Tomorrow s World Conference December 2013

Transcription

1 Tomorrow s World Asia Pacific Real Estate Conference December 2013

2 Navigating the changing accounting landscape Magdelene Chua (PwC) g ( ) Rachel Tsang (PwC) CK Lau (JLL)

3 Agenda 1. Redefining control with IFRS Exception to consolidation for investment entities 3. Property valuation 4. Fair value under IFRS Watch the space for new developments 6. Q&A PwC Asia Pacific Real Estate Conference 2013 Singapore 3

4 Redefining control under IFRS 10

5 IFRS 10 -Introduction - Replacing IAS 27 and SIC-12 Criticism of IAS 27 and SIC- 12 Perceived conflict of emphasis IFRS 10 Single control definition and criteria Diversity in practice on defacto control, agency relationships, etc. Explicit guidance included Lack of transparency around off-balance sheet vehicles Explicit guidance on structured entities. Disclosures in IFRS 12 PwC Asia Pacific Real Estate Conference 2013 Singapore 5

6 Introduction Effect analysis Are there new consolidation requirements? Will there be more or less consolidation? Who will be most impacted? No Most Control new consolidation concepts without t a introduced. majority decisions of Builds may voting be on rights unaffected existing control guidance. Consistent May Potential result voting more rights Adds consolidation application additional or context de- of and application consolidation guidance depending di on bright Agency concept lines relationships applied of under Fund IFRS or asset 27/INT managers IFRS 12 IFRS 10 control!! will change the way control is assessed focus on all Will three result elements in more of control appropriate consolidation i PwC Asia Pacific Real Estate Conference 2013 Singapore 6

7 What s new? Previously IAS 27.4 Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Now, under IFRS 10, control is redefined PwC Asia Pacific Real Estate Conference 2013 Singapore 7

8 What is control? Control Power What activities significantly affect returns ( relevant activities )? How are decisions about relevant activities made? Do investor s rights provide current ability to direct relevant activities? iti Exposure or rights to variable returns Ability to use power to affect returns Principal/agent assessment PwC Asia Pacific Real Estate Conference 2013 Singapore 8

9 Ability to direct relevant activities Potential voting rights rights to obtain voting rights of an investee Substantive or protective? Changes from IAS 27: in/out of money options timing of exercise. Changes from IAS 27: intention to exercise. Potential voting rights Purpose Other voting & design of or decision instrument and rights involvement Continuous reassessment! PwC Asia Pacific Real Estate Conference 2013 Singapore 9

10 Agent or Principal? Property Co Considerations 20 % RE Trust manages Fund Manager 100 % Scope of decision-making authority Rights held by third parties g Remuneration e Exposure to variable returns Fund A Fund B Judgement! PwC Asia Pacific Real Estate Conference 2013 Singapore 10

11 Potential implications The application of judgement may drive different conclusions Comparability of financials across fund managers Impact on fund manager s regulatory capital Consolidation may place extra demands on timelines and have an impact on systems, processes and controls Changes to key metrics and communication strategy to stakeholders PwC Asia Pacific Real Estate Conference 2013 Singapore 11

12 Exception to consolidation for investment entities

13 Exception to consolidation for Investment Entities IASB issued amendments to IFRS 10, IFRS 12 and IAS 27 in November Amendment gives a definition of an investment entity. Introduction of a scope exception to consolidation for investment entities ttes Only applicable if the entity has subsidiaries If qualifies as an investment entity, subsidiaries held would be accounted for at fair value through profit or loss PwC Asia Pacific Real Estate Conference 2013 Singapore 13

14 Amendment to IFRS 10 - Investment Entities Definition An investment entity is an entity that: obtains funds from one or more investors for the purpose of providing those investor(s) with investment management services: commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both; and measures and evaluates the performance of substantially all of its investments on a fair value basis. PwC Asia Pacific Real Estate Conference 2013 Singapore 14

15 Amendment to IFRS 10 - Investment Entities Typical characteristics: a) it has more than one investment b) it has more than one investor c) it has investors that are not related parties of the entity and d) it has ownership interests in the form of equity or similar interests. Other considerations: Business purpose Exit strategies Fair value measurement PwC Asia Pacific Real Estate Conference 2013 Singapore 15

16 Illustration Practical Fund Z The objective is to acquire, refurbish and actively manage a portfolio of residential properties. Investment strategy is to identify residential properties that can be refurbished and re-let with a highh rental growth and capital gain. Closed ended fund with a number of unrelated investors. Fund s life is for a period of seven years with two possible one year extension periods. Investment advisor undertakes asset management activities (selection of properties for refurbishment, tenantt selection, marketing). Fund uses the fair value option under IAS 40 for valuing its residential properties. PwC Asia Pacific Real Estate Conference 2013 Singapore 16

17 Illustration Example 1: Fund Z - Solution Obtains money from more than one investor. Provides management services to the investors. Measures and evaluates its investments on a fair value basis. Due to limited lifetime of the Fund, an exit strategy could be assumed. Conclusion: Fund Z meets the definition of an investment entity and would apply the exception to consolidation under IFRS 10. PwC Asia Pacific Real Estate Conference 2013 Singapore 17

18 Illustration Example 2: Fund X The objective is to acquire, own and manage a diversified portfolio of core office properties. Investment strategy is to acquire office properties and provide shareholders with asteady dividendid d as well as a annual return between 5% and 8%. Target investments should generate sufficient rental income to achieve the targeted return. Open ended investment fund with no specific timeframe for disposal of its investments. The Fund intends to achieve itsobjective by generating a reliable steam of rental income and maximizing the value of its properties. Acquisitions will be financed with equity and up to 75% leverage. The Fund uses the fair value option under IAS 40 for valuing its properties. PwC Asia Pacific Real Estate Conference 2013 Singapore 18

19 Illustration Example 2: Fund X - Solution The Fund offers investment management services to unrelated investors. The Fund commits to invest funds solely for returns from capital appreciation and investment income. Measurement of its performance on fair value basis as well as by yield generated from its properties. Fair value and cash flow generated from rental income earned from properties represent the key measures used by the fund. Conclusion: As the Fund is managing its properties not substantially on a fair value basis using the yield as well as the fair value information, it does not meet the definition of an investment entity. No definitive exit strategy The Fund does not apply the exception to consolidation investment t entity under IFRS 10. as it is not an PwC Asia Pacific Real Estate Conference 2013 Singapore 19

20 Implications Increase in relevance via fair value reporting Consistency ste depends ds on the application of judgment Possible streamlining of financial reporting Impact on business decisions PwC Asia Pacific Real Estate Conference 2013 Singapore 20

21 Property valuation

22 Part 1 Introduction Fair Value vs Market Value IFRS define Fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. International Valuation Standards define Market value as the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm s-length transaction after proper p marketing and where the parties had each acted knowledgably, prudently and without compulsion. PwC Asia Pacific Real Estate Conference 2013 Singapore 22

23 Part 1 Introduction Common purposes for valuations: Accounting purposes Transactions (Acquisition/Disposal) Financing purposes (Mortgage/Loan) Insurance purposes PwC Asia Pacific Real Estate Conference 2013 Singapore 23

24 Part 2 Valuation Approaches Some commonly used valuation methods:- Market Approach Direct Comparison Method Income Approach Cost Approach Other Approach Discounted Cash Flow Analysis, Term and Reversion Method Depreciated Replacement Cost Method Residual Method, Profit Method PwC Asia Pacific Real Estate Conference 2013 Singapore 24

25 Part 2 Direct Comparison Method Adjustment (Sample only) Date of Valuation: 31/12/2011 No. Subject Property Comparable 1 Comparable 2 Comparable 3 Address G/F, No. 123 AA Road, Central, G/F, No. 789 RR Road, Central, Hong G/F, No. 546 BB Road, Central, Hong G/F, No. 567 CC Road, Central, Hong Hong Kong Kong Kong Kong Year of completion Nature of Instrument ASP ASP ASP Date of Instrument 26/8/ /8/ /10/2011 Consideration (HK$) N/A 12,000,000 12,100,000 17,650,000 Saleable Area (sq.ft.) , Frontage (ft.) Unit Rate on SA (HK$/sq.ft.) 21,053 20,167 19,396 Adjustment Time 3% 3% 1% Size -5% -5% 0% Location 0% 10% 0% Frontage 5% 5% 5% Layout 0% 0% 10% Building Condition 0% 0% 0% Total Adjustment 3% 13% 16% Adjusted Unit Rate (HK$/sq.ft.) 21,684 22,788 22,499 Average 22,324 (HK$/sq.ft.) Note: (ASP) Agreement for Sale and Purchase Adopted d 22,300 PwC Asia Pacific Real Estate Conference 2013 Singapore 25

26 Part 2 Direct Comparison Method Ideal method if applicable in a truly competitive market Sufficient comparable market transactions must be available Reliability is limited when the market is highly volatile Factors to consider and adjust (depending on the type of property) Location Size layout Building Age Aspect and View Physical condition Transaction date Development constraints State of improvements Shape/size of the site PwC Asia Pacific Real Estate Conference 2013 Singapore 26

27 Part 2 Income Approach Value of the property measured by estimating present value of future earnings Used for valuing income-generating real estate (e.g. Office buildings, retail properties) Valuation parameters input based on market-derived data (e.g. Capitalisation rate, discount rate, market rent) Diverse ways of calculation Variation i 1 Variation i 2 Variation i 3 Term & Reversion Simplified version of DCF, usually calculated on fullylet/gross income basis Term: capitalise current passing rental income over the existing lease term. Reversion: capitalise the current market rental income which is then discounted back to the date of valuation. Disc. Cash Flow Forecast the expected future cash flows (normally 10 years) Discount the cashflow to present value at the required rate of return Takes explicit account of future rental growth and projections. Direct Capitalisation Short-cut method, prefer to be used for cross-checking only Perpetual Annuity (Value = annual income in the upcoming year/cap. rate) Skip multi-year cashflow forecast 27 PwC Asia Pacific Real Estate Conference 2013 Singapore 27

28 Part 2 Income Approach Term & Reversion Gross/Net revenues Expiration of current lease contract Term Reversion Valuation Date (e.g. 12/31/2013) Years or End of lease term Capitalisation rates PwC Asia Pacific Real Estate Conference 2013 Singapore 28

29 Part 2 Depreciated Replacement Cost Method Current gross replacement costs of buildings - depreciation from physical deterioration - depreciation due to functional/external t l obsolescence = Value of buildings + Land value = Depreciated Replacement Costs of Property Note: Commonly adopted d for special or purpose-built properties where no market data is available (e.g. Schools, chemical plants, infrastructure facilities, etc) Make reference to standard cost measures No consideration of future earnings PwC Asia Pacific Real Estate Conference 2013 Singapore 29

30 Part 2 Residual Method Gross Development Value (GDV) (i.e. expected market value upon completion determined by market/income approach) - Outstanding development costs to completion (e.g. construction costs, land premium payable, legal and professional fee, finance cost, etc) including developer s profit = Residual Value of Property under Development Note: Hypothetical development scheme represents the highest and best use of the property based on the given development restrictions (e.g. permitted usage, plot ratio, coverage, height, ht etc) PwC Asia Pacific Real Estate Conference 2013 Singapore 30

31 Part 3 Review of Property Valuation Factors to consider when determining which valuation methods are most relevant and appropriate: the purpose of the valuation, the property type, data availability, and circumstances relating to the market or the property itself. Valuation at Asset Level, Equity Level or Fund level? Experience, competence and objectivity of valuers Audit checking of valuation inputs e.g. terms in the lease contracts, gross floor area vs lettable area Valuation Approaches Major Valuation Assumptions PwC Asia Pacific Real Estate Conference 2013 Singapore 31

32 Part 3 Review of Property Valuation (1) Valuation approaches One or more approaches may be appropriate (2) Major valuation assumptions Market Approach Income Approach Cost Approach Direct Comparison Appropriateness and relevance of selected comparables Reasonableness of the adjustments made and applications Term and Reversion/DCF Capitalisation rate Existing/latest rent, market rent Vacancy, marketing void, renewal probability Discount rate Other projections in DCF Depreciated Replacement Cost Construction cost Index Cost estimate prepared by quantity surveyors/benchmark with similar projects Land comparables PwC Asia Pacific Real Estate Conference 2013 Singapore 32

33 Fair value under IFRS 13

34 Fair value has been taken out of brackets! Which objectives are pursued by the new IFRS 13? Simply how (not when!) to measure fair value! Provide a single source of guidance for all fair value measurements and codification in a single standard. Clarify definitions around the term fair value and provide clear framework for measuring fair value. Enhance fair value disclosures. Enhance convergence with US GAAP. New Fair Value Definition: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants ts at the measurement e e date. [IFRS 13.9] PwC Asia Pacific Real Estate Conference 2013 Singapore 34

35 Which basic concepts need to be considered? Unit of Principal Valuation HABU account market technique(s) The particular asset or liability being measured The highest and best use for non-financial assets The market an orderly transaction would take place The appropriate ate valuation technique(s) to measure fair value Defining the market place Valuation PwC Asia Pacific Real Estate Conference 2013 Singapore 35

36 The unit of account may vary between different investment properties - market expectations should be considered ed Examples Separate apartments, that for itself are subject to a longterm lease contract. Single apartment house that can be leased out or sold separately. Several apartment houses that share one main entrance. Several apartment houses that are connected somehow (e.g. main entrance, parking lot, other functional areas). PwC Asia Pacific Real Estate Conference 2013 Singapore 36

37 Highest and Best Use has been explicitly defined in IFRS 13 - to which extent does this concept impacts fair value measurement? ement? A fair value measurement of a non-financial asset takes into account a market participant s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use (IFRS 13.27) Physically possible Legally permissible Financially feasible Takes into account the physical characteristics of the asset that market participants would take into account when pricing the asset (eg the location or size of a property). Takes into account any legal restrictions on the use of the asset that market participants would take into account when pricing the asset (eg the zoning regulations applicable to a property). Takes into account whether e a use of the asset generates adequate income or cash flows (taking into consideration the costs of converting the asset to that use) to produce an investment return that market participants would require from an investment in that asset put to that use. PwC Asia Pacific Real Estate Conference 2013 Singapore 37

38 The determination of the relevant market is key to determine the appropriate valuation technique as well as the relevant fair value (a) Main market for the asset or liability, or (b) most advantageous market for the asset or liability, if no main market exists Aggregation level in the main or most advantegous market: valuation on a stand-alone alone basis, consideration of synergies only insofar as they are available for typical market participants only in very limited circumstances: allocation of fair value of an asset group to single asset (considering the unit of account) distinction between sub-markets and its typical market participants for example Fair Value determination of office properties, single-family houses etc.. PwC Asia Pacific Real Estate Conference 2013 Singapore 38

39 The selection of the valuation procedure: Use of appropriate valuation techniques No more hierarchy between the techniques (all related guidances in IAS 40 have been deleted). The selected valuation technique must be appropriate for the determination of the price in the particular case. Sufficient data must be available for the calculation of the price. Use of relevant, observable bl input factors should be kept as high h as possible and those unobservable input factors as low as possible. Valuation method and procedures according to IFRS 13 Market approach Income approach Cost approach PwC Asia Pacific Real Estate Conference 2013 Singapore 39

40 Fair Value Hierarchy Level 1 Inputs Quoted prices (unadjusted). For identical assets. In an active market. Fair Value Hierarchy Level 2 Inputs Quoted prices for similar assets or liabilities in active markets. Quoted prices for identical or similar assets or liabilities in markets that are not active. Inputs other than quoted prices that are observable for the asset or liability (e.g. market observable interest rates). Inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3 Inputs Unobservable inputs. If inputs are categorized in different levels - fair value in its entirety as the lowest level that is significant For real estate : just level 2 or 3 are potentially applicable PwC Asia Pacific Real Estate Conference 2013 Singapore 40

41 Consequence of disclosure requirements Level Disclosure requirement Fair value measurement at the end of the reporting period Level of the fair value hierarchy The reason for the measurement Amounts of transfers between Level 1, 2 and 3 & the entity s policy for determining when transfers between levels are deemed to have occurred Transfers from and into Level 1 Description of the valuation technique(s) and the inputs used in the fair value measurement all nonrecurring all recurring all nonrecurring all recurring Changes in valuation techniques and reasons for making those changes all nonrecurring all recurring Quantative information about the significant unobservable inputs used in the fair value measurement if reasonably available Description of valuation processes, policies and procedures If the highest and best use differs from its current use, an entity should disclose the fact and why the non-financial i asset is being used in a manner that t differs from its highest and best use Narrative description of sensitivity of the fair value measurement to significant changes in unobservable inputs (recurring only) Reconciliation i from opening to closing balances showing changes in P/L, OCI, purchases/sales & transfers (recurring only) PwC Asia Pacific Real Estate Conference 2013 Singapore 41

42 Adoption of IFRS 13 - first impressions from the market For the majority of the companies the current use is in line with the highest and best use. There is a uncertainty regarding the distinction between highest and best use and investment in the assets in future years. Most companies choose to define the asset classes according to usage and geographical criteria. i Sensitivity analysis are generally based on discount and cap rate. Furthermore, most companies disclose information regarding g yield (Discount and cap rate as well as net initial yield), market rent and vacancy rate per asset class. However, there are some new developments to be mentioned that are not established so far. PwC Asia Pacific Real Estate Conference 2013 Singapore 42

43 Key take aways In general, the results of the fair value measurement won tbeimpacted Highest and best use may open the opportunities for showing scenarios that are relevant for the market Level 2 or Level 3 depends on how observable inputs to valuation are and may vary with markets, type of properties, valuation techniques, etc. Internal processes and procedures have to be reviewed - disclosures have to be adjusted PwC Asia Pacific Real Estate Conference 2013 Singapore 43

44 Watch the space for other developments

45 New developments Leasing IFRS 11 - Joint Arrangements IFRS 12 - Disclosure of Interests in Other Entities PwC Asia Pacific Real Estate Conference 2013 Singapore 45

46 Q&A

47 Contacts t Magdelene Chua PwC Partner, Real Estate Singapore Direct: Magdelene.wz.chua@sg.pwc.com Rachel Tseng PwC Partner, Real Estate Hong Kong Direct: Rachel.nk.tsang@hk.pwc.com This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, [insert legal name of the PwC firm], its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PwC. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers LLP which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.