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  • Subject Name : Accounting and Finance

Australian Real Estate Investment Trust

Table of Contents

Introduction.

Usefulness of financial statements for non accounting end users.

Accounting treatment of property.

Current capital structure.

Sources of finance.

Conclusion.

References

Introduction to Scentre Group Analysis

Scentre Group is the owner of the eminent portfolio of living centres in New Zealand and Australia having retail real estate assets under the management estimated at greater than $50 billion and ownership interest at shopping centre being estimated as $34.2 billion. This embraces 42 Westfield living centres having great franchise value and the capability to fascinate top retail brands of the world. The major strategy of the company is to own interest in the high quality regional living centres available in the market and to undertake investment in these assets through the opportunity of redevelopment (Scentre Group, 2020). It works with leading retail and prestigious brands to establish a leisure and unique shopping experience. It has developed a responsible business framework that laid emphasis on 4 areas, namely, community, environmental impact, economic performance and its people. The main purpose of the report is to analyse the financial statements of the company in order to find its usefulness for the non-accounting users and to obtain clear understanding about its capital structure.

Usefulness of Financial Statements for Non Accounting End Users

Several significant functions are being performed by financial statements of the corporation. The annual report of the Scentre Group reflects the true state of affairs of the company and is considered helpful to acquire essential financial information. It can be effectively used by creditors, government, shareholders and investors to undertake effective decision making process (Knezevic et al., 2019). They have clearly reflected the financial performance of the company that further helps in bridging the gap between the expectation of owners and lapses in management. Every business organization require funds for carrying out its functions and business processes in an effective and efficient manner. For this, it has to rely on several lenders like financial institutions, banks and investors. They are considered as the non – accounting users and financial statements of the company are helpful to check the creditworthiness of the company as they depict the debts, profits, assets related information about the company. Investors can effectively use financial statements to evaluate the finances in order to determine the solvency position of the firm. Good financial position attracts large amount of funds from investors (Brooks & Oikonomou, 2018). The policies made by the government with regard to corporations rely heavily on the financial statements. They can be used to establish taxation and other regulatory policies. Thus, they can be effectively used by the non – accounting users to undertake informed decisions.

Accounting Treatment of Property

  • Depreciation - The investment properties of the Group comprises of shopping centre investments, development projects and construction in progress. The shopping centre investment properties of the Group depicts completed centres comprising of leasehold and freehold land, leasehold improvements and buildings. Land and building are considered to perform the investment function and thus, are considered as a composite asset whose complete value will be influenced by several factors. The major factor will be the income yield instead of reduction in the worth of the building content due to effluxion of time (Annual report, 2019). As per this basis, the building and its various components including all its integral part and equipment will not be depreciated.
  • Impairment – The company recognises all the incremental costs of obtaining a contract with a customer and all the costs of fulfilling a contract as an asset, if the company has expectation to recover all such costs. The costs which are capitalised are amortised with the expense being recognised on the systematic basis that represents the transfer of goods and services to the consumers (Annual report, 2019). There will be recognition of impairment loss if the carrying amount of asset is higher than the remaining amount of consideration expected by the company to acquire after deducting all the costs that have not been recognised as expenses yet.
  • Revaluation – The investment made in shopping centres by the company are measured at cost comprising of transaction costs initially. The portfolio of such investments will be recorded at fair value. The losses and gains that have raised from changes in these fair values of the investment properties are duly accounted for in in the income statement of the company in the subsequent year. The gain or loss arising from the sale of any investment property is recognised in the year of sale (Annual report, 2019). The assessment of fair value by the Directors takes into consideration the latest independent valuations incorporated with the changes in rate of capitalisation.
  • Intangibles – There is no mention of intangible assets in the annual report of Scentre Group.
  • Construction contracts – The revenue from construction and property development comprises of Construction, Design and development fees acquired from Design and Construction Agreements with the third parties. The company takes into consideration all the services that are being provided under Design and Construction Agreements as a single obligation of performance (Annual report, 2019). These services are considered as a portion of a sequence of different goods and services that are significantly combined with the similar outline of allocation and revenue will be recognised on the basis of the completion percentage for that particular single commitment of performance. The completion percentage is computed is identified on the basis of the proportion of costs of contract being incurred till date and the forecasted cost of contract to complete the whole project. The difference that is being recognised between the amount that is recognised as revenue and the amount actually billed to the customer is regarded as the contract liabilities or assets on the balance sheet.

Current Capital Structure

Capital structure of the company comprised of both debt and equity. This indicates that some portion of total funds are acquired for debt sources and some from equity (Ardalan, 2017). Scentre Group has raised debts related funds by issuing commercial papers and uncommitted facilities, notes payables, loans from banks and mortgages. On these debts, it is liable to pay the interest at regular intervals of time irrespective of the amount of profits being earned by the firm. This is the reason; they are also known as interest bearing liabilities. They amounted to $13819.7 million (Annual report, 2019). Funds are also acquired by issuing equity shares in the market. Equity holders tend to have ownership stake in the company. Total number of ordinary shares accounted to 5305155689. Total amount of funds being raised with the help of issuing equity amounted to $10164 million (Annual report, 2019). Total cash and cash equivalents amounted to $253 million. Therefore, total enterprise value of the company is calculated as –

Enterprise value = Equity value + Debt value – cash and cash equivalents

Enterprise value = $10164 million + $13819.7 million - $253 million

Enterprise value = $23730.7 million

Proportion of debt = 58.2%

Proportion of equity = 42.8%

Cost of equity will be determined with the help of dividend paid to the shareholders.

Dividend paid = $1187.1 million

Cost of equity (Ke) = $1187.1 million / $10164 million * 100 = 11.68%

Cost of debt will be determined with the help of interest expense.

Total interest expense = $622.8 million

Cost of debt (Kd) = $622.8 million / $13819.7 million * 100 = 4.51%

Tax rate = 30%

WACC = Ke * weight of equity (%) + Kd * weight of debt * (1-tax rate) (Chyba, 2020)

WACC = 11.68% * 42.8% + 4.51% * 58.2% * (1 – 0.30)

WACC = 4.99% + 1.84% = 6.83%

Sources of finance

After analysing the cost of securities, it has been estimated that it would be beneficial for the firm to finance the proposed acquisition amounted to $1 billion with the help of debt related instruments as cost of debt is lower in comparison to cost of equity. However, it can raise some minimum proportion of funds by issuing equity shares in the market as if it raises such huge amount through debt then interest expenses will also rise that will influence its profitability. Therefore, it can raise funds in the ratio of 30:70 in the form of equity and debt respectively.

The various instruments through which the funds can be raised are listed below –

  • Financial institutions –Credit unions, building societies and banks provide a wide range of financial products to meet both short term and long term requirements of funds (Nking, 2019). These products may include lines of credit, overdraft services, equipment leases, asset financing, etc.
  • Private investors – These are regarded as people who can contribute funds for the particular project in the expectation of earning a return in the profits and equity of the company. They are considered helpful in acquiring large amount of funds to expand the business.
  • Real estate crowdfunding – This is considered as the process that comprises of putting together the amount of funds that have been generated from multiple sources and individuals (Montgomery et al., 2018). These provide flexible terms and conditions to the recipients and are successively growing in popularity.
  • Commercial loans – These are considered beneficial to acquire funds from banks to buy commercial properties. These are long term loans on which the company is liable to pay interest at regular intervals of time along with repayment of principal amount at maturity. These are sometimes available at lower interest rates. However, sometimes it may become harder to get approval for the commercial loan for such a huge amount.
  • Angel investors – These are considered as well off individuals who are ready to contribute funds for the expansion of the business firms in exchange for ownership equity or convertible debt (Crick & Crick, 2018). They are regarded as the riskier investor and the money contributed by them represents the acquisition of some proportion of the business.

Conclusion on Scentre Group Analysis

It can be concluded that the major strategy of Scentre Group is to own interest in the high quality regional living centres available in the market and to undertake investment in these assets through the opportunity of redevelopment. It works with leading retail and prestigious brands to establish a leisure and unique shopping experience. It has been analysed that the annual report of the Scentre Group reflects the true state of affairs of the company and is considered helpful to acquire essential financial information. Land and building are considered to perform the investment function and thus, are considered as a composite asset whose complete value will be influenced by several factors. It would be beneficial for the firm to finance the proposed acquisition amounted to $1 billion with the help of debt related instruments as cost of debt is lower in comparison to cost of equity.

References for Scentre Group Analysis

Annual report. (2019). 2019 Annual financial report. Retrieved from https://www.scentregroup.com/getmedia/1eca105d-02a3-408b-9745-faea95f67d48/2019-Annual-Financial-Report_18Feb20_2.pdf

Ardalan, K. (2017). Capital structure theory: Reconsidered. Research in International Business and Finance39, 696-710.

Brooks, C., & Oikonomou, I. (2018). The effects of environmental, social and governance disclosures and performance on firm value: A review of the literature in accounting and finance. The British Accounting Review50(1), 1-15.

Chyba, J. (2020). Impact of Capital Structure and Its Changes on the Value of Companies Obtained Through the Discounted Cash Flow Formula.

Crick, J. M., & Crick, D. (2018). Angel investors’ predictive and control funding criteria. Journal of Research in Marketing and Entrepreneurship.

Knežević, S., Mitrović, A., & Cvetković, D. (2019). The role of auditing profession in detecting frauds in financial statements. NBP. Nauka, bezbednost, policija24(2), 97-109.

Montgomery, N., Squires, G., & Syed, I. (2018). Disruptive potential of real estate crowdfunding in the real estate project finance industry. Property Management.

Nking, C. O. U. B. (2019). Commercial Banks, Savings Banks, Cooperative Banks, and Credit Unions. The Oxford Handbook of Banking, 321.

Scentre Group. (2020). About us. Retrieved from https://www.scentregroup.com/about-us/about-page

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