of the income statement or the consolidated statement of profit or loss of SCP, these changes will make the revenue of the company motionless which means there will neither be increase in sale nor decrease. In addition, increase fixed cost will lead to the increase in the overall expenses of the company in this particular statement (Easton & Sommers, 2018). It can also be observed that these changes in the retail industry will have a negative impact on the investments in the properties, for example, there can be change in the fair value of the investments in property of the company and this will create an impact on the statement of profit or loss of SCP. There will be changes in the EBIT as well as net profit of the company (scaproperty.com.au, 2019).

Certain impacts of these changes will be there on the balance sheet of SCP. Due to the volatility or changes in the investment of the company in the properties, investment properties under the non-current assets will be impacted (Robinson et al., 2015). Since sales revenue is stagnant, there will not be any purchase of fixed assets, moreover, the management may opt for selling their assets to cater to the need for funds. This will have a crucial impact on the balance sheet. The stagnant nature of sales and profit would affect the company’s ability in paying off their liabilities which can lead to the increase in the company’s liability and this will impact the balance sheet of the company. These are the major effects on the income statement and balance sheet.

Potential Economic Consequences of the Changes in Retain Industry

Apart from the impact on the financial statements of SCP, these changes in the retail industry have certain economic consequences on the company’s financial statements. In this context, the name of Positive Accounting Theory needs to be mentioned since it is related to the use of financial reports. The positive accounting theory is concerned with the prediction of the actions by the firms in the accounting policy selection and how the firm is going to respond to the prosed accounting standards (Christensen, Nikolaev & Wittenberg‐Moerman, 2016). This theory has connection with the provided situation of SCP.

It can be seen from the above discussion the revenue under the retail industry becomes stagnant and as a consequence, the revenue of the company will be affected. At the same time, the retail industry is witnessing increase in fixed expenses and the same will happen to SCP. As a consequence of stagnant revenue and increased fixed expenses, the net profit of the company will decrease along with the decrease in earnings per share. The decrease in profitability of the company will have certain other consequences. It needs to be mentioned that decreased profitability of SCP will leads to the cost-cutting activities for the companies. Some of the major consequences of cost-cutting activities are decrease in the quality of products, decrease in the wages of the employees and employee layoffs (Zygmunt, 2013).

At the same time, these changes have certain negative consequences on the balance sheet of SCP. Decrease profitability will lead to the decrease in assets base of SCP since the company would opt for selling their assets for funding the business operations (Zygmunt, 2013). At the same time, increased competition in the retail industry may lead to the decrease in the return from investment properties. In the presence of all these economic consequences, the management of SCP is needed to develop effective strategies to fight with these changes in the retail industry. For example, the company is needed to increase their presence to online market for tapping into the large market because it will provide them with the necessary competitive advantage. In addition, increase in sales and profitability will be possible due to these strategies (Zygmunt, 2013).

References

Aasb.gov.au. (2019). Investment Property. Retrieved 30 April 2019, from https://www.aasb.gov.au/admin/file/content105/c9/AASB140_07-04_COMPjun14_07-14.pdf
Christensen, H. B., Nikolaev, V. V., & Wittenberg‐Moerman, R. (2016). Accounting information in financial contracting: The incomplete contract theory perspective. Journal of accounting research, 54(2), 397-435.
Dunckley, M. (2018). ‘Marked down to clear’: Roger David collapses into administration. The Sydney Morning Herald. Retrieved 30 April 2019, from https://www.smh.com.au/business/companies/heartbroken-roger-david-collapses-into-administration-20181018-p50adk.html
Easton, M., & Sommers, Z. (2018). Financial Statement Analysis & Valuation, 5e.
Karadag, H. (2015). Financial management challenges in small and medium-sized enterprises: A strategic management approach. EMAJ: Emerging Markets Journal, 5(1), 26-40.
Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial statement analysis. John Wiley & Sons.
Scaproperty.com.au. (2019). ANNUAL REPORT 2018. Retrieved 30 April 2019, from https://www.scaproperty.com.au/Resources/pdf/LCM448_AR_2018_Complete%20vFs.pdf
Trigeorgis, L., & Reuer, J. J. (2017). Real options theory in strategic management. Strategic Management Journal, 38(1), 42-63.
Yao, D. F. T., Percy, M., & Hu, F. (2015). Fair value accounting for non-current assets and audit fees: Evidence from Australian companies. Journal of Contemporary Accounting & Economics, 11(1), 31-45.
Zygmunt, J. (2013, March). Does liquidity impact on profitability. In Conference of informatics and management sciences, March (pp. 38-49).

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